hard · Private Credit fund-structures-returns-economics
A direct-lending fund's LPA contains a 'European' (whole-fund) carry waterfall with a GP clawback. Over the fund's life the GP received $30M of carried interest from early profitable exits, but late-life write-downs mean the fund ultimately fails to clear the LP preferred return; the clawback obligation is $12M. The LPA specifies the clawback is calculated 'net of taxes the GP paid on the carry.'
If the GP's blended tax rate on that carry was 25%, what is the LP-protective concern with this 'net-of-tax' clawback provision?
- LPs may recover only $9M instead of $12M, because the GP returns the after-tax amount and LPs absorb the $3M tax wedge the GP already paid to authorities
- LPs recover the full $12M because the GP can reclaim taxes already paid via amended returns, making the net-of-tax language economically irrelevant
- LPs recover $15M total, because the clawback provision grosses up the full repayment obligation by the 25% tax rate to make LPs fully whole pre-tax
- LPs still recover the full $12M but on a delayed payment schedule, since the net-of-tax clause in the LPA affects only timing, not the principal amount ultimately owed
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