Private Funds: Six Considerations When Negotiating Carry Clawback Provisions

Key Takeaways

• Clawback liability must be ascertained with respect to each investor.
• Standalone clawback obligations may not be sufficient.
• The clawback provision should include a true-up mechanism for sponsors.
• Tax leakages must be accounted for when determining clawback liability.
• The waterfall sequence must be maintained when clawed back amounts are distributed to the LPs.
• In a no-fault removal scenario, the original carry recipients must be released from future clawback liability.

From the very inception of the private equity fund model, limited partners (LPs) have been sensitive to sponsors benefitting disproportionately to investors. This wariness resulted in the carried interest clawback. The idea behind a clawback is to ensure that sponsors have not been overpaid beyond the remit of the waterfall. In the event of overpayment, a sponsor is under an obligation to return distributions until the amounts distributed to the investors and the