Private Equity Partnership Agreements, LPA Waterfalls & GP Clawback
PE American Deal-by-Deal Waterfall & GP Clawback Formula
Calculate Private Equity American (Deal-by-Deal) Early Carried Interest Paid, True Whole-Fund Earned Carry After Later Realized Write-Offs, Gross GP Clawback Liability, and Out-of-Pocket GP Cash Beyond Escrow.
Protect Limited Partners from front-loaded American-waterfall carry overpayments with Escrow + Clawback!
Whereas a European whole-fund waterfall requires returning 100% of ALL called capital before the General Partner receives a dollar of carried interest, a US "American" (Deal-by-Deal) waterfall pays GP carry on early winning exits BEFORE later investments are realized! If early home-run exits generate Early_Realized_Gains (paying Early_Carry = Early_Gains * Carry_Rate), and subsequent portfolio companies suffer Later_Realized_Losses, the GP ends up holding more carry than True Whole-Fund Earned Carry = MAX(0, (Early_Gains - Later_Losses) * Carry_Rate)! Limited Partnership Agreements (LPAs) therefore mandate a Gross GP Clawback = Early_Carry - Earned_Carry at fund liquidation, backed by a Carry Escrow Holdback (e.g., 30% of early carry parked in a segregated escrow account) plus personal GP Out-of-Pocket Cash Clawback for any deficit exceeding escrow!
Verify on a Liquidating Buyout Fund—Early_Winning_Deal_Gains = $50.00M (B2), Later_Realized_WriteOff_Losses = $30.00M (B3), GP_Carry_Rate = 0.20 (20.0%, B4), and Carry_Escrow_Holdback_Rate = 0.30 (30.0% -> $3.00M locked in escrow, B5): Early Deal-by-Deal Carry Paid is 50 * 0.20 = $10.00M (E2); True Whole-Fund Earned Carry on the $20.00M net profit is MAX(0, (50 - 30) * 0.20) = $4.00M (E3); Gross GP Clawback Owed to LPs is 10.00 - 4.00 = $6.00M (E4); and after sweeping the $3.00M escrow, Out-of-Pocket GP Cash Clawback Required is MAX(0, 6.00 - 3.00) = $3.00M (E5)!
| LPA GP Clawback Metric ($50M Early Gains, $30M Late Losses, 20% Carry, 30% Escrow) | Formula | Verified Output |
|---|---|---|
| Early Deal-by-Deal Carry ($M) | Early_Winner_Gains * Carry_Rate | $10.00M |
| Whole-Fund Earned Carry ($M) | MAX(0, (Early_Gains - Late_Losses)*Carry) | $4.00M ($0.00M @ $60M Losses) |
| Gross GP Clawback Owed ($M) | Early_Carry_Paid - Earned_Carry | $6.00M ($10.00M @ $60M Losses) |
| Out-of-Pocket GP Clawback ($M) | MAX(0, Gross_Clawback - Early*Escrow%) | $3.00M ($7.00M @ $60M Losses) |
American-Waterfall Out-of-Pocket GP Clawback Beyond Escrow Formula
Validate Early_Gains > 0, Later_Losses >= 0, 0 < Carry_Rate < 0.50, and 0 <= Escrow_Pct <= 1!
=LET(gn_e, B2, ls_l, B3, cr_r, B4, es_p, B5, IF(OR(gn_e <= 0, ls_l < 0, cr_r <= 0, cr_r >= 0.5, es_p < 0, es_p > 1), "Invalid LPA Clawback Input", LET(cr_0, gn_e * cr_r, cr_t, MAX(0, (gn_e - ls_l) * cr_r), cl_g, cr_0 - cr_t, ROUND(MAX(0, cl_g - cr_0 * es_p), 2))))Net Fund Loss Full-Clawback Stress Check (Set Later Losses = $60.00M)
Increase Later_WriteOff_Losses B3 to $60.00M (-$10.00M net fund loss): Earned Carry E3 drops to $0.00M, Gross Clawback E4 claims 100% of the $10.00M early carry, and GP Out-of-Pocket Cash Clawback E5 hits $7.00M!
=IF(ISTEXT(E5), E5, ROUND(E2 - E3, 2))Try the example
Use the original values or change them to test your understanding.