Hurdle Rate

The hurdle rate is a benchmark return used in venture capital investments. It ensures that fund managers only earn carried interest if they exceed this minimum acceptable return. There are two types of hurdle rates: "hard" and "soft." The specific percentage can vary but is often linked to a risk-free rate or a fixed rate. This concept aligns the interests of managers and investors, encouraging managers to outperform certain targets before earning performance fees. The hurdle rate's details, such as its level and type, can impact the fund's payout structure, so investors should consider its effects on potential returns.