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FRM Part I · FRM Exam Part I · Fund Management

A private equity GP is entitled to carried interest, and the fund agreement includes a clawback provision. Which situation does the clawback provision protect against?

A clawback protects limited partners when the general partner has been paid carried interest on early successful deals but later losses mean LPs end up below their contributed capital plus preferred return. The GP must then return the excess carry.

  1. AThe GP having received carry on early profitable exits, while later losses leave LPs with less than their capital plus the preferred returnCorrect
  2. BLPs failing to meet a capital call from the GP
  3. CPortfolio companies failing to repay their debt to the fund
  4. DThe GP charging management fees on uncalled commitments

Explanation

A clawback requires the GP to return excess carry if, over the whole fund life, LPs do not receive their contributed capital plus the preferred return. It addresses deal-by-deal carry paid early followed by later losses. It does not address LP defaults or fee bases.

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