Which hurdle allows LPs to receive a guaranteed return before profit-sharing begins?

Which hurdle allows LPs to receive a guaranteed return before profit-sharing begins?

• A. The catch-up hurdle
• B. The preferred return hurdle
• C. The carried interest hurdle
• D. The common equity hurdle

Answer: (B)

The preferred return hurdle is designed to ensure that limited partners (LPs) receive a guaranteed return on their investment before general partners (GPs) start sharing in the profits from the investment. This mechanism provides a level of protection for LPs, allowing them to recoup their capital plus a predetermined return rate before any profit distribution occurs. In typical fund structures, the preferred return is established as a specific percentage, and only after the LPs meet this return threshold does the profit-sharing (or carried interest) arrangement begin, where GPs receive a share based on fund performance. This hurdle is critical in aligning the interests of LPs and GPs, as it incentivizes GPs to perform well while ensuring LPs have a safety net. The other options correspond to different concepts in private equity: - The catch-up hurdle defines a phase where GPs can "catch up" to the LPs’ returns after the preferred return has been met, but it does not guarantee a return for LPs before the profit-sharing starts. - The carried interest hurdle pertains to the portion of profits that GPs are entitled to receive after LPs have received their preferred return and may include additional performance incentives. - The common equity hurdle typically refers to the equity stake

The preferred return hurdle is designed to ensure that limited partners (LPs) receive a guaranteed return on their investment before general partners (GPs) start sharing in the profits from the investment. This mechanism provides a level of protection for LPs, allowing them to recoup their capital plus a predetermined return rate before any profit distribution occurs.

In typical fund structures, the preferred return is established as a specific percentage, and only after the LPs meet this return threshold does the profit-sharing (or carried interest) arrangement begin, where GPs receive a share based on fund performance. This hurdle is critical in aligning the interests of LPs and GPs, as it incentivizes GPs to perform well while ensuring LPs have a safety net.

The other options correspond to different concepts in private equity:

• The catch-up hurdle defines a phase where GPs can "catch up" to the LPs’ returns after the preferred return has been met, but it does not guarantee a return for LPs before the profit-sharing starts.

• The carried interest hurdle pertains to the portion of profits that GPs are entitled to receive after LPs have received their preferred return and may include additional performance incentives.

• The common equity hurdle typically refers to the equity stake