Hurdle rate
Factual definition
A hurdle rate is a contractual return threshold used in calculating or distributing carried interest. It is not a guaranteed investor return; rates, preferred-return mechanics and the relevant capital and timing bases depend on the agreement.
Related variants Hard hurdle, Soft hurdle, Preferred return
Soft and hard hurdles
Hard and soft hurdles describe different ways a threshold affects the profit base eligible for carry. A catch-up can allocate later profits toward an agreed sharing ratio, but requires enough profits and does not instantly deliver a full carry percentage merely because the threshold is crossed.
With a soft hurdle and a full catch-up, once LPs receive the hurdle return, the GP catches up until it holds its full carry share of all the profit. With a hard hurdle, carry is paid only on profit above the hurdle.
Hurdle rate in practice
A fund agreement may specify a preferred return before later waterfall tiers. The Institutional Limited Partners Association (ILPA) deal-by-deal model agreement shows an adjustable [8]% parameter, compounded annually and calculated daily on specified contributions.
It is a template provision, not a mandatory industry rate or a promise that investors receive that return.
Source: ILPA deal-by-deal model partnership agreement: parameterized preferred return.
Shayne Fitz-Coy’s definition of Hurdle rate
The 8% hurdle rate is broadly standard.
A full catch-up changes the profit split
Hypothetical one-year fund: investors contribute US$100m and US$120m is available to distribute exactly one year later, before carry. Assume an 8% hurdle, 20% carry and no other fees or cash flows.
The first alternative pays carry only on profit above the US$8m hurdle. The second returns capital and the preferred return, then pays a 100% GP catch-up before splitting remaining profit 80/20.
Scroll horizontally to read all columns.
| Payment | Hard hurdle, no catch-up | Full GP catch-up |
|---|---|---|
| Capital returned to investors | 100 | 100 |
| Preferred return to investors | 8 | 8 |
| Catch-up to GP | 0 | 2 |
| Remaining profit to investors | 9.6 | 8 |
| Remaining profit to GP | 2.4 | 2 |
| Total to investors | 117.6 | 116 |
| Total to GP | 2.4 | 4 |
With the hard hurdle, carry is 20% × (20 − 8) = US$2.4m. With the full catch-up, the GP receives US$4m, or 20% of the entire US$20m profit.
Both alternatives distribute the same US$120m in total. Different catch-up percentages, capital bases, timing or payment order require a different calculation.
In course notes
Where Hurdle rate fits
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