Side letter
A side letter is a bilateral agreement between a fund and a single limited partner that grants that LP terms beyond the limited partnership agreement, such as a management fee discount, most-favoured-nation rights, co-investment rights, excuse rights or additional reporting, and must be tracked and honoured in every subsequent calculation and notice.
Example
An anchor LP negotiates a 25 basis point fee discount and quarterly ESG reporting. From the first capital call onward, that LP's fee allocation differs from every other LP's, and the reporting calendar has an extra deliverable.
Confused with
Most-favoured-nation clause. An MFN is one common side letter term, giving the LP the right to elect any better term granted to another LP. It is the reason side letters compound.
Related terms
- Management fee The management fee is an annual charge paid by the fund to the management company, typically 2% of committed capital during the investment period, often stepping down afterwards to a lower rate or a basis of invested capital, to cover salaries, rent and the cost of running the firm.
- Capital call A capital call, also called a drawdown, is a notice from the general partner requiring each limited partner to wire a portion of their committed capital to the fund by a due date, usually ten business days, to fund investments, fees or expenses.
- KYC and AML KYC (know your customer) and AML (anti-money-laundering) are the checks a fund performs on each prospective limited partner before accepting their subscription: verifying identity and beneficial ownership, screening against sanctions and politically exposed person lists, and documenting the source of funds, with records kept for audit and regulatory review.