# Clawback

A **clawback** is a contractual obligation requiring the GP to return previously received [carried interest](/waterfall-and-distributions/carried-interest.md) if, at the end of the fund's life, the cumulative carry paid exceeds what the fund's total performance would entitle the GP to.

## Why Clawbacks Exist

Clawbacks exist primarily to backstop the [American waterfall](/waterfall-and-distributions/waterfall-american.md). Under deal-by-deal carry, the GP may earn carry on strong early exits while later deals underperform — leaving total LP returns below the [preferred return](/waterfall-and-distributions/preferred-return.md) on a fund-wide basis. The clawback ensures the GP cannot keep carry that the overall fund performance does not justify.

Under a [European waterfall](/waterfall-and-distributions/waterfall-european.md), clawback risk is minimal by design — the GP cannot receive carry until all LP capital and preferred return is returned fund-wide.

## Clawback Formula

```
Clawback = Carry paid to date − Carry earned on total fund profit

Where:
  Carry earned = carry rate × max(0, total fund profit − total accrued preferred return)
  Total fund profit = total distributions to LPs + remaining NAV − total paid-in capital
```

If this figure is positive, the GP owes the difference to LPs at wind-down.

## Carry Escrow

Most LPAs in American waterfall funds require the GP to hold a **carry escrow** (also called a **carry reserve** or **holdback**):

* A percentage of carry (typically 20–30%) is withheld from each distribution and held in an escrow account.
* The escrow balance is available to cover the clawback obligation at wind-down.
* Any escrowed carry not required for clawback is released to the GP after the final wind-down audit.

Gildi maintains the carry escrow balance as a separate ledger and surfaces it on the GP carry dashboard.

## Clawback Trigger at Wind-Down

The clawback calculation is performed when the fund reaches wind-down:

1. All positions have been exited (or marked at final fair value for any remaining positions).
2. Total fund profit is finalized.
3. Total carry entitlement is computed on that profit.
4. Carry paid to date (from deal-by-deal distributions) is compared against the entitlement.
5. If carry paid > carry earned, the difference is the clawback amount.

The GP returns the clawback amount to LPs, distributed pro-rata to each LP's paid-in capital.

## LP Protection Mechanisms

Beyond the clawback itself, LPAs typically include:

* **Personal guarantee** — GP principals personally guarantee the clawback obligation, ensuring it survives even if the GP entity is wound down.
* **Net clawback** — clawback is calculated net of taxes the GP paid on the original carry, so the GP is not required to return more than they actually kept after tax.

## How Gildi Tracks Clawback Exposure

For American waterfall funds, Gildi continuously computes the **hypothetical clawback exposure** — the amount the GP would owe if the fund were wound down at the current NAV. This is displayed on the GP's fund dashboard as a risk indicator throughout the fund's life. It goes to zero as distributions eventually cover all LP capital and preferred return.


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