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CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt

A fund's gross IRR is higher than the net IRR received by its limited partners. The difference is most likely explained by:

The gap between gross and net IRR is most likely due to management fees, carried interest and fund expenses. These costs are deducted before cash reaches limited partners, so net IRR is lower. Benchmarking methods and RVPI measure performance but do not cause the difference.

  1. Athe use of a public market equivalent benchmark
  2. Bmanagement fees, carried interest and fund expensesCorrect
  3. Cthe fund's residual value to paid-in capital ratio

Explanation

Net returns to limited partners are after management fees, carried interest and fund expenses, which reduce the return relative to gross portfolio-level returns. A PME is a benchmarking method and RVPI is a metric; neither creates a gross-to-net gap.

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