Hurdle Rate
Private Credit glossary · Fund Structures, Returns & Economics
Definition
Minimum return rate (typically a 7%–8% preferred return in private debt; 8% standard in private equity) that the fund must deliver to LPs before the GP begins earning carried interest. Paired with a catch-up: once the hurdle is met, the GP receives 100% (or 80%–100%) of subsequent distributions until the agreed carry split (e.g., 80/20) is restored on aggregate profits.
Hurdle Rate in plain English
When investors hand their money to a fund manager, they don't want to pay the manager a bonus unless the fund actually performs well. The hurdle rate is the minimum yearly return the manager must deliver first — often around 7%–8% — before the manager is allowed to start collecting their share of the profits (called carried interest). It's like a salesperson who only earns commission after hitting a baseline sales target. The "catch-up" is a follow-on rule: once that target is cleared, the manager temporarily takes most of the next dollars until their agreed profit split (commonly 80% to investors, 20% to the manager) is restored across all the gains.
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