Lesson 6 of 8 · 15 min
Hurdle rates, catch-up, waterfalls and clawback
Hurdles make the manager earn a minimum return for investors before taking a performance fee, and clawbacks make sure the fee reflects the fund's overall result, not its best early deals.
In short
- A hard hurdle: the performance fee applies only to returns above the hurdle.
- A soft hurdle: once the hurdle is cleared, the fee applies to the whole return; in private equity this works through a catch-up.
- Private equity waterfall: return of capital → preferred return to LPs → GP catch-up → split (e.g. 80/20).
- American (deal-by-deal) waterfalls pay carry deal by deal; European (whole-of-fund) waterfalls pay carry on the aggregate fund profit.
- A clawback forces the GP to return carry already taken if later losses reduce the fund's aggregate profit.
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