Clawback provision.
In plain English
A clawback provision is a clause in a fund or employment agreement requiring someone to give back compensation they already received. In private funds it usually applies to the general partner's profit share: if early deals pay out well and later deals lose money, the manager may have taken more than the agreed lifetime split, and the excess has to come back to investors. The calculation is normally run at the end of the fund's life, once every investment is sold. Enforcement depends on the manager still having the money and on how the clause is written. Similar clauses appear in executive pay when results are later restated.
01Why it matters
A clawback is the only thing standing between an investor and a manager who was paid handsomely for early wins in a fund that ended up flat or down overall.
02The math, step by step
Say a fund's first exit produces $10,000,000 of profit and the manager takes 20 percent, or $2,000,000. Later deals lose $8,000,000. Lifetime profit is $2,000,000, so the agreed 20 percent share should have been $400,000. The clawback requires returning $2,000,000 minus $400,000, which is $1,600,000.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A high-water mark prevents a fee from being charged in the first place. A clawback recovers a fee that was already paid and spent. One is a gate before payment, the other is a bill after it.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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