Hurdle Rate
The minimum annual return a fund must generate for LPs before the GP starts earning carried interest.
A hurdle rate (also called a preferred return) is a minimum threshold return, commonly 8% annually in venture and private equity, that LPs must receive before the GP is entitled to any carried interest. It's meant to ensure GPs only get paid performance compensation once LPs have earned a baseline return on their capital.
Hurdle rates are more common and more strictly enforced in buyout and private equity funds than in venture capital, where many funds — particularly at the earlier stages — forgo a hurdle entirely given the difficulty of predicting venture-style outlier returns and the long time horizon before any distributions occur.
If a fund's terms include a hurdle, check whether it's a 'hard' hurdle (GP never catches up on the missed return) or a 'soft' hurdle with a catch-up provision (GP eventually gets their full carry percentage once the hurdle clears) — the difference materially affects LP economics.
Do all venture funds have a hurdle rate?
No — many early-stage venture funds skip a formal hurdle rate entirely, unlike buyout and growth-equity funds where an 8% preferred return is close to universal.
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