The primary reasons that clawback is of such a recent concern to Private Equity (PE) funds are the macroeconomic and geo-political conditions forcing fund managers to delay liquidation events past their initially estimated timeframes. 

As rising interest rates are eating into portfolio company valuations, PE funds are shifting their focus away from liquidation and towards value creating, holding investments longer in an attempt to increase a prolonged exit model. 

However, due to the nature of PE-style waterfall calculations – in which the return on investment required for the General Partner (GP) to receive an allocation of carried interest increases exponentially with every day a portfolio company remains unrealized –, even an increased exit value may not be sufficient to compensate the Limited Partner (LP) for the time-weighted value of their capital.

If the GP has been allocated carried interest based on early fund realizations but then notes their returns have dropped below the Preferred Return threshold based on longer hold-times, there is a significant risk of clawback. 

Read the full ‘Thought Leadership’ article at the link below