Definition of Hurdle Rate in Private Equity

Hurdle rate is an important concept in private finance. It is the minimum rate of return an investment must achieve to be profitable.

For example, if the investor requests a rate of return of 10%, the expected return on the investment must be at least 10%, otherwise the investment will be considered unprofitable. This notion is mainly used for private equity investments, and is considered the minimum threshold to be reached to generate sufficient returns to compensate for the risk taken.

Most investors require a higher rate of return than the market rate of return, which is often the case for private equity, in order to compensate for the higher risk associated with these investments. The threshold rate is determined by an investor's risk tolerance and financial objectives.