Top Private Equity News, Member Posts, Managed Futures Daily Indices and more!

3yrs ago Private Equity privateequitylitigation Views: 283

We at The Capital Commitment blog have previously discussed several steps for fund managers and others to weather the storm brought by COVID-19.  One of those steps is assessing the likelihood of a carried interest return obligation under a fund agreement’s general partner clawback provision (and planning for how to mitigate those obligations, if necessary).  A recent article from our colleagues in Proskauer’s Private Funds group highlights the important role that general partner clawbacks play in ensuring the economic deal between a fund manager and the fund’s limited partners is protected, regardless of how market disruptions, such as those brought on by COVID-19, impact a fund’s portfolio.

As detailed in that article, a boom-bust cycle may result in a general partner receiving more than its agreed-upon share of a fund’s cumulative profits if initial investments resulted in large profits, but later investments lose value or are written off entirely.  If distributions of carried interest made early in the life of a fund result in a general partner receiving a total share of the fund’s aggregate profits greater than what was agreed upon with the investors at the fund’s outset, the excess must be returned to the fund for distribution to the limited partners.  It is important to note that general partner clawbacks can and do happen, even for successful funds and for funds that return full contributions back to investors before making carried interest distributions, which is why it is important for all general partners to analyze and plan for a potential return obligation.

Returning carried interest under a clawback obligation can often be complex and painful, as general partners ordinarily distribute carried interest out to their individual members and other carry recipients on or shortly after receipt.  Clawback provisions, on the other hand, are not typically applied until the end of a fund’s life, meaning that several years may pass between distributions of carried interest and the final calculation determining whether excess profits have been received by the general partner.  Asking individuals to return money they received several years prior, and likely have already spent, is very difficult and may increase the potential for disputes between the individual members of the general partner, particularly those who may have already departed the firm.  Fund sponsors that are considering fundraising in the near future should recognize that limited partners will be very interested in whether a sponsor’s prior funds are facing potential clawbacks and what plans the sponsor has to help mitigate and manage those obligations.

Effective communication between and among a general partner and its limited partners, as well as between the individual members of a fund sponsor, are of the utmost importance in managing carried interest clawback risk and avoiding potential disputes.  For more, please check out our colleagues’ recently published article, and watch here for future updates as we continue to monitor disputes and litigation arising from the impacts of COVID-19.

*      *      *

Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.


Today's Private Equity Headlines:

Log In for More
Access Over 250K+ Industry Headlines, Posts and Updates
Not a member yet?

Join AlphaMaven

The Premier Alternative Investment
Research and Due Diligence Platform for Investors

Free Membership for Qualified Investors and Industry Participants
  • Easily Customize Content to Match Your Investment Preferences
  • Breaking News 24/7/365
  • Daily Newsletter & Indices
  • Alternative Investment Listings & LeaderBoards
  • Industry Research, Due Diligence, Videos, Webinars, Events, Press Releases, Market Commentary, Newsletters, Fact Sheets, Presentations, Investment Mandates, Video PitchBooks & More!
  • Company Directory
  • Contact Directory
  • Member Posts & Publications
  • Alpha University Video Series to Expand Investor Knowledge
  • AUM Accelerator Program (designed for investment managers)
  • Over 450K+ Industry Headlines, Posts and Updates
ALL ALPHAMAVEN CONTENT IS FOR INFORMATIONAL PURPOSES ONLY. CONTENT POSTED BY MEMBERS DOES NOT NECESSARILY REFLECT THE OPINION OR BELIEFS OF ALPHAMAVEN AND HAS NOT ALWAYS BEEN INDEPENDENTLY VERIFIED BY ALPHAMAVEN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THIS IS NOT A SOLICITATION FOR INVESTMENT. THE MATERIAL PROVIDED HEREIN IS FOR INFORMATIONAL PURPOSES ONLY. IT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY INTERESTS OF ANY FUND OR ANY OTHER SECURITIES. ANY SUCH OFFERINGS CAN BE MADE ONLY IN ACCORDANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THE INVESTMENT'S PRIVATE PLACEMENT MEMORANDUM. PRIOR TO INVESTING, INVESTORS ARE STRONGLY URGED TO REVIEW CAREFULLY THE PRIVATE PLACEMENT MEMORANDUM (INCLUDING THE RISK FACTORS DESCRIBED THEREIN), THE LIMITED PARTNERSHIP AGREEMENT AND THE SUBSCRIPTION DOCUMENTS, TO ASK SUCH QUESTIONS OF THE INVESTMENT MANAGER AS THEY DEEM APPROPRIATE, AND TO DISCUSS ANY PROSPECTIVE INVESTMENT IN THE FUND WITH THEIR LEGAL AND TAX ADVISERS IN ORDER TO MAKE AN INDEPENDENT DETERMINATION OF THE SUITABILITY AND CONSEQUENCES OF AN INVESTMENT.