What is a side letter?
A side letter is a private agreement between the fund (the general partner) and a single limited partner that modifies, supplements, or clarifies the terms of the main fund documents for that LP alone. The limited partnership agreement governs everyone; a side letter carves out individual treatment for the investor who negotiated it.
Side letters exist because large or strategic LPs have leverage that smaller investors do not. A sovereign wealth fund or a major pension writing a nine-figure check can extract concessions — on fees, on reporting, on co-investment access — that the GP would never offer the whole fund. The side letter is where those concessions live, kept separate from the LPA so the headline terms stay uniform.
Crucially, a side letter binds only the GP and that one LP. It does not amend the fund. But its provisions can ripple across the whole investor base through the most-favored-nation mechanism.
What side letters typically contain
The specific asks vary by investor type, but they cluster into a familiar set.
- Economic terms. Reduced management fees or carried interest, often tied to commitment size or early-close status.
- Most-favored-nation (MFN). A right to elect into better terms granted to other LPs — the provision that links side letters together.
- Reporting and transparency. Additional or more frequent reporting, often to satisfy a regulated LP's own compliance obligations.
- Co-investment rights. Priority access to invest alongside the fund in individual deals, sometimes fee-free.
- Regulatory and legal carve-outs. Excuse or exclusion rights letting the LP opt out of investments that conflict with its mandate (e.g., ERISA, public-policy, or sanctions constraints).
Why the MFN process matters
The most-favored-nation clause is what turns a stack of individual letters into a coordinated exercise. After final close, the GP circulates the menu of side-letter terms — usually tiered by commitment size — and each LP with MFN rights may elect into provisions granted to investors of equal or smaller commitment. A fee break given quietly to one LP can become a fee break the GP must offer broadly. This is why GPs track side-letter obligations meticulously: an unmanaged stack of overlapping commitments is a compliance liability, and a missed MFN election can be a breach.