GP Clawback

A GP Clawback provision requires the GP (and often individual carry recipients) to repay carried interest that was distributed earlier but is not ultimately earned once the fund’s final performance is known.

From an allocator perspective, clawback terms reveal whether downside protections are real, collectible, and timely — especially in scenarios where early wins are followed by later losses.

How allocators define clawback risk drivers

Allocators evaluate clawbacks through:

• Trigger basis: fund-level true-up vs deal-by-deal mechanics
• Calculation method: netting rules, write-down treatment, and expenses
• Net-of-tax terms: whether repayment is gross or net of taxes paid
• Liability structure: who is responsible (entity vs individuals)
• Repayment timing: deadlines, installment options, and enforcement rights
• Security: escrow/holdback, guarantees, or reserve accounts
• Dispute process: audit rights and calculation transparency
• Real-world collectability: whether recipients can practically repay

Allocator framing:
“A clawback that can’t be collected is not protection — it’s narrative.”

Where clawbacks matter most

• American-style waterfalls with early carry distributions
• strategies with high dispersion and late loss risk
• funds with significant leverage or tail-risk positions
• multi-partner teams distributing carry broadly

How clawback design changes outcomes

Strong clawback design:

• reduces LP downside exposure to early over-distributions
• increases trust in economics and governance maturity
• simplifies re-up decisions and internal IC comfort

Weak clawback design:

• creates material end-of-fund repayment risk
• increases governance disputes over calculations
• undermines allocator confidence in alignment

How allocators evaluate enforceability

Conviction increases when managers:

• use fund-level true-up with clear calculation rules
• implement escrow/holdbacks or other security mechanisms
• define personal liability and repayment timeframes
• provide audit rights and transparent reporting

What slows allocator decision-making

• clawbacks net of taxes with no security
• liability limited to an empty GP entity
• unclear calculation methodology and dispute rights
• long repayment timelines or discretionary repayment plans

Common misconceptions

• “Clawback always exists.” → yes, but enforceability varies massively.
• “Net-of-tax is standard and fine.” → without escrow it increases LP risk.
• “Clawback is theoretical.” → it becomes real when late losses occur.

Key allocator questions during diligence

• Is carry distributed deal-by-deal or fund-level?
• Is repayment gross or net-of-tax?
• Who is liable — the GP entity or individuals?
• Is there escrow/holdback security?
• What audit and dispute rights exist?