Clawback
Private Equity glossary · Private Equity Fundamentals
Definition
A contractual obligation for the GP to return previously-distributed carry if, on final fund liquidation, cumulative GP carry exceeded 20% of net fund profit: Clawback = max(0, Carry Paid - 0.20 × Total Fund Profit). Two critical design features: (i) net-of-tax clawback (the GP returns post-tax carry since it paid tax on the original distribution, creating a tax-asymmetry shortfall risk for LPs); (ii) GP escrow (some LPAs require a portion of carry to be held in escrow until final liquidation). American (deal-by-deal) waterfalls carry larger clawback risk than European; interim clawback checkpoints mitigate this.
Clawback in plain English
A clawback is a safety net for investors: it forces the fund manager (GP) to give back reward money it was paid earlier if, at the very end, it turns out the GP took more than its fair 20% share of the total profit. This can happen when early deals win big — the GP collects its cut — but later deals lose money, so across the whole fund the GP was overpaid and must return the excess. It's like a waiter who pockets a generous tip on the appetizers, but if the rest of the meal goes badly the final bill gets recalculated and they owe some of that tip back. Two wrinkles bite the investors: the GP already paid taxes on that money so it may only return the after-tax amount (leaving a gap), which is why some contracts hold part of the GP's reward in a locked escrow account until everything is finally settled.
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