Hurdle rate
In venture capital, the "Hurdle Rate" is the minimum rate of return that must be achieved before a General Partner (GP) can start collecting carried interest. It serves as a performance benchmark that the GP must surpass to earn their share of the profits.
Hurdle rates typically range from 6% to 10% and are stipulated in the Limited Partnership Agreement.
The hurdle rate acts as a safeguard for Limited Partners (LPs), ensuring that GPs have a strong incentive to generate significant returns.
If the fund's performance doesn't exceed the hurdle rate, the GP may only collect management fees, which are generally much lower than carried interest.
In practice, hurdle rates can significantly affect the dynamics between GPs and LPs.
A high hurdle rate might discourage a GP from taking on riskier investments that could either fail or yield astronomical returns.
Conversely, a low hurdle rate might make it too easy for the GP to earn carried interest, potentially compromising the alignment of interests between the GP and the LPs.
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