Preferred Return
Private Credit glossary · Fund Structures, Returns & Economics
Definition
Minimum return rate (typically 7–8%) LPs must earn before the GP participates in carried interest. Also called 'hurdle.'
Preferred Return in plain English
When people pool money into a fund, a manager (the 'GP') invests it on behalf of the outside investors (the 'LPs'), and the GP earns a bonus cut of the profits called 'carried interest.' The preferred return, or 'hurdle,' is a promise that the LPs must first earn a minimum yearly return — usually about 7 to 8% — before the GP is allowed to take any of that bonus. It's like a waiter who only gets a tip after the meal clears a certain quality bar: the manager only shares in the upside once investors have gotten their fair baseline first. This keeps the GP focused on actually beating that bar, not just collecting fees.
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