What is an LP side letter?
A side letter is a supplementary agreement between an individual limited partner (LP) and the fund’s general partner (GP) that grants the specific LP terms that differ from — or supplement — the standard Limited Partnership Agreement (LPA). Side letters customise the LP’s rights, obligations, and economic terms without amending the LPA itself, which would require all-LP consent. Side letter use is industry-standard but heavily regulated by MFN (Most-Favoured Nation) clauses that allow other LPs to elect equivalent terms.
Common side letter provisions
- Fee discount: reduced management fee for large or anchor LP commitments.
- Co-investment rights: right of first refusal or pro-rata participation in direct co-investments.
- Excuse rights: opt-out from specific investments (sanctioned countries, prohibited sectors, regulatory restrictions).
- Reporting: enhanced transparency for sovereign or regulated LPs (transaction-level detail, ESG metrics).
- Transfer rights: permitted intra-group transfers without GP consent.
- Most-favoured-nation (MFN): right to elect any more-favourable terms granted to other LPs.
- Key-person: additional triggers or remedies on departure of named investment professionals.
MFN mechanics
- MFN tiers: top-tier (full MFN — all terms), tiered (only terms granted to LPs of similar commitment size), or category-restricted (only ESG, only regulatory).
- MFN election process: GP shares redacted summary of other side letters; LP elects within fixed window (typically 30-90 days post-closing).
- Carve-outs: common exclusions include terms reflecting regulatory status (sovereign immunity, ERISA), structural type (fund of funds gating), or anchor LP arrangements predating fund close.
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