Definition
Clawback provisions require the sponsor to repay profits if actual returns fall below projections. It's investor protection encouraging conservative projections.
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Clawback provisions protect investors if performance disappoints. If distributions exceed eventually-realized returns, GP must repay excess. Encourages conservative projections and honest reporting. Limits GP profit-taking in good early years. Increasingly common in institutional deals. Reassuring to investors concerned about aggressive projections. Complex calculation and administration required. Significant protection for limited partners. Professional GPs accept clawback provisions. Reduces conflicts between GPs and LPs.
Pro Tip
Clawback provisions are investor protections. Sponsors accepting them improve credibility.
Example
Clawback provision required GP repayment if investor returns fell below 10% target.