The hurdle rate is the minimum rate of return that an investment must achieve to be considered acceptable by its capital providers. In private equity funds, it represents the minimum annualised return (typically 6–8%) that Limited Partners must receive before General Partners begin earning their carried interest. In business valuation and corporate finance, the hurdle rate is equivalent to the WACC — any project or acquisition whose IRR exceeds the hurdle rate creates value for the company's stakeholders.

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Example: a Swiss private equity fund applies an 8% hurdle rate. On a CHF 20.0 million investment over 5 years, LPs must receive CHF 20.0 million × (1 + 8%)^5 = CHF 29.4 million before carried interest is triggered. If the fund distributes CHF 40.0 million at exit, the 20% carry applies to CHF 40.0 - 29.4 = CHF 10.6 million — generating CHF 2.1 million of carried interest for the GPs, with the remaining CHF 8.5 million returned to LPs.

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Hectelion models distribution waterfalls including hurdle rate mechanics in fund valuations and carried interest analyses for GPs and LPs.