What is a carry escrow?

It matters most where carry is paid deal by deal, before LPs have their capital back across the whole fund. ILPA’s Principles say accrued carry should be held in escrow with significant reserves, such as 30% or more of carry distributions, and that an escrow of at least 30% may be enough to back the clawback guarantee. The terms sit in the LPA.

Say a manager is due $20 million of carry and the LPA sets a 30% escrow. It receives $14 million now, and $6 million is held in escrow until the fund’s results are settled. Simple example. Terms vary by fund.

It makes a clawback collectable, so LPs need not chase individual partners for carry they have already spent or paid tax on.