A side letter is a separate agreement between the fund (or GP) and a specific investor that modifies the terms of the LPA for that investor. Side letters grant preferential terms such as fee discounts, co-investment rights, reporting enhancements, or opt-out rights.
Why It Matters
Large institutional investors routinely request side letters as a condition of their commitment. Managing them requires careful tracking because most side letters contain MFN (most favored nation) clauses that extend certain terms to other investors who elect to receive them. A single side letter can have implications across your entire LP base.
Key Details
- Common provisions include management fee discounts, carried interest reductions, and enhanced reporting obligations beyond what the LPA requires.
- Co-investment rights give the LP the ability to invest alongside the fund in specific deals, typically on a no-fee, no-carry basis.
- Opt-out rights allow the LP to exclude itself from certain types of investments, for example tobacco, firearms, or other restricted sectors under the LP's own investment policy.
- MFN clauses require the GP to disclose side letter terms to other LPs, who can then elect to receive the same benefits. This creates a tracking obligation that grows with each new side letter.
- Side letter terms must not contradict the LPA. Where a conflict exists, the side letter typically controls for that specific LP, but this should be stated explicitly.
For a full walkthrough of side letter management, see the Side Letters Guide.
Capital Company handles side letter tracking and MFN election processing as part of fund administration.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation.