Hurdle Rate

A hurdle rate is the minimum return, commonly 8 percent per year, that a fund must deliver to investors before the manager can collect carried interest, the manager's share of profits. It is often called the preferred return. The logic is simple: performance fees should reward performance, so investors are protected from paying a profit share on results they could have earned in less risky assets.

The hurdle rarely works alone. Most funds pair it with a catch-up provision, under which the manager, once investors have received their preferred return, takes most or all of the next distributions until the agreed profit split is restored. Funds also differ on whether the hurdle is 'hard' (carry is paid only on profits above the hurdle) or 'soft' (once the hurdle is cleared, carry applies to all profits). Two funds quoting the same headline hurdle can deliver noticeably different net outcomes.

Why it matters for family offices

Family offices commit to private funds as limited partners, and the hurdle sits at the centre of the distribution waterfall, the sequence in which cash flows back to investors and manager. Reading the waterfall correctly is part of every fund diligence exercise: the hurdle, the catch-up, and the carry percentage together determine how much of a fund's gross return actually reaches the family. A generous-sounding hurdle can be neutralised by a full catch-up, while a hard hurdle without one is meaningfully more investor-friendly. Offices that hold many fund positions also use hurdle terms to compare managers on equal footing rather than on headline performance alone.

How it shows up in practice

Suppose a family office commits $5 million to a buyout fund with an 8 percent preferred return, a full catch-up, and 20 percent carried interest. As the fund exits investments, distributions first return the family's drawn capital, then pay the preferred return on that capital. Only then does the manager begin taking its catch-up, and eventually distributions settle into the 80/20 split. Modelling where each fund sits in its waterfall, and how much of the reported gain is really the family's, is exactly the kind of calculation that outgrows a spreadsheet once an office holds a dozen funds with different terms. Whether tracked by hand or in dedicated software, the hurdle is the line every distribution notice should be checked against.