Hurdle Rate
A hurdle rate is the minimum return threshold a fund must achieve before the GP earns carried interest.
Allocator relevance: A key LP protection and alignment tool that shapes the waterfall and net outcome fairness.
Expanded Definition
The hurdle (often called preferred return) sets the baseline return LPs receive before carry is paid. Hurdles can be structured in different ways (e.g., simple preferred return, compounding, different rates). The presence of a catch-up clause can materially affect how quickly the GP reaches full carry once the hurdle is met.
Allocators evaluate hurdle structure alongside catch-up and clawback to understand real net economics under different performance scenarios.
How It Works in Practice
In the distribution waterfall, cash flows first cover LP return of capital and the preferred return. Then, depending on the structure, the GP may receive catch-up distributions until the agreed carry split is reached, after which distributions follow the ongoing split.
Decision Authority and Governance
Governance includes reviewing LPA waterfall mechanics, ensuring clarity on compounding and timing, and negotiating side letter clarifications if needed. LPAC oversight may address disputes around calculations.
Common Misconceptions
- A hurdle always guarantees LP-friendly economics.
- Catch-up is a minor detail.
- Hurdles are identical across strategies.
Key Takeaways
- Hurdle mechanics shape fairness and timing of carry.
- Evaluate hurdle + catch-up + clawback as a system.
- Model net outcomes across scenarios.