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�鶹��� partner Michael Hong was quoted in Private Equity Law Report discussing contractual mechanisms that GPs pursue to limit the scope and likelihood of clawbacks as well as ways they improve their ability to hold current and former employees accountable for their respective shares of clawback obligations.

Speaking about alterative GP clawback formulations, Michael noted, “It is worth emphasizing that the push in negotiations to omit LPs’ preferred return from GP clawback obligations is not common among GPs.”

The article noted that the most common approach is for GPs to cap clawback obligations to the amount of carried interest that was improperly received, net of any income taxes paid or accrued on those proceeds. “For example, if a GP receives a $100 carried interest distribution from a fund and then pays $30 of it to the government in taxes, then the maximum amount LPs can recoup under a clawback provision is $70,” he explained.

However, he pointed out that a common problem is that many fund managers incorrectly assume that their clawback obligation itself is “after-tax.” “In the scenario where a fund manager received $100 of carry but only netted $70 after tax, if the clawback is for $50, then the manager needs to pay that entire $50 to its LPs,” Michael explained.

Michael continued, “Those LPs are basically saying, ‘the tax proceeds are your problem, not mine,’ which is the first time I’ve seen LPs take that stance in my years in the industry.”

Discussing deferred carry distributions, Michael noted that “a deferment provision is a win-win from LPs’ perspective as it reduces the risk of a clawback and results in them receiving more cash earlier. As a result, most well-drafted private fund LPAs [limited partnership agreements] include the mechanism, and with minimal pushback from LPs.”

Noting that it is common for GP agreements to include a provision allowing the GP to hold back a portion of any carried interest distributions owed to applicable current and former employees, Michael said the proceeds are held in an escrow account. “Of course, if the GP thinks the fund is doing well and a clawback is unlikely, it might release the escrow funds to keep its employees happy,” he added.

“,” Private Equity Law Report (April 17, 2025) (subscription required)