Asset management and funds
Hurdle rate
The minimum return a project or fund must beat before it counts as worth doing.
Facts checked against sources onWhat 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.
Where does it come up in case interview prep?
Related terms
- Carried interest (carry)The general partner's share of a fund's profits, usually 20 percent.
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
- IRR (internal rate of return)The discount rate at which NPV is exactly zero.
- Discount rate and hurdle rateThe rate used to turn future cash into today's value.
- Assets under management (AUM)The total market value of the money a firm manages for clients.
- Net flows (net new money)New client money coming in minus money taken out.
- Active versus passive investingTrying to beat the market versus simply tracking it at low cost.
- Sovereign wealth fund (SWF)A state-owned investment fund, often built from oil revenues or reserves.
Learn it in context
See Hurdle rate at work in a lesson from Why some businesses win: competitive advantage and the economics of strategy, with checks as you go.
Spotted something wrong or out of date? Report a mistake. We check every report and correct the page.