Hurdle Rate

Also called: Preferred return, Hurdle

TL;DR

The minimum annualized return GPs must deliver before they can begin earning carried interest.

A hurdle rate is the threshold return below which GPs receive no carry. Common hurdles range from 6% to 10% per year. Below the hurdle, all profits go to LPs; above the hurdle, GPs typically catch up to their full carry percentage and then split additional profits per the agreed waterfall.

Hurdles are common in private equity and growth funds; they're less common in early-stage venture, where the long J-curve and high variance make a meaningful hurdle hard to enforce. Many top venture funds operate without a hurdle.

Formula

Hurdle Met When LP IRR ≥ Hurdle Rate (typically 8%)

LP IRR , IRR of distributions back to LPs after fees but before GP carry
Hurdle Rate , Preferred return % LPs must achieve before GP earns carry

Some hurdles include a 'GP catch-up' where, once cleared, the GP receives 100% of distributions until carry % is restored across the full profit pool.

Worked example

A growth fund has an 8% hurdle with full GP catch-up. LPs first receive 8% IRR on paid-in capital; the GP then catches up to 20% of total profit; after that, 80/20 LP/GP split applies to remaining distributions.

Common pitfalls

•Confusing 'hurdle' with 'minimum return', fund returns can fall below the hurdle and still go to LPs.
•Setting a hurdle in early-stage venture where the dynamics don't fit.
•Misunderstanding the catch-up mechanics after the hurdle clears.

When this shows up in a pitch deck

Fund-economics concept.

Related terms

Carry (Carried Interest)

The share of fund profits paid to the GPs above a defined hurdle, typically 20% in venture funds, 'carry' is the GP's economic upside.

Management Fee

An annual fee LPs pay GPs to operate the fund, typically 2% of committed capital during the investment period and lower after.

GP Commit

The capital General Partners personally commit to their own fund, signaling alignment with the LPs they're raising from.

IRR

Internal Rate of Return, the annualized return that makes the net present value of all fund cash flows equal to zero.

Limited Partner

A passive investor in a venture fund, providing capital but not making investment decisions, and limited in liability to their commitment amount.

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