---
title: "What Is Hurdle Rate?"
term: "Hurdle Rate"
description: "The hurdle rate is the minimum return limited partners must receive on their invested capital before the general partner begins earning carried interest on fund profits."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["fund-economics"]
source: https://venturecapitaltracker.com/glossary/hurdle-rate
---

# What Is Hurdle Rate?

> The hurdle rate is the minimum return limited partners must receive on their invested capital before the general partner begins earning carried interest on fund profits.

Also called: preferred return

**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](/glossary/hurdle), waterfall, and catch-up provisions define fund profit allocation.

## FAQ

### What is a hurdle rate in simple terms?

It is the return LPs get first — often around 8% per year — before the GP shares in profits through carry. Think of it as the LPs' priority return before profit splitting begins.

### Why does the hurdle rate matter?

It protects LPs from paying carry on mediocre performance. GPs only earn meaningful carry after beating the hurdle, aligning incentives toward strong absolute returns.


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Source: https://venturecapitaltracker.com/glossary/hurdle-rate