A hurdle rate is the minimum annualized return a position or fund must earn before the manager shares in profits or before an investment is considered acceptable. In legal assets it has to be tested against the time a matter actually takes.
Because a hurdle is annualized, duration is built into it. A position that returns a healthy multiple can still miss the hurdle if the matter runs long, since the same cash arrives after more years of capital being tied up.
Funds use hurdles in waterfalls and in approval thresholds. A realistic hurdle test uses the duration distribution, including its tail, and not only the median expected duration.
A hurdle rate is not a forecast of return. It is the bar against which a forecast or an outcome is judged.
Working a file that turns on this term?
Working through a diligence process?
Institutional partners evaluating a position against this platform's outcome and duration models are welcome to reach out directly.