What should an investor verify first?

The exact hurdle rate and whether the catch-up mechanism is full or partial.

Which documents matter most?

The PPM's hurdle and catch-up clauses, read directly rather than relying on a summary.

What is the main downside to test?

Assuming an 8% hurdle guarantees investors keep all profit up to that threshold regardless of catch-up terms.

How should the final decision be made?

Work through a numerical example at a few return scenarios to confirm the actual manager-investor split.

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How Hurdle Rate and Catch-Up Work

Reena M1 min read

Understanding the Return Path

A hurdle rate is the minimum return investors must receive before the manager earns any carried interest — commonly 8% for many Indian AIFs. A catch-up clause then lets the manager receive a larger share of subsequent profit until their total carry reaches the agreed percentage of total profit above the hurdle.

Reading Waterfalls, Distributions and Exit Timing

A hurdle alone might suggest the manager only ever earns carry on profit above that threshold, but a full catch-up clause changes this: once the fund clears the hurdle, the manager can receive 100% of the next tranche of profit until they've caught up to their full agreed carry percentage on all profit generated, including the hurdle portion.

Where Liquidity Expectations Break

The common failure is assuming an 8% hurdle guarantees the manager earns nothing until investors have already received an 8% return, without understanding that a full catch-up can then let the manager claim their full carry percentage on the entire profit pool, not just the amount above the hurdle.

Making the Cash-Flow Decision

Before committing, confirm the exact hurdle rate, whether the catch-up is full (100% to manager until caught up) or partial, and work through a numerical example showing manager versus investor split at a few different total-return scenarios.

A hurdle without understanding the catch-up mechanism tells only half the story — always work through both together with real numbers.

Key takeaways

A hurdle rate is the minimum return before the manager earns any carry — commonly 8% for many Indian AIFs.
A full catch-up can let the manager claim their full carry percentage on the entire profit pool, not just above the hurdle.
An 8% hurdle does not automatically mean investors keep all gains up to that point — check the catch-up terms.
Work through a numerical example at a few return scenarios to see the actual manager-investor split.

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