How do investors compare a real estate fund's net IRR to its gross IRR?

Comparing net IRR to gross IRR helps investors understand how much of a real estate fund's raw investment performance is retained after fees, carried interest, and fund-level expenses are deducted.

Understanding the Components of Each Metric

• Gross IRR reflects returns generated purely by the underlying property investments before any fee deductions.
• Net IRR reflects what investors actually receive after management fees, promote, and fund expenses are applied.
• The spread between the two figures is often referred to as fee drag or the fee load.

Factors That Widen or Narrow the Gap

• Higher promote percentages and lower preferred return hurdles typically widen the gap between gross and net figures.
• Fund size and management fee percentage directly influence how much annual drag is applied to performance.
• Fund term length matters, since fees compound differently across shorter versus longer holding periods.

Using the Comparison in Due Diligence

• Investors benchmark the historical gap across a manager's prior funds to assess consistency of fee structures.
• A persistently wide gap may signal high fee structures relative to the fund's actual value creation.
• Requesting a detailed fee schedule during due diligence clarifies exactly where the performance difference originates.

the difference between net and gross IRR reveals how much value fees and carried interest absorb, making this comparison essential for investors judging a real estate fund's true economic proposition.