Side letters are separate agreements between a fund manager (general partner) and one or more investors (limited partners) in a private equity or venture capital fund, or other investment vehicle. These agreements serve to modify the terms or conditions of the fund's main agreement, typically outlined in the Limited Partnership Agreement (LPA) or other offering documents.
Side letters may provide specific investors with certain rights, privileges, or concessions that are not granted to all investors in the fund. These could include preferential fee arrangements, more favorable withdrawal rights, additional reporting requirements, or rights to co-invest in portfolio companies.
The use of side letters can lead to a degree of asymmetry among investors in terms of information and economic benefits. As such, they need to be handled with great care. Regulatory bodies often require that the use of side letters be disclosed to all investors, and in some cases, certain provisions of a side letter may need to be extended to all investors to ensure fairness and transparency.
Therefore, while side letters can be a useful tool for addressing the individual needs of certain investors, they also require careful legal review and management to ensure compliance with regulatory requirements and fairness among all investors in the fund.
