A clawback provision requires the general partner to repay carried interest it received during the fund's life if, once every investment is counted, the GP ends up having taken more than the percentage of total profit the limited partnership agreement actually entitles it to.
The clawback exists mainly to correct a deal-by-deal distribution waterfall: because that structure pays the GP its catch-up and carry deal by deal, an early exit can pay out carried interest before later investments in the same fund are known to be losers. The clawback is the limited partners' contractual remedy once the fund's whole-life numbers are in — it is a creature of the LPA, not of any Canadian statute, which is exactly why LPs negotiate hard over how it is secured. The CVCA-annotated ILPA model limited partnership agreement is the document most Canadian funds' clawback language is negotiated from, commonly paired with an escrow holdback of part of each carry distribution, or a guarantee from the GP's individual principals, so the LPs are not left relying only on the GP corporation's own solvency years after the fund has mostly wound down.
Repaying a clawback often means giving back money on which tax was already paid in an earlier year, and how a specific repayment is treated is a question for the fund's own tax counsel, not something this glossary can generalize — well-drafted LPAs address the mechanics of a clawback repayment directly in the agreement itself rather than leaving it to be worked out after the fact.
Two separate questions get asked at wind-up, and it is worth keeping them apart: whether a clawback is owed at all, and whether the GP can actually pay it. The escrow holdback answers the second question by construction — the money is already sitting aside, so collection does not depend on the GP corporation's solvency years after the fund stopped generating fees. Where an LPA relies instead on a personal guarantee from the GP's individual principals, LPs are taking on the collection risk of enforcing that guarantee against people who may, by wind-up, have moved on to a different fund entirely.
At the wind-up of Meridian Growth Fund I, LP, a whole-fund reconciliation shows the GP received $9,000,000 of carried interest across the fund's life against a life-of-fund entitlement of $7,000,000 once every investment, including two later write-offs, is counted. Under the fund's clawback provision the GP must repay the $2,000,000 difference, drawn first against the escrow holdback the LPA required on each carry distribution; only the shortfall, if any, falls to the personal guarantee behind it.
See also: GP catch-up · Distribution waterfall · General partner.
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