Clawback
A duty for the GP to return carry it was paid if LPs end up short.
If early carry was paid on winning deals but later losses mean LPs did not get their capital and preferred return, the clawback makes the GP repay the excess, usually after tax and capped by the carry received.
Clawbacks are usually calculated at the end of the fund and limited to carry received net of the taxes the GP paid on it. To make sure the money can actually be recovered, LPs ask for escrow of part of the carry, personal guarantees from the partners or interim clawback tests during the fund's life.
Clawbacks matter most under deal-by-deal waterfalls, but they also appear in whole-fund structures to cover later losses or expense surprises. A clawback that is unsecured or capped at a low amount gives LPs little real protection.
Worked example
Under a deal-by-deal waterfall a GP receives $6M of carry when Company A sells. Company B later fails, and at the end of the fund LPs have only got their capital back with no profit. The clawback requires the GP to return the $6M, or the after-tax amount, perhaps $4M, if the LPA limits it that way.
Common questions about clawback
How are clawbacks secured?
Through carry escrow accounts, personal guarantees from the individual partners, holdbacks of a share of each carry payment, or interim tests that require repayment before the end of the fund.
Is a clawback calculated before or after tax?
Most LPAs limit the clawback to carry received net of taxes paid on it, because partners cannot easily recover tax already paid. LPs negotiate how that tax amount is calculated.