Hurdle rate
The minimum annual return LPs must earn before the manager takes carry.
Eight percent a year is the common benchmark, compounding. If the fund does not beat it, the GP earns no carry.
The hurdle is usually expressed as an annual compounding return on contributed capital, measured from the date each contribution was made until it is returned. Many venture funds have no hurdle at all, while it is near universal in buyout, private credit and real estate funds.
A hurdle is almost always paired with a catch-up, so once a fund clears it comfortably the GP still receives its full carry percentage. The hurdle therefore mainly matters for funds with modest returns, where it decides whether the GP earns carry at all.
Worked example
LPs contribute $50M at the start of a fund with an 8 percent compounding hurdle. After five years, the hurdle amount is $50M times 1.08 to the power of five, about $73.5M. LPs must receive $73.5M in distributions before the GP takes any carry.
Common questions about hurdle rate
What is a typical hurdle rate in private equity?
Eight percent a year, compounding, is the long-standing market convention for buyout funds. Venture capital funds frequently have no hurdle.
Is the hurdle rate the same as the preferred return?
In everyday use, yes. Both describe the minimum return LPs receive before the GP shares in profits, usually 8 percent a year.