Private Fund Side Letters: Negotiating and Drafting Key Terms, Financing and Other Concerns

Description

Private fund side letters grant special rights and privileges that modify the terms of a fund's partnership agreement. They have become increasingly common in the fund formation process, often provided to seed or strategic investors, employees, friends, and family; to accommodate last-minute requests on the eve of the initial closing; or to address the needs of limited partners participating in subsequent closings without amending the partnership agreement.

Many prospective limited partners will negotiate most favored nation (MFN) provisions that permit the election of any benefits granted to other limited partners. MFN rights can significantly extend the fund's obligations. Fund managers and their counsel must determine whether an investor's terms are captured by MFN provisions when negotiating a side letter.

Other standard provisions may include transfer rights, excusal rights, limitations on fees, redemption rights, notice of redemptions by other investors, additional reps and warranties, additional due diligence or inspection rights, and enhanced reporting obligations. Care should be taken to ensure that such provisions are commercially appropriate and operationally practical for the fund and its manager. Counsel must consider side letters in the context of any credit facilities or co-investment arrangements.

Listen as our authoritative panel discusses the provisions typically found in private fund side letters, the motivations behind limited partner requests for side letters, and the potential legal and administrative issues they present for fund managers.