Gross versus net returns, what to ask a manager

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Always ask for net. Gross returns show how the investments performed. Net returns show what investors received after management fees, fund expenses and carried interest. In venture the gap can be large, and it is larger for small funds, where fees and expenses are a bigger share of capital. Compare gross with gross and net with net, never one against the other.

What sits between gross and net

  • Management fees, charged over the fund's life on the base set in the fund documents.
  • Fund expenses, including organizational costs, administration, audit and legal.
  • Carried interest, the manager's share of profits once the waterfall allows.
  • Subscription line effects, which can change IRR without changing the multiple.

Where confusion usually comes from

  • Deal-level track records. A manager's prior investments at another firm, or as an angel, usually exist only as gross MOIC. There were no fund fees to deduct. That is legitimate information, but it cannot be compared with a fund's net returns. See How to read a prior-firm track record.
  • Pro forma net figures. Some managers estimate what net returns would have been under hypothetical fund terms. Ask how the estimate was built and treat it as illustrative.
  • Mixed presentations. A deck that shows gross MOIC next to a benchmark of net fund returns is not comparing like with like.

Questions to ask the manager

  • Are these figures gross or net, and of what exactly?
  • If net, which fees, expenses and carry are deducted, and on what terms?
  • If gross, is there a net figure, and if not, why not?
  • Was a subscription line used, and how does it affect IRR?
  • Who calculated the figures, and have they been reviewed by an administrator or auditor?

Related questions

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