What it is
A preferred return (“pref” or hurdle) is a threshold LPs must receive, typically expressed as an annual percentage of contributed capital, before the GP shares in profits. It is a priority in the distribution order, not a guaranteed payment: if a deal doesn’t earn it, it isn’t paid.
How it works
Key details: is it cumulative (unpaid amounts carry forward) or not? Compounding or simple? Measured on contributed capital or invested capital? Is there a GP catch-up after the hurdle that lets the GP “catch up” to its full 20% share?
Example: $100,000 contributed for two years at an 8% simple, cumulative pref = $16,000 of pref owed before any profit split. If year 1 paid $3,000, $13,000 is still owed.A full catch-up means that after LPs receive the 8%, the next dollars go mostly or entirely to the GP until it has 20% of all profits, so above a certain return the pref no longer changes the economic split. No catch-up keeps LPs ahead at every level of profit.
Good for LPs vs. watch out for
✓ Good for LPs
- Cumulative pref (shortfalls carry forward)
- Pref measured from the day each dollar is contributed
- No GP catch-up, or a partial catch-up
- Return of all capital before the GP splits profits
⚠ Watch out for
- Non-cumulative pref (missed years disappear)
- 100% GP catch-up immediately after the hurdle
- Pref only on invested capital while fees are charged on committed capital
- Marketing that implies the pref is a guaranteed yield
How Story Samurai Investments handles it
The template sets an 8% per annum preferred return, cumulative, on capital contributed to each deal, paid only after LPs get their capital back for that deal (LPA §5.2(a)–(b)). Compounding is [PLACEHOLDER – to confirm]. Whether any GP catch-up applies is [PLACEHOLDER – to confirm]; the template flags the clause for deletion if none. The pref is a distribution priority, not a promised return (Risk Factors #1).
Based on our template documents (TEMPLATE, DRAFT FOR ATTORNEY REVIEW, NOT FOR USE). The final Limited Partnership Agreement controls.
Where to find it in the documents
- LPA Art. 2 (“Preferred Return”), §5.2
- PPM §1, §6
- Risk Factors #1