What does gross IRR represent in the context of private equity?

In the context of private equity, gross IRR (Internal Rate of Return) represents the returns generated by an investment before accounting for any management fees, carried interest, or other expenses. This metric is crucial for evaluating the performance of a private equity fund as it provides a view of the raw investment returns based solely on the cash flows generated by the underlying investments, without the distortion of fund-level costs.

By focusing on gross IRR, investors can better assess how well the assets within the portfolio are performing based solely on operational or investment success. It's important because it sets a benchmark for what investors can expect to earn before the fund management takes its share. Thus, the raw investment performance can be clearly distinguished from the impact of fees and costs that will ultimately reduce the returns allocated to the investors.

Overall, gross IRR serves as a vital indicator for investors in private equity, allowing them to evaluate the attractiveness of a fund's investment strategy and operational effectiveness before the deductions that impact net returns.