## What is 'The Net Internal Rate of Return (Net IRR)'

Net internal rate of return (net IRR) is a performance measure equal to the internal rate of return after fees and carried interest are factored in. It is used in capital budgeting and portfolio management to calculate an investment's yield or overall financial quality by calculating an expected rate of return. Practically, it is the rate at which the net present value ofÂ negative cash flow equals the net present value of positive cash flow. A net internal rate of return is expressed as a percentage.

Next Up

## BREAKING DOWN 'The Net Internal Rate of Return (Net IRR)'

The IRR is a discount rate where the present value of future cash flows of an investment is equal to the cost of the investment. The net IRR is a modified IRR value that has taken into consideration management fees and any carried interest. Generally, a higher net internal rate of return means that it is a better investment, though a marginally lower net IRR spread over a longer time period can be superior to a shorter-term, higher net IRR investment.

## Net Internal Rate of Return Put to Use

Calculating a fund's net internal rate of return can help an investor or analyst determine which investment is the best option. Given a pair of funds that hold the same investments and are managed using the same strategy, it would be wise to consider the one with the lower fee. But structural similarity and fees are not enough to prove that one fund is better than another. That can only be learned by calculating the net IRR for both funds. The one with the lower fee may not necessarily be the best choice.

## Net Internal Rate of Return and Private Equity

Net internal rate of return is commonly used in private equity to analyze investment projects that require regular cash investments over time but offer only a single cash outflow at its completion â€” usually an initial public offering,Â a merger or an acquisition. If the investment's net present value is the same as the net present value of benefits, or if it surpasses the acceptable rate of return, the project is considered profitable. If two competing projects turn out to have the same net internal rate of return, then the one with the shorter time frame is considered the better investment.

In 2014, the Securities and Exchange Commission (SEC) began investigating whetherÂ private equity fund managers were correctly disclosingÂ their own invested capital into their own funds when performing net internal rate of return calculations. Including that sum â€” known as a "general partner commitment" â€” could artificially inflate fund performance because such capital infusions do not have fees attached to them. How net IRR calculations are performed (whether they include general partner capital or not) varies among private equity firms, Reuters found. The SEC expects private equity firms to clearly report both average net IRRs and gross IRRs on all fund prospectuses and marketing material.

RELATED TERMS
1. ### Internal Rate of Return - IRR

Internal Rate of Return (IRR) is a metric used in capital budgeting ...
2. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present ...
3. ### Net Interest Margin

Net interest margin is a metric that examines how successful ...
4. ### Relative Return

Relative return is the return an asset achieves over a period ...
5. ### Net Worth

Net worth is a concept applicable to individuals and businesses ...
6. ### Hurdle Rate

A hurdle rate is the minimum rate of return on a project or investment ...
Related Articles
1. Investing

### Return on investment versus internal rate of return

Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI).
2. Investing

### An Introduction To Capital Budgeting

We look at three widely used valuation methods and figure out how companies justify spending.

### How to Compare Permanent Life Insurance Policies

How you can use the internal rate of return to compare and purchase a permanent life insurance policy.
4. Investing

### Private equity management: Fees and regulations

Learn about the fees and regulations associated with private equity management, with a focus on the industry since Dodd-Frank was signed into law in 2010.
5. Investing

### Learn The Lingo Of Private Equity Investing

Because of the non-public nature of private equity, it can be difficult to the learn the lingo. We break it down here.
6. Investing

### The importance of knowing your net worth

It is vital that you track your net worth (the difference between what you own and what you owe), no matter what your age.
7. Investing

### Learn to Value Real Estate Investment Property

Make sure you know what your real estate investment is worth before you sign the ownership papers. Learn what capitalization rate means to your net operating income.
8. Insights

### How Interest Rates Affect Private Equity

With an impending increase in US interest rates and lower - even negative rates - elsewhere in Europe and Japan, we assess the impact on private equity.
9. Investing

### Time Value Of Money: Determining Your Future Worth

Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation.

### CAIBX: Overview of American Funds Capital Income Builder

Learn about the American Funds Capital Income Builder Fund, a world asset allocation fund from Capital Group that focuses on a high level of income.
RELATED FAQS
1. ### How do you calculate IRR in Excel?

Understand how to calculate the internal rate of return (IRR) in Excel and how it's used to determine anticipated yield per ... Read Answer >>
2. ### Which is better for capital budgeting, IRR or NPV?

All other things being equal, using IRR and NPV measurements to evaluate projects often results in the same findings. However, ... Read Answer >>
3. ### How do hurdle rate MARR and internal rate of return IRR relate?

In capital budgeting, projects are evaluated by comparing the internal rate of return (IRR) to the hurdle rate, also known ... Read Answer >>
4. ### How do you use internal rate of return to calculate a capital budget?

Learn about how the internal rate of return is used in the creation of a capital budget along with net present value and ... Read Answer >>
5. ### How do I use Excel to get discount rate over time?

Learn how to calculate discount rate in Microsoft Excel and how to find the discount factor over a specified number of years. Read Answer >>
6. ### Calculate your portfolio's investment returns

Learn the basic principles underlying the data and calculations used to perform personal rates of return on investment portfolios. Read Answer >>
Hot Definitions
1. ### Return On Equity - ROE

The profitability returned in direct relation to shareholders' investments is called the return on equity.
2. ### Working Capital

Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
3. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
4. ### Compound Annual Growth Rate - CAGR

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
5. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
6. ### Price-Earnings Ratio - P/E Ratio

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...