What Is a Side Letter?
A side letter is a bilateral contract signed alongside a fund's limited partnership agreement, customizing the deal for one specific investor. While every LP in a private equity or venture fund signs the same core LPA, large or strategic investors often negotiate supplemental rights that apply only to them, documented in a letter that most other investors never see in full.
Typical provisions include management fee or carried interest discounts, guaranteed co-investment access, seats on the LP advisory committee, excuse rights that let the investor opt out of certain deals for legal or policy reasons, tighter reporting requirements, and transfer flexibility. Public pensions frequently negotiate provisions tied to their disclosure obligations, while sovereign funds may require tax or regulatory accommodations.
How Side Letters Work
Negotiating leverage drives the outcome. An anchor investor writing a $200 million check into a $1 billion fund can extract far more than a $5 million commitment, and early closers in a fundraise often receive better terms than latecomers. Fund counsel compiles every negotiated provision into a compendium so the GP can track the obligations owed to each investor across dozens of letters.
The most important mechanic is the most favored nation clause, or MFN. An MFN entitles an LP to see the provisions granted to other investors and elect any it likes, usually limited to investors of equal or smaller commitment size. This tiering means a $100 million LP can typically claim rights given to smaller checks but has no claim on the anchor's package, which preserves the incentive to commit big and early.
Why Side Letters Matter
Side letters shape the real economics of a fund in ways headline terms conceal. Two LPs in the same vehicle can earn meaningfully different net returns once fee breaks and co-investment rights are factored in, which is why sophisticated allocators treat side letter negotiation as a core part of underwriting a fund commitment rather than an afterthought.
The practice also draws regulatory attention. The SEC's 2023 private fund adviser rules sought to restrict preferential treatment around redemptions and portfolio information, and although courts vacated those rules in 2024, disclosure expectations have permanently risen. For candidates targeting fund formation law, investor relations, or LP-side roles, fluency in MFN mechanics and common side letter asks signals genuine private markets knowledge.
