Hurdle rate

The return a fund must deliver to its investors before the manager becomes entitled to a share of the profit.

Example

A fund with an 8% hurdle pays carried interest only on profit above an 8% annual return to investors.

Important

The hurdle alone does not tell you the economics. A catch-up provision after it can hand the manager a large share of the next tranche of profit, so read the whole waterfall rather than the headline rate.

Related terms

  • Carried interest — The share of a fund's profit that the manager keeps, conventionally around twenty percent, usually payable only above a defined return to investors.
  • MOIC (multiple on invested capital) — Total value divided by the money put in - 300,000 back on 100,000 is 3.00x.
  • Internal rate of return (IRR) — The single annual rate at which every cash flow, positive and negative, discounts back to exactly zero - the r solving sum of CF_t/(1+r)^t = 0.

Lessons that explain it

  • A hurdle protects LPs when returns are modest, and a catch-up gives it back when they are strong — Carried interest is the manager's share of profits. A hurdle rate means LPs receive a minimum return before carry is paid; a catch-up then lets the manager receive its full share once returns clear the hurdle. (14 min)
  • MOIC: the multiple, and why it ignores time on purpose — The multiple answers one question exactly - how many times your money came back - and refuses to answer any other. Its blindness to time is a feature and a trap. (10 min)
  • One company usually carries the whole fund — Venture returns come from a handful of outliers, and the fund's own fees and carry take a large slice before the LP sees anything. (13 min)

All 578 terms in the Investing glossary