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Vesting, Clawback and Alignment

The provisions that govern who keeps carried interest: vesting schedules and leaver terms, the general partner clawback and how it is computed, escrow and holdback arrangements that secure it, and limited partner giveback obligations.

Who this is for

You are negotiating the terms that decide who keeps carry once it has been earned — vesting and leaver provisions, clawback, the escrow that funds it, and LP giveback.

What happens to carried interest if a fund's later deals lose money?

Carried interest already distributed to a general partner can be clawed back. A clawback obliges the manager to repay distributions that, measured across the fund's whole life, exceeded the agreed profit share, so the calculation runs at the end rather than deal by deal. Escrow and holdback arrangements fund that obligation by withholding part of each distribution, and vesting and leaver terms decide who still holds points when the recalculation lands.1,2,3

Source ILPA, ILPA Private Equity Principles 3.0 (2019) · Duane Morris LLP, Private Equity Funds: Clawbacks and Investor Givebacks · Morgan, Lewis & Bockius LLP, VC & PE Funds Deskbook — *Carried Interest: Vesting*

Carry can be earned, allocated, paid, and still not kept. Four separate mechanisms decide that, and they are negotiated in different clauses by different people at different times. Vesting governs whether an individual retains their points if they leave. Clawback governs whether the general partner must return carry already distributed once the fund's final result is known. Escrow and holdback govern whether there is money available when that obligation crystallises, which is the difference between a clawback that works and one that is merely written down. LP giveback governs what limited partners must return to meet the fund's own obligations. Read together they are the alignment architecture; read separately each looks like boilerplate.

Straight answers

Every question below was observed in a live People-Also-Ask box for a carry search term. None were invented to fill a page.

What is a clawback in PE?

A clawback is the general partner's obligation to return carried interest it has already received, when the fund's final results show it was overpaid. It arises where carry was distributed deal by deal on early profitable exits and later investments performed badly enough that, measured across the whole fund, limited partners did not receive their capital and preferred return. The calculation is performed at the end of the fund's life and reconciles what the general partner actually received against what the waterfall says it should have received overall.

Sources: ilpa-model-lpa-wof-ts · ilpa-principles-3 · duanemorris-clawbacks

What is an example of a clawback?

A fund exits its first investment at a large gain, pays the general partner carry on that deal, and then writes off several later investments — at wind-up the limited partners are short of their capital and preferred return, so the general partner must return the carry it was paid. The obligation exists because the early payment was calculated on one deal rather than on the fund's cumulative result. Whether the money is actually recoverable depends on the escrow or holdback arrangements agreed at the outset, which is why those provisions are negotiated alongside the clawback rather than after it.

Sources: ilpa-model-lpa-wof-ts · ilpa-model-lpa-wof · duanemorris-clawbacks

What is the concept of clawback?

The concept is that interim payments are provisional until the final result is known. A waterfall that pays carry as gains are realized has to reconcile at the end, because the agreed split is a claim about the fund's lifetime economics and not about any single deal. The clawback is that reconciliation expressed as an obligation, and it is what makes deal-by-deal distribution defensible to limited partners at all.

Sources: ilpa-principles-3 · duanemorris-clawbacks

How does vesting work for carried interest?

Carry vesting determines how much of an individual's allocated carry they keep if they leave the firm, typically by earning the entitlement in instalments over a period of years. Points are allocated at the management-company level and vest on an agreed schedule, often with a cliff before any portion is retained. What happens to unvested and vested points on departure depends on the leaver provisions, which usually distinguish between departures on good terms and departures for cause — a distinction documented in the operating agreement rather than defined by any standard-setter.

Sources: morganlewis-carry-vesting

What does equity clawback mean?

"Equity clawback" is not a private fund term, and the substitution matters: in a fund the clawback attaches to carried interest already distributed, not to an equity stake. The general partner clawback is an obligation to return carry it has received once the fund's lifetime result shows limited partners did not get their capital and preferred return. Where an individual instead loses points or units on departure, that is vesting and forfeiture under the management company's operating agreement. The two run between different parties — the clawback from the general partner to the limited partners, forfeiture from an individual to the management company — and they are computed separately even when both are live.

Sources: ilpa-model-lpa-wof-ts · ilpa-principles-3 · duanemorris-clawbacks

What is the typical vesting schedule for carried interest?

There is no market standard for how carried interest vests, and the sourced literature says so in terms rather than leaving it to be inferred. Four exemplar schedules appear there and they are not variants of each other: 20% per annum across years one to five; 20% at closing then 20% per annum in years two to five; 20% at closing with 15% per annum in years two to five plus a 20% holdback running to final dissolution; and 10% per annum straight-line over a full ten-year term. A professional fully vested at year five and one carrying a holdback to dissolution do not hold comparable instruments. Schedules also vary by seniority, with the most senior sometimes fully vested from the outset.

Sources: morganlewis-carry-vesting · states no value

In depth

Vesting and clawback

Market phrases, labelled as such

These are real market usage with no standard-setter behind them. They are defined here because readers meet them in term sheets, and no citation attaches to the phrase itself — only to the sourced mechanic underneath it.

  • Vesting "in the fund"

    no citation may attach to the market phrase; cite only the sourced mechanic

  • Vesting cliff

    no citation may attach to the market phrase; cite only the sourced mechanic

  • Leaver treatment and forfeiture

    no citation may attach to the market phrase; cite only the sourced mechanic