hard · Private Credit & Debt 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 paid via amended returns, making the net-of-tax language economically irrelevant
- LPs recover $15M, because the clawback grosses up the obligation by the 25% tax rate to make LPs whole on a pre-tax basis
- LPs recover $12M but on a delayed schedule, since the net-of-tax clause only affects timing, not the principal amount owed
Sign up free to see the explanation and track your rank →
More Private Credit & Debt fund-structures-returns-economics practice
- What is the fund's TVPI (Total Value to Paid-In) multiple?
- What is the Dividend Coverage ratio?
- What is its current Debt-to-Equity (Leverage) ratio?
- A BDC (Business Development Company) is required to distribu… — What is the primary benefi
- An investor is reviewing a fund's performance and sees a DPI… — What does this suggest abo
- If the fund's net TVPI is only 1.15×, what is the most likely explanation?
- If management achieves a 6.0x Money Multiple (MOIC) on their personal investment, while th
- What is the Sponsor's Money Multiple (MOIC)?