Preferred return, also known as hurdle rate or pref, is the minimum annual return that limited partners must receive before the general partner can begin collecting carried interest. The preferred return aligns incentives by ensuring GPs only receive performance fees after delivering meaningful returns to investors.
How preferred return works
A typical preferred return is 8% annually, though rates can range from 5% to 10%. The preferred return accrues on invested capital from the date capital is called until it's returned through distributions. For example, if an LP contributes £1 million and that capital is invested for three years, the LP would need to receive approximately £1.26 million (representing 8% compound annual return) before the GP could collect any carried interest on profits.
