Hurdle Rate
1 minute read
What is a hurdle rate?
A hurdle rate, sometimes referred to as the preferred return, is the minimum rate of return a private equity fund must deliver to investors before the fund manager becomes entitled to performance fees, known as carried interest. This ensures fund managers are incentivised to deliver meaningful value creation rather than being rewarded for average results.
In private equity, the hurdle rate typically sits at around 8% but can vary depending on the fund structure. It acts as a safeguard for investors by ensuring that General Partners only participate in profit-sharing once a pre-agreed level of return has been achieved.
Why is the hurdle rate important?
The hurdle rate plays a central role in aligning the interests of fund managers and investors. It ensures that carried interest is only paid when performance exceeds a set benchmark, reinforcing investor confidence and trust in the fund structure.
For Limited Partners, understanding hurdle rates is a key part of evaluating private equity opportunities and fund terms. When considering investment options such as Venture Capital Trusts (VCTs) or EIS, knowing how hurdle rates work provides valuable insight into how returns are structured and how performance fees are distributed.