Sign inWhat is a hurdle rate in private equity?
The hurdle rate, or preferred return, is the minimum annual return limited partners receive before the general partner participates in profits.
How practitioners use it
An 8% preferred return is the long-standing market convention. Below it, all profit goes to limited partners. Above it, the split shifts toward the general partner, often through a catch-up before settling at the stated carry rate.
Whether the hurdle is hard or soft changes the economics. A soft hurdle lets the general partner catch up on all profit once the threshold is cleared. A hard hurdle only shares profit above it.
The hurdle is also the reference point that makes a target IRR meaningful. Deals are underwritten to clear it with room.
Worked example with round numbers
01
Limited partners commit 100 with an 8% preferred return.
02
Profit up to the 8% accrual goes entirely to limited partners.
03
Above that, a 100% catch-up runs until the general partner has received 20% of total profit.
Where people get it wrong
- Treating the hurdle as a guarantee rather than a priority claim.
- Confusing a preferred return with a preferred equity coupon in a deal structure.
- Ignoring whether the hurdle compounds.
Learn it by using it
Definitions stick once you have run the numbers yourself. The desk below is free and needs no signup.
Model the hurdle