How do clawback provisions work?
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
If a fund distributes carry early (based on early exits) but later deals underperform, the GP may have to return ('claw back') excess carry. Example: Fund exits Deal 1 at 3x and distributes carry. Deals 2-4 return 0.8x. The fund overall is below hurdle, so the GP must return the carry from Deal 1. This protects LPs from 'cherry-picking' by GPs who take carry on winners but ignore losers.
WHAT INTERVIEWERS LISTEN FOR
- ✓GP returns excess carry
- ✓Early distributions clawed back
- ✓Protects LPs from cherry-picking
- ✓Triggered by overall underperformance
COMMON MISTAKES
- ✗Confusing clawback with vesting
- ✗Thinking clawback applies only to losses
- ✗Ignoring the role of hurdle rate
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