Escrow / Holdback

Escrow and holdback mechanisms retain a portion of carry (or other distributions) in a controlled account to cover potential future obligations, most commonly GP clawbacks. They are a governance tool designed to ensure that repayment is possible even if individual carry recipients cannot (or will not) repay later.

From an allocator perspective, escrow/holdback is often the difference between “paper protection” and real downside mitigation.

How allocators define escrow/holdback risk drivers

Allocators evaluate escrow/holdback mechanics through:

• Coverage scope: clawback only vs broader liabilities/expenses
• Holdback percentage: sufficiency relative to modeled clawback risk
• Release conditions: objective milestones vs discretionary release
• Control: who controls the account and authorization rules
• Jurisdiction/legal structure: enforceability across entities and individuals
• Transparency: reporting frequency and audit rights
• Interaction with taxes: whether escrow offsets net-of-tax clawback weakness
• Duration: how long funds remain secured (tail risk coverage)

Allocator framing:
“If carry is distributed early, what ensures it can be returned later?”

Where escrow/holdbacks matter most

• American-style waterfalls distributing carry early
• strategies with late-stage write-down risk
• funds with many carry recipients
• managers with limited balance-sheet support

How escrow design changes outcomes

Strong escrow design:

• increases confidence in clawback collectability
• reduces end-of-fund disputes and repayment friction
• supports smoother re-up and IC approvals for allocators

Weak escrow design:

• leaves LPs exposed to repayment uncertainty
• increases dependence on GP goodwill
• produces governance conflict in down markets

How allocators evaluate sufficiency

Conviction increases when managers:

• set holdbacks based on realistic stress scenarios
• define clear release schedules tied to fund-level outcomes
• grant audit rights and transparent statements
• establish independent controls over release decisions

What slows allocator decision-making

• holdbacks too small to matter
• releases controlled solely by GP discretion
• escrow held in structures that are hard to enforce
• limited reporting and no audit rights

Common misconceptions

• “Escrow implies distrust.” → it’s standard risk engineering in long-duration funds.
• “Clawback is enough.” → escrow makes it collectible.
• “Holdbacks slow distributions.” → they reduce tail risk and disputes.

Key allocator questions during diligence

• What % is held back and why that level?
• What conditions govern release and who approves?
• Does escrow cover net-of-tax clawback exposure?
• What audit/reporting rights exist?
• Is the structure enforceable across carry recipients?