Hurdle Rate
A hurdle rate is the minimum return LPs must receive before the GP earns carried interest under the fund’s waterfall.
Definition
A hurdle rate (preferred return) sets a baseline return that must be achieved for LPs before carry is paid to the GP. It is designed to ensure LPs receive a minimum outcome prior to performance compensation. Hurdles are typically expressed as an annualized rate, often calculated on an IRR basis in private markets. Allocator Context Hurdles are common in private equity and venture funds but vary by market norm, strategy type, and competitive dynamics. Allocators evaluate whether hurdle structure is meaningful given the fund’s risk profile and whether the carry system appropriately rewards true outperformance. Decision Authority Hurdle terms are negotiated and reviewed as part of fund terms diligence. Deviations from allocator standards may require committee or legal sign-off, especially for large commitments. Why It Matters for Fundraising Managers should communicate hurdle mechanics plainly. Confusion around hurdle calculation or catch-up provisions increases diligence burden and slows approvals. Key Takeaways Hurdle sets minimum LP return before carry Structure affects incentives and fairness Often a core term in negotiations Clarity improves approval speed