The general partner (ME Real Estate) is incentivized to achieve strong results for the investors by participating in the return on investment as part of its fee. The hurdle rate ensures that investors get a minimum specified return before the general partner (GP) is allowed to participate in the deal’s profit. The GP must exceed the hurdle rate for it to share in the profits. Hurdle rates are cumulative and compounded annually. This means that the returns to investors must exceed the hurdle rate for their investment over its entire life before the GP can realize a share of the profits.
The unrealized share of profits to the GP that may accumulate on an annual basis is referred to as “carried interest” or simply “carry.” On each deal, the GP’s hurdle rates are measured using either by the Internal Rate of Return (IRR) or it is based on a multiple of the initial investment amount. The details for each deal are described in the fund’s offering documents. ME’s hurdle rate is usually around 6-8%.