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CFA Level I · CFA Level I Exam · Alternative Investment Features, Methods, and Structures

A clawback provision in a private equity fund's partnership agreement is most likely intended to:

A clawback most likely requires the general partner to return carried interest that was paid early but exceeds its final entitlement once the whole fund's results are known. It protects limited partners, especially under deal-by-deal waterfalls where early gains can be followed by later losses.

  1. Areturn excess carried interest to limited partners if early payments exceed the general partner's final entitlementCorrect
  2. Ballow the general partner to recover management fees from portfolio companies
  3. Clet limited partners withdraw uncalled commitments at any time

Explanation

In a deal-by-deal waterfall, the general partner may receive carry early on profitable deals, and later losses can leave it overpaid. A clawback requires the general partner to return the excess so limited partners receive their agreed share of total profits.

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