In a recent piece in this series, our colleagues showed that funds set hurdle rates differently depending on the asset class. Funds also use different approaches for calculating hurdle rates.
Funds typically use one of three main approaches to calculate the hurdle: compounding interest rate, internal rate of return (IRR), or percent of amounts drawn or committed.
When all funds are considered together, the compounding interest rate approach is the most popular. An analysis of Goodwin’s Private Funds Terms Database shows that 50% of funds overall use this approach, while 38% use IRR, and 12% use percent of amounts drawn or committed.
