Internal Rate of Return (IRR) is the annualized rate of return that makes the net present value (NPV) of all cash flows — both contributions and distributions — equal to zero. It is the standard performance metric for private funds because it accounts for the timing of cash flows, unlike simple return multiples.
Net IRR vs. Gross IRR
Gross IRR measures fund performance before management fees, carried interest, and fund expenses — reflecting the GP's investment skill. Net IRR is calculated after all fees and expenses, representing the actual return delivered to LPs. Net IRR is the metric LPs care about most when evaluating fund performance and making re-up decisions.
Related Performance Metrics
TVPI (Total Value to Paid-In): Total fund value (distributions + remaining NAV) divided by total contributions. A TVPI of 1.5x means the fund has generated 1.5 times the invested capital. DPI (Distributions to Paid-In): Actual cash returned to LPs divided by contributions — the "realized" return. RVPI (Residual Value to Paid-In): Remaining NAV divided by contributions — the "unrealized" portion. These multiples complement IRR by showing absolute return magnitude regardless of timing.