During a speech in Berlin last month, TPG Capital co-founder Jim Coulter spent a lot of time discussing the future of private equity fund structures. Most of it was in relation to general partner concessions, particularly in light of the ILPA guidelines. But then he brought up the issue of hurdle rates, and suggested that limited partners actually are getting an inappropriately sweet deal.

For the uninitiated, hurdle rates are the percentage return that a fund must generate for investors before fund managers get to begin sharing in the profits (i.e., carried interest).

Coulter said that they were originally structured to mirror 10-year U.S. Treasuries — the broadly-accepted baseline for riskless investment. That’s why hurdles were typically put at between 7% and 8%, which is where Treasuries were priced during most of the late 1980s and early 1990s (when the PE business was really becoming institutionalized). But Treasuries fell below 6% in 1998, and haven’t looked back since. Hurdle rates, on the other hand, have mostly remained stable.

To be sure, there are exceptions. Firms with strong track records often propose lower hurdle rates (because they can), while firms with tougher fundraising slogs often propose higher hurdles rates (because they have to). But the original rationale seems to have been lost.

Coulter did not suggest that TPG planned to take up this particular mantle for its own fundraising efforts, nor did he think 2%-3% hurdle rates would ever become the new normal. But in a time when so much attention is focused on GP/LP alignment, I felt it was worth noting that not everything over the past decade has shifted in the GP’s direction…

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