A side letter supplements the main fund or investment agreement with terms tailored to one party — without changing everyone else’s core documents.

How it works

In fund raises, anchor LPs request side letters covering management fee discounts, carried interest reductions, advisory committee seats, co-investment allocation, ESG reporting, or excusal rights for certain investments. The GP signs individually; other LPs may receive most favored nation (MFN) rights to elect comparable terms if disclosed.

In company financings, large investors occasionally negotiate side letters on information rights, board observer access, or pro rata beyond the standard investors’ rights agreement.

Side letters are confidential. Fund administrators track them to honor fee calculations and co-invest offers.

Why it matters

• LPs: Read the LPA for MFN elections — you may match favorable anchor terms if you ask within deadlines.
• GPs: Side letter sprawl creates operational burden and LP relations risk. Standardize where possible and document consistently.

Common mistake

GPs granting co-invest priority in side letters without capacity to deliver — anchor LPs remember broken promises across fund vintages.

Related ideas

• LPA
• Separately managed account (SMA)
• MFN and anchor LP negotiations