Hurdle rate

What does Hurdle rate mean?

A hurdle rate has two related uses. In company decisions, it is the minimum expected return a project must beat to be approved, often set at or above the cost of capital. In private equity, it is the preferred return, often 8 percent a year, that limited partners must receive before the general partner earns carried interest. Example: an LP puts 100 into a fund with an 8 percent hurdle; after one year it must receive 108 before any carry is paid. Many funds then have a catch-up, which gives the GP a larger share of further profits until it has received its full 20 percent.