Internal Rate Return
Internal Rate of Return (IRR) is a percentage metric that shows the annualized return that a fund has earned from its portfolio companies. Gross IRR ignores fees paid to the manager (carry & management fee), while Net IRR calculates the return to LPs once carry and management fees have been factored in.
Typically, a higher IRR indicates a better performing portfolio, although there are a number of factors that can be used to manipulate a fund’s IRR.
IRR is a helpful tool to analyze funds across different vintages, since it takes into account the amount of time it took for a fund to earn returns for its LPs.