A GP clawback is an LPA provision requiring the general partner to return previously distributed carried interest if, at the end of the fund's life, the GP received more carry than it was entitled to based on the fund's overall performance.
Why It Matters
In a deal-by-deal carry model, early profitable exits can generate carry distributions to the GP before later losses reduce the fund's total return. The clawback ensures the GP does not keep carry it did not earn on a whole-fund basis. Without this provision, LPs bear the risk that the GP profits from early winners while later underperformance goes unaddressed.
Key Details
- The clawback is calculated at fund wind-down or final liquidation, when total distributions to all parties are known and the fund's actual performance can be measured against the carried interest hurdle.
- It applies when total carry distributed to the GP over the fund's life exceeds what whole-fund performance would justify under the waterfall calculation in the LPA.
- The return obligation is typically limited to after-tax carry. The GP returns the net amount after accounting for taxes already paid on prior carry distributions, not the gross amount received.
- Some LPAs require the GP to escrow a portion of carry distributions, commonly 10 to 30 percent, to secure clawback obligations. The escrow is released at final liquidation once the clawback is settled.
- Personal guarantees from GP principals are sometimes required alongside or instead of an escrow. This gives LPs recourse against individuals if the GP entity cannot fund the clawback.
For more on fund economics and waterfall provisions, see Private Fund Documents.
Capital Company handles waterfall calculations and clawback tracking as part of fund administration.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation.