Side Letter

Side letters exist because institutional investors and very large limited partners often have leverage to negotiate bespoke terms that the manager would not offer to every investor through the LPA. Common provisions include reduced management fees, co-investment rights, enhanced transparency or portfolio-level data, excuse rights from certain investment types, and specific legal or regulatory accommodations for sovereign wealth funds or ERISA-governed investors.

For a family office entering a fund with a meaningful commitment — illustratively, $25 million or more in a fund with a $500 million target — side letter negotiation is often worth exploring. A family with religious or ethical investment constraints, for example, might seek an excuse right that allows them to opt out of investments in specific industries without penalty.

A critical complication is the most favored nation clause. Many LPAs or side letters grant investors the right to elect the most favorable terms given to any other investor — which means side letter terms can ripple across the LP base in ways managers must manage carefully. Families should understand that side letters are confidential but not invisible; other sophisticated investors often know they exist and may request equivalent treatment.