Glossary
Preferred Return (Hurdle Rate)
The minimum return LPs receive before GPs earn carry — typically 8% annual for Indian VC funds. Below this hurdle, GPs receive no carry; above it, GPs earn 20% of additional profits.
By Amit Tyagi, Fitoor Capital · AletheiaAI Glossary
Definition
Preferred Return (or hurdle rate) is the minimum return LPs receive before GPs earn carried interest. In standard VC fund structures, LPs receive their capital back plus an 8% annual return; only profits beyond this hurdle flow to GP carry.
Two structures: 'soft hurdle' (GP earns full 20% once hurdle is cleared); 'hard hurdle' (GP earns 20% only of the portion above hurdle).
India Context
Indian VC funds typically use 8% preferred return with soft hurdle ('catch-up' structure). Some Indian secondary and growth funds use hard hurdles or higher hurdles (12-15%) reflecting different risk profiles.
Example
A ₹500Cr fund returns ₹1,500Cr over 10 years. Hurdle = 8% × ₹500Cr × 10 = ₹400Cr equivalent (₹900Cr total to LPs). Soft hurdle: GP gets 20% of all profits ₹600Cr+ = ₹120Cr carry; LPs get rest. Hard hurdle: GP gets 20% of (₹1,500Cr - ₹900Cr) = ₹120Cr — same in this case, differs at lower returns.
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