M&A Term of the Day: What is a Hurdle Rate?
The newest addition to our M&A glossary is the term "Hurdle Rate". In corporate finance, Hurdle Rate is the minimum expected return which a planned investment or project must yield in order to be accepted. Therefore, the Hurdle Rate is also referred to as the Minimum Acceptable Rate of Return (MARR). Often, a company’s Hurdle Rate is set at its Weighted Average Cost of Capital (WACC), i.e. the discount rate used in DCF calculations for internal purposes. In the context of Private Equity, Hurdle Rate represents the minimum return a fund must generate before the fund managers can collect incentive fees in the form of Carried Interest. In other words, Hurdle Rate is the fund’s minimum expected return to an investor (who is willing to share with the fund management only the return in excess of the minimum expected return). For example, if the Hurdle Rate of a fund is set at 15% and the actual return is 20% then the management remuneration is composed of the agreed fixed annual Management Fee plus the agreed Carried Interest calculated on 5% (20%-15%). Read more in the Glossary Section of mergers-acquisitions.org.
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