First, the meaning of the threshold rate of return of funds
1, fund threshold rate of return: Generally speaking, priority rate of return and threshold rate of return are synonymous. Wikipedia's explanation of priority rate of return and threshold rate of return is the minimum rate of return (for example, 8- 12%) that a fund manager (GP) must achieve before getting a performance commission.
Rate of return refers to the rate of return on investment, generally expressed as an annual percentage, and calculated according to the current market price, face value, coupon rate and the time from the maturity date. For a company, the rate of return refers to the percentage of net profit to the average capital used. As the rate of return of personal (and family) and social (government public expenditure) investment, the rate of return research can be divided into personal rate of return and social rate of return, with the former being the main concern.
2. Specific meaning: For example, the threshold rate of return of 1 10,000 is 15%, and then you invest 1 10,000, and the expected rate of return of investment should be greater than 15%. That is to say, this 15% is the lowest rate of return for investing in one million projects. If it is lower than this rate of return, this investment project is a failed investment project.
Second, why does the foundation have a threshold rate of return?
Because a great investment company always makes money for others, it can only give LP a low guaranteed return. (1) When the actual rate of return of PE is lower than this ratio, LP has the right to get all the income, while GP has no right to extract the performance commission, that is, the premise for GP to get the performance commission is that PE has obtained and realized the investment income exceeding the priority income. Priority income of LP should be obtained before other income.
(2) Once the rate of return of PE exceeds the threshold rate of return, GP seems to have crossed a threshold, and it can be rewarded according to work and awarded performance commission.
(3) In practice, some LPAs only specify the specific proportion of return on investment, and do not directly use the names of priority return or threshold return, which actually play the same role. As for the specific proportion, it varies from 6% to 20% or even higher depending on the fund.