Definition
The minimum annual return (typically 8%) that limited partners receive before general partners can claim carried interest, functioning as a hurdle rate to ensure LPs get paid first. Think of it as making the GP eat their vegetables before getting dessert.
Example Usage
With an 8% preferred return, our LPs need to receive $43M before we can start collecting our 20% carry on this fund.
Origin
Private equity terminology adopted from real estate partnerships, formalized in VC in the 1980s-1990s
Fun Fact
Preferred returns compound annually but are calculated across the entire fund life, meaning early exits help GPs reach the hurdle faster.
Source: Venture capital and private equity fund structures
Related Terms
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