Side letters are an (increasingly) common way of formalising negotiated arrangements between a private fund and an investor. Whilst used more widely in the closed-ended fund context (given the limited withdrawal rights associated with such funds, the typically higher level of negotiation and greater structural complexity), they are also a feature of open-ended funds, for instance where there is a seed or cornerstone investor investing significant capital or an investor subject to specific tax or regulatory regimes that require bespoke terms.

A side letter supplements and, where the fund takes contractual form (such as a partnership), can override the terms of the fund’s constitutional documents and is typically required where an investor has specific commercial, legal, regulatory, taxation or operational concerns with respect to its investment in the fund. In many instances it is easier to agree concessions in these separate agreements rather than amend the fund’s constituting documents (being the private placement memorandum and the constitutional documents such as the partnership agreement or articles), especially as the latter approach would mean the rights agreed would generally then be available to all investors. Some rights are also most practically recorded in a side letter (for example confirmation of an advisory committee seat for a closed-ended fund).

This article provides an overview of common side letter terms and current themes in the private fund market. It also considers the regulatory context and practical points for managers navigating the restrictions and obligations of multiple side letters.