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CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt

In a private equity fund, the hurdle rate (preferred return) is most likely:

The hurdle rate is a minimum annual return that limited partners must receive before the general partner can earn carried interest. It aligns incentives by making the manager clear a performance threshold first. It is distinct from the management fee, which is charged regardless of performance.

  1. Aa minimum annual return that limited partners must receive before the general partner earns carried interestCorrect
  2. Ba fee paid yearly to the general partner based on committed capital
  3. Ca cap on the total capital the fund may call from limited partners

Explanation

The hurdle rate is the minimum return LPs must earn before the GP is entitled to carried interest. The management fee is a separate charge, usually on committed or invested capital. A cap on capital calls relates to the commitment, not the hurdle.

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