Glossary
Hurdle Rate
The minimum return a VC fund must generate for its LPs before fund managers can start collecting carried interest.
By Amit Tyagi, Fitoor Capital · AletheiaAI Glossary
Definition
The hurdle rate (or preferred return) is the minimum annual return that LPs must receive before GPs start earning their carried interest. It is typically 8% per year compounded on invested capital. If a fund doesn't return at least 8% per year to LPs on their capital, the GPs receive no carry — just management fees.
The hurdle rate protects LPs from paying carry on mediocre performance. It ensures that GPs are genuinely creating value above a reasonable return threshold before they share in the profits. Most American and Indian VC funds use 8% hurdle, though some funds (particularly crossover and PE funds) use higher hurdles of 10–12%.
India Context
SEBI's AIF (Alternative Investment Fund) regulations for Category II funds (where most Indian VC funds are registered) allow hurdle rates but don't mandate them. In practice, India-focused VC funds targeting institutional LPs (including foreign DFIs) typically include 8% hurdle rates to match international LP expectations. Domestic family office LPs often accept funds without formal hurdle rates.
Example
A VC fund invested ₹100 crore over 3 years. After 8 years, total distributions = ₹280 crore. LP return = ₹280 crore on ₹100 crore invested. The 8% hurdle compounded = ₹100 crore × (1.08)^8 = ₹185 crore. Profit above hurdle = ₹280 crore − ₹185 crore = ₹95 crore. GP carry at 20% = ₹19 crore. LPs receive ₹185 + ₹76 = ₹261 crore total.
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