Hurdle rate (preferred return)
The hurdle rate, also called the preferred return, is the annual return, commonly 8%, that limited partners must receive on their contributed capital before the general partner is entitled to carried interest in the distribution waterfall.
Checked against our editorial standards
Example
LPs contribute $50M. At an 8% compounding hurdle, the fund must distribute $50M plus accrued preferred return before any carry is paid. A GP catch-up tier then pays the GP until it has received 20% of total profit.
Confused with
A guarantee. The hurdle is a threshold for carry, not a promised return. If the fund never reaches it, LPs simply receive all the proceeds and the GP receives no carry.
Related terms
- Distribution waterfall A distribution waterfall is the sequence in which a fund's proceeds are allocated between limited partners and the general partner, typically return of contributed capital first, then a preferred return to LPs, then a catch-up to the GP, then the remaining profit split at the carried interest rate.
- Carried interest Carried interest is the general partner's share of a fund's profits, typically 20%, paid through the distribution waterfall only after limited partners have received their contributed capital and, usually, a preferred return.