In practice
The obligation sits in the LPA and usually applies at the fund’s end, though some agreements also test it at interim dates. It is typically capped at the carry received net of taxes, and individual partners often guarantee it, sometimes jointly and severally. Escrow accounts or carry holdbacks are common backstops.
An example
Round numbers, not a real fundSay a fund pays its manager $20 million of carry after a strong first deal, then loses money on the rest. If the manager’s final share is only $5 million, it returns $15 million.
Why it matters
It is the safeguard for investors in funds that pay carry deal by deal, and it bites managers who were paid early and then lost money.
A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.