Side letter
A separate agreement giving one LP terms beyond the standard fund documents.
Side letters can cover reporting, fee discounts, co-investment rights, excuse rights or regulatory needs. Larger and earlier investors usually get them, and other LPs may have the right to elect the same terms.
Common side letter terms include fee and carry discounts, co-investment rights, enhanced reporting, LPAC seats, the right to be excused from certain investments, confidentiality carve-outs for public records laws, tax and regulatory provisions, and MFN rights.
After the final close, the GP usually circulates a compendium of side letter terms so eligible LPs can elect them under their MFN rights. Promises must then be tracked and honoured for years, so operational capacity should limit what is offered.
Worked example
A public pension's side letter excuses it from any investment in tobacco or private prisons, adds quarterly reporting in its own template and confirms the fund will respond to public records requests under state law. An anchor's side letter gives it a 0.25 percent fee discount and co-investment priority above $5M.
Common questions about side letter
Do all LPs get side letters?
No. Side letters usually go to larger investors and those with specific regulatory, tax or policy needs. Smaller LPs typically invest on the standard terms.
Can other LPs see side letter terms?
Through MFN rights, eligible LPs usually see a summary of the terms given to others of equal or smaller size after the final close, and can elect those that apply to them.