Lesson 6 of 10 · All lessons in this module
- Why appraisal is harder: the life cycle and the J-curveVideo lesson
- Measuring returns: IRR versus MOICVideo lesson
- Leverage: magnifying gains and losses
- Valuation: fair value levels and smoothed returns
- Fees, custom terms and redemption provisions
- Hurdle rates, catch-up, waterfalls and clawbackVideo lesson
- High-water marks, investor timing and either/or feesVideo lesson
- Integrated case: hurdle rate and high-water mark in one fee
- Integrated case: three investors, one fund, four years
- Funds of funds, benchmarks and index biases
Lesson 6 of 10 · 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.
Unlock this lesson free for 7 days
Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.