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Guide

The side letter register: how to build it, and how to run it through every fee, call and report

Checked against our editorial standards4 min read
Fountain pen on black lined paper
Quick answer

A side letter register is one table that records every term a fund has granted to a single LP outside the LPA: who, what, which clause, from when, and what it changes in operations. Build it before the first close, add every letter the day it is signed, run the most favoured nation election from it after final close, and make it the input to the fee calculation, every capital call and distribution notice, every report and the audit. A term that lives only in a PDF gets missed at the first capital call.

Before you start

Read the LPA's side letter clause. It says whether side letters are permitted, what they may cover, whether the GP must disclose them, and how the most favoured nation mechanism works: who may elect, within what window, with what exclusions. Then read every letter already signed, because the register is being built after the first one, not before.

Decide the owner. The register is an operations document, not a legal one: counsel keeps the letters, but the person who runs fees, calls and reports keeps the register, because those are the three places a term lands.

A term's life, from negotiation to audit

Every side letter term passes through these steps. The register is the second one, and everything after it reads from the register, not from the letter.

  1. 1NegotiatedCounsel checks the LPA permits it
  2. 2Signed and registeredOne row per term, the same day
  3. 3ConfiguredFee rate, reporting deliverable or right set up in the system
  4. 4MFN compendiumAfter final close, to LPs entitled to elect
  5. 5Elections registeredNew rows, dated, from the letter's effective date
  6. 6Applied every periodFees, notices, reports, consents
  7. 7TestedThe auditor checks fee allocations against the register
Figure 1The GP Ledger

Step 1. Build the table

One row per term. A letter granting a fee discount, an MFN right, quarterly ESG reporting and a seat on the advisory committee is four rows. Each row carries the LP and its commitment, the letter date and clause, the term in plain words, its category, the operational effect in one sentence, the system where it is configured, the owner, the effective date, and a column for MFN status.

The columns of the register

The first column is the one that prevents problems; the last two are the ones the administrator and the auditor use.

  1. 1LPA clause referenceThe clause that permits the term; if none, counsel before signature
  2. 2LP, commitment and letter dateWho, how much, when signed
  3. 3Term, in plain words'Management fee at 1.75% on commitments', not 'see section 2(b)'
  4. 4CategoryFee, reporting, excuse, co-investment, transfer, MFN, regulatory, other
  5. 5Operational effectWhat changes in a fee run, a notice, a report or a consent
  6. 6System and ownerWhere it is configured, and who checks it each period
  7. 7Effective date and MFN statusFrom when; offered, elected by whom, excluded and why
Figure 2The GP Ledger

Step 2. Register on the day of signature

The rule is the same day, because the alternative is a term that surfaces at the first capital call, which is usually a month after the close. The person who signs for the GP sends the executed letter to the register owner, who adds the rows, sets the effective date and flags the system changes needed. A fee discount goes to the fee model; a reporting deliverable goes to the reporting calendar; an excuse right goes to the capital call procedure; a co-investment right goes to the deal process; a transfer consent goes to the transfer procedure.

Step 3. Configure before the first period

Every row with an operational effect is configured before the first fee run, call or report it touches, and the configuration is checked back to the register by someone other than the person who set it. The most common failure is a discount agreed at closing and applied from the second quarter, with a true-up and an awkward email in between.

Step 4. Run the MFN election from the register

After final close, the register produces the compendium: every term offered to LPs entitled to elect, grouped by category, with the exclusions the LPA and the letters set (terms tied to an LP's legal, tax or regulatory status, and usually terms granted to LPs with larger commitments). Send it, record the election window, record each election as a dated row, and configure the elected terms exactly as in Step 3. The register's MFN column is now the answer to "who has this term", which the auditor will ask.

Step 5. Apply it every period

The register is an input to four recurring processes, and each should start by reading it: the fee calculation (rates, offsets, bases), the capital call and distribution notices (excuse rights, special allocations, notice periods), the reporting calendar (extra deliverables, formats, deadlines), and consents and approvals (transfer rights, advisory committee seats, co-investment offers). Add a line to each procedure: "check the register for terms in this category".

Step 6. Give it to the auditor

The auditor tests fee allocations by LP against the LPA and the side letters. A register that reconciles to the letters, with the configuration evidence, turns that test into an afternoon. Keep the executed letters, the compendium, the elections and the register together, and put the register's version date on the capital account statement workpapers for the period.

What goes wrong

  • The register is the letters folder. Terms in PDFs are not a register; the first capital call finds the one nobody re-read.
  • One row per letter. Six terms in one row are five terms that never reach the fee model.
  • MFN elections not dated. An election applies from a date the letter sets; applied from election day, the fee allocations are wrong for a quarter.
  • Reporting promises outside the calendar. The anchor LP's extra report is due with the quarterly package, and nobody owns it.
  • Signed without the clause check. A term the LPA does not permit is a problem the register records but cannot fix.

Frequently asked questions

What goes in a side letter register?
One row per term, not per letter: the LP, the letter date, the clause reference, the term in plain words, the category (fee, reporting, excuse, co-investment, transfer, MFN, regulatory), the operational effect, the system it is configured in, the owner, and whether it was elected by other LPs through MFN. A letter with six terms is six rows.
How does the MFN election work?
After final close the GP sends each LP with MFN rights a compendium of the terms granted to others, usually limited to LPs with an equal or smaller commitment and excluding terms that exist because of another LP's legal, tax or regulatory status. Each LP elects within the window its letter sets. The elections are new rows in the register, dated, and apply from the date the letter says.
Who should see the register?
The administrator, who allocates fees and issues notices from it; the auditor, who tests fee allocations against it; counsel, who maintains the letters; and the investor relations owner, who tracks reporting promises. LPs see only their own terms and, through MFN, the compendium.
What happens when a side letter conflicts with the LPA?
The LPA usually says the LPA prevails unless it expressly permits side letters, and most do permit them within limits. A term that the LPA does not allow is not fixed by the register; it is a question for counsel before signature, which is why the register's first column is the clause reference.
Do side letters have to be disclosed to all LPs?
Through MFN, the terms covered by the election are disclosed to the LPs entitled to elect them. Institutional LPs increasingly ask for the full compendium in diligence. Beyond that, the obligations come from the LPA, the side letters and what LPs negotiate, not from a rule.

Sources

  1. ILPA Principles 3.0ilpa.org/industry-guidance/ilpa-principles/
  2. ILPA templates hubilpa.org/industry-guidance/templates-standards-model-documents/ilpa-templates-hub/

Terms used in this article

  • 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.
  • MFN (most favoured nation) clause An MFN, most favoured nation, clause is a side letter provision that gives a limited partner the right to see the terms granted to other limited partners in their side letters and to elect any that are more favourable, usually limited to LPs with an equal or smaller commitment and excluding terms that exist because of another LP's legal, tax or regulatory status.
  • 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.
  • Management fee offset Management fee offset is the mechanism in a limited partnership agreement by which fees the general partner or its affiliates receive from portfolio companies, such as transaction, monitoring, advisory or director fees, reduce the management fee charged to the fund, in whole or in part.
  • Co-investment A co-investment is an investment made by a limited partner, or another investor, directly into a portfolio company alongside a fund, outside the fund's own commitment, typically with reduced or no management fee and carried interest, and often structured through a special purpose vehicle that the general partner controls.
  • 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.
  • Capital account statement A capital account statement is the periodic report, usually quarterly, that shows a single limited partner the movement in their capital account over the period: opening balance, contributions, allocated income, gains and losses, management fees and expenses, distributions, and closing balance, alongside their commitment and unfunded commitment.
  • Fund audit A fund audit is the annual examination of a private fund's financial statements by an independent accounting firm, which issues an opinion on whether the statements, including the schedule of investments at fair value and the partners' capital, are fairly presented.
  • First close A first close is the first date on which a fund's general partner accepts subscriptions and admits limited partners, at which point the partnership agreement takes effect, the fund can call capital and make investments, and the management fee usually begins to accrue.
  • Final close A final close is the last closing at which a fund admits limited partners or accepts increased commitments.
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