Glossary
Clawback
A Clawback clause obliges the General Partner to repay Carried Interest already paid out if, over the full life of the fund, it turns out that the GP received more than was agreed. It corrects at the end of the fund's life what early individual exits had already triggered.
At a glance
- It becomes necessary because Carried Interest is often paid out following individual successful exits, while later holdings may still produce losses.
- Many contracts secure the claim through an escrow account. Part of the Carried Interest is retained there until the final settlement.
- The clause is effective only as far as it is enforceable. A review of a fund agreement looks at the security provided, at the time limit, and at whether the repayment applies before or after tax.
Frequently asked questions
Rarely, and that is the real weakness of the clause. In funds that perform well overall it is never triggered. It becomes relevant in funds with one strong early exit and a weak remainder, that is, exactly where years pass between payout and recovery. Whether the repayment then actually happens depends on the security in the contract, not on the clause alone.
