Hurdle Rate

Category: Returns & Fund Performance · Level: Advanced · 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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