The hurdle rate (also called the preferred return hurdle or minimum return threshold) is the annual return that a fund must deliver to LPs before the GP becomes eligible for carried interest. In most private equity, real estate, and private debt funds, the hurdle rate is set at 6–8% annually, compounded. Until cumulative distributions to LPs exceed their contributed capital plus the compounded hurdle return, 100% of profits go to the LPs.
Hurdle Rate in the Waterfall
The hurdle rate is the second tier of a typical distribution waterfall: (1) return of contributed capital, (2) preferred return at the hurdle rate, (3) GP catch-up (if applicable), and (4) carried interest split. Some waterfalls use a "hard hurdle" where the GP only earns carry on returns above the hurdle, while a "soft hurdle" allows the GP to earn carry on all profits once the threshold is met — typically through the catch-up provision.
Hurdle Rate Variations
Not all funds use the same hurdle rate. Real estate funds may set hurdles at 6–7%. Buyout and growth equity funds typically use 8%. Credit funds may use SOFR-based floating hurdles. Some fund structures have multiple hurdle tiers — for example, 8% up to a 1.5x MOIC, then 10% up to 2.0x — creating additional complexity in waterfall calculations. Accurate hurdle rate computation requires tracking time-weighted returns per investor, accounting for varying contribution dates and recycling provisions.