The hurdle rate — also called preferred return — is the minimum annual return LPs earn on contributed capital before the GP participates in profit sharing via carried interest.

How it works

Standard venture and buyout funds often set a hurdle around 8% compounded annually, though terms vary. Until distributions give LPs back their capital plus the hurdle return, the GP typically receives no carry — only management fees. Once the hurdle is cleared, profits split according to the carry structure, commonly 80% to LPs and 20% to the GP above the hurdle. Waterfall mechanics matter: American waterfalls distribute carry deal-by-deal; European waterfalls wait until fund-level hurdle is met across the portfolio. Some funds use a hard hurdle (no catch-up below threshold) versus soft hurdle with GP catch-up provisions. The hurdle rate appears explicitly in the limited partnership agreement.

Why it matters

• LPs: A meaningful hurdle ensures GPs do not collect carry on returns that merely return capital slowly. Compare hurdle terms across fund offers during due diligence.
• GPs: Lower or absent hurdles are GP-friendly but harder to market in competitive fundraises. Strong track records support maintaining standard preferred return levels.

Common mistake

Assuming all carry begins at dollar-one of profit. Without clearing the hurdle, GP economics come almost entirely from management fees — a misaligned outcome if returns are thin.

Related ideas

Preferred return, carried interest, hurdle, waterfall, and catch-up provisions define fund profit allocation.