Fund Structure
Preferred Return
The minimum annual return (typically 6-8%) LPs receive before the GP begins taking carried interest — also called a hurdle rate.
A preferred return (or 'pref') is the minimum annual return that LPs must receive before GPs participate in profits through carried interest. Standard preferred returns in PE and growth equity are 6-8% per year. Pure VC funds often have no preferred return — just a 'return of capital then split' structure. When a preferred return exists, the GP doesn't earn carry until LPs have received their pref on all invested capital. This creates alignment: GPs don't get paid on profits until LPs have meaningfully outperformed their cost of capital. After the preferred return hurdle is cleared, a catch-up provision often lets GPs collect 100% of distributions until they've 'caught up' to their target carry percentage.