A Clawback is a safety mechanism for investors found in the fine print of AIF agreements. It protects you if the fund manager takes too much profit (carried interest) early on, but the fund underperforms later.
For example, if a manager takes a profit share after a great Year 3, but the fund loses money in Year 5, the clawback provision forces the manager to return that previously taken money to the investors. It ensures that the manager is paid only on the whole fund’s performance, not just the lucky winners.
