Fund Structure
Preferred Return
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Quick Answer
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.
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Frequently Asked Questions
What is Preferred Return in venture capital?
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.
Why is Preferred Return important for startups?
Understanding Preferred Return is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Preferred Return fall under in VC?
Preferred Return falls under the fund-structure category in venture capital. This area covers concepts related to how venture capital funds are organized, managed, and governed.
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