How a fund can model 1.9x gross and deliver 1.31x net, and where the difference goes
Take a 2019 vintage, $60M value-add fund with 11 deals and a $150k limited partner commitment, final distribution landing at the 6.5 year mark. A realized deal-level gross multiple across the portfolio of 1.87x turning into a net multiple of 1.31x for the LP is a common and fully disclosed outcome that still surprises investors who modeled the fund against invested capital rather than committed capital. Management fee is usually the first gap: 2 percent on committed capital for the investment period, then on invested capital afterward, can run to roughly 13 percent of a commitment over the fund's life, and modeling it against invested capital from year one understates it badly when capital isn't fully drawn until well into the fund. Fund expenses, often uncapped and running under 1 percent of commitments a year plus a lump sum of organizational costs, add a meaningful additional drag. The waterfall matters just as much. An American, deal-by-deal structure with an 8 percent pref lets a manager take carry on early winners even while later deals lose money, and clawback provisions are frequently capped at carry actually received net of assumed taxes, with carry already distributed to individuals, meaning an LP can recover well under the full dollar amount the arithmetic says is owed. A subscription credit facility that lets a manager call capital late can also produce an accurate but misleading reported net IRR that looks strong even as the multiple lags, because both figures can be correct while only one reflects the investor's actual capital timeline. The fix for modeling this correctly: build the model in calendar quarters on committed dollars, not invested dollars, put every fee and expense in the same column as the distribution it reduces, and ask any manager for the prior fund's net-to-LP multiple after all fees and expenses in writing rather than accepting gross deal IRRs as an answer.
