Clawback
A clawback is a provision requiring the GP to return excess carry if full-fund results do not support carry already distributed.
Allocator relevance: A critical LP protection that reduces misalignment from early carry payouts and protects net outcomes.
Expanded Definition
Clawbacks exist because early realizations can generate carry distributions even if later losses reduce total fund profits. If carry is paid before final outcomes are known—especially in deal-by-deal waterfalls—LPs rely on clawbacks to ensure the GP ultimately receives only what the overall waterfall supports.
Clawback strength depends on enforceability: whether obligations are joint/several across GP entities, backed by escrow, or dependent on individuals’ ability to repay.
How It Works in Practice
At the end of fund life (or specified checkpoints), accountants calculate total carry owed under the full waterfall and compare it to carry already paid. Any excess is repaid to the fund or LPs according to the LPA’s mechanics.
Decision Authority and Governance
Clawback governance includes disclosure, escrow controls, and clear responsibility for repayment. Allocators also evaluate whether the GP has institutional infrastructure to handle disputes and repayment logistics.
Common Misconceptions
- Clawbacks are easy to enforce in practice.
- All clawbacks provide equivalent protection.
- Clawbacks eliminate carry misalignment entirely.
Key Takeaways
- Strong clawbacks protect LP downside alignment.
- Enforcement mechanics matter as much as wording.
- Deal-by-deal carry increases clawback importance.