Glossary
Hurdle Rate
The Hurdle Rate is the minimum return a fund must achieve before the General Partner shares in the profit. It is set contractually when the fund is launched and is the threshold that must be cleared before any Carried Interest arises. It is a remuneration threshold, not a promised return.
At a glance
- If the Hurdle Rate is not exceeded, no Carried Interest arises. The Management Fee continues to be charged regardless.
- The level of the Hurdle Rate is agreed contractually for each fund. There is no prescribed value.
- There are two designs. With a hard hurdle, the General Partner shares only in the profit above the threshold. With a Catch-up clause, once the threshold is passed the GP catches up to its share of the entire return. The difference to investors' net proceeds is substantial.
- The Hurdle Rate is a remuneration threshold, not a return expectation. It says nothing about the return a fund will achieve.
Frequently asked questions
No. It only determines the return from which the fund manager participates in the profits. If the fund stays below it, investors receive no compensation payment; the manager simply receives no Carried Interest. Losses remain losses.
Part of the topic
Private Markets
This entry is for general information purposes only and does not constitute investment, legal or tax advice. It is a simplified summary of the legal position and tax treatment.