It’s never too early for LPs to engage with GPs on clawbacks

There are multiple ways an LP can avoid having to take the last resort route of suing a GP over return of paid-out carry.

By Hannah Zhang, CFA

Conversations around clawbacks on carried interest can be a sensitive topic for LPs and GPs alike. Increasingly, they are one that can no longer be overlooked as a growing number of LPs note that their PE performance has been trending downward and even dragging down their overall portfolio return.

There could be almost $80 billion of NAV in funds where carry is owed back to LPs that have backed US vehicles, according to research from Upwelling Capital Group , as Private Equity International explored this week. The paper studied 584 US-domiciled funds from the 2012-15 vintages and extrapolated the result to a broader pool of funds. Assuming a cumulative hurdle rate of 8 percent, the paper found that approximately one in 14 private equity funds in the US is potentially at risk of clawback.

In Upwelling’s experience, GPs in a clawback situation have often suffered from consecutive years of underperformance and have limited resources to fund the clawback liability. Therefore, they are inclined to “kick the can” forward until...

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