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FRM Part II · FRM Exam Part II · Private Markets Investing

Which feature of a private equity limited partnership most directly protects LPs against a GP having been overpaid carried interest after an interim distribution?

A clawback provision is the protection. It obliges the GP to return carried interest that was paid early but exceeds its entitlement once the fund's final cumulative performance is known. Other terms such as key-person or no-fault clauses address manager departure or removal rather than overpaid carry.

  1. AClawback provisionCorrect
  2. BKey-person clause
  3. CNo-fault divorce clause
  4. DCapital call notice period

Explanation

A clawback requires the GP to return carry received in excess of its entitlement (typically 20% of cumulative profit) when final results are lower than interim payments implied. Key-person and no-fault clauses address manager continuity and removal, and call notice periods relate to liquidity timing.

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