If you’re considering investing in a private equity (PE) fund, you may come across the term side letter. For many high net worth individuals, especially those newer to private equity, this can be an unfamiliar concept. Here’s what you need to know—and whether it might be relevant to your investment.
What is a side letter?
A side letter is a separate agreement between a fund and an individual investor that supplements the main fund documents (like the limited partnership agreement or subscription agreement). It is designed to address that investor’s unique concerns or requirements—things that may not be covered in the standard agreements.
For example:
- If you have specific reporting deadlines for your tax or financial advisors, a side letter can ensure the fund provides the necessary data by a particular date.
- If your personal or religious beliefs prohibit investing in certain industries—like alcohol, tobacco, or pork—a side letter can carve out those restrictions for your portion of the investment.
- If you require additional confidentiality protections or customized notice periods, those too can be added via side letter.
Side letters are common in private funds, especially among institutional investors, such as pension funds or endowments, that have regulatory obligations, investment mandates, or other compliance requirements.
Do I need a side letter?
If you’re an individual investor, especially one not representing other clients or institutions, you may not need a side letter. But in certain cases, it may be worth considering.
Ask yourself:
- Do I have any specific requirements or restrictions related to my investment—such as reporting timelines, compliance needs, or moral exclusions—that aren’t addressed in the standard documents?
- Is my investment large enough that the fund managers may be open to granting accommodations? (Side letters often come with additional administrative burden for the fund, so size can matter.)
- Am I willing to invest time and legal fees to negotiate a side letter that reflects my needs?
If the answer to any of these questions is “yes,” it may be worth asking the fund whether they are open to a side letter.
Final Thoughts
For many individual investors, the fund’s standard agreements may be sufficient. But if you have unique circumstances, a side letter can be a valuable tool to tailor the investment to your needs. It’s also an opportunity to proactively address potential legal or logistical issues before they arise.
If you’re unsure whether a side letter makes sense for your situation—or if you want help reviewing fund documents—book a consultation. I work with high net worth individuals navigating private investments and can help you understand where side letters fit into your overall strategy.
Disclaimer: This article is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. The information is based on general principles of law and may not reflect the most current legal developments in Illinois or your jurisdiction. You should consult with a qualified attorney licensed in Illinois to obtain legal advice tailored to your specific situation.
