Preferred Return

A minimum return that LPs must receive, often expressed as an annual rate such as 8%, before the manager earns carried interest.

Example

On 100,000,000, an 8% preferred return compounded over five years is about 46,930,000.

With a full catch-up, it mainly protects LPs in funds with modest returns rather than reducing carry in strong funds.

Hurdle rate — The return a fund must deliver to its investors before the manager becomes entitled to a share of the profit.
Catch-Up Clause — A term allowing the fund manager to receive most or all distributions after LPs reach their preferred return, until the manager has its full carry share of profits.
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.

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)