When you go over hurdle rate in PE investment....

CFA Level II
#1

When you go over hurdle rate in PE investment, do you get the carried interest on the % return over the hurdle rate, or it’s just a trigger and you get the full return * carried interest?

#2

Full return * carried interest

#3

Correct. This was on one of the schweser mocks.

#4

It depends on whether it’s a hard hurdle rate or a soft hurdle rate. With a hard hurdle rate, the manager gets carried interest only on the returns above the hurdle rate; with a soft hurdle rate, the manager gets carried interest on all returns, once the return exceeds the hurdle rate.

#5

remember to use annualized return as hurdle rate on annual terms

#6

Is this from CFAI material or you’re own knowledge?

#7

I know that it’s in one of the CFA Levels, but I cannot recall which one.

I’d encourage you to look at the Level II curriculum to verify whether it’s there; if not, they probably have a soft hurdle rate.

#8

Didn’t notice any distinction between soft and hard hurdle rate in CFAI curriculum, but after going through a few examples (both from curriclum and schweser) they all seem to use soft hurdle rate.

Can someone confirm this?

#9

agree with kobi from my experience

#10

Schweser, Volume 4, p. 82: carried interest is usually 20% of _ profits _.

_Not profits above the hurdle rate _.

Soft hurdle.

#11

Thanks.