Hurdle Rate

A hurdle rate — also called a preferred return — is the threshold return an SPV must clear before the sponsor participates in profits. A common formulation is an 8% annual preferred return: LPs receive their capital back plus 8% per year before carry begins. Hurdles come in two flavours that produce very different economics. With a catch-up (a 'hard' or full-catch-up hurdle), once the threshold is cleared the sponsor receives an accelerated share until they have earned carry on all profits including the preferred portion. Without one, the sponsor only ever earns carry on profits above the hurdle. Hurdles are standard in private equity and real estate but comparatively rare in single-asset venture SPVs, where a straight 20% carry with no hurdle remains the norm.