Side letter (private equity)

A side letter is a bilateral agreement between a private equity fund's General Partner and a specific Limited Partner, granting that LP rights or terms that differ from those in the main Limited Partnership Agreement (LPA). Side letters are negotiated alongside the fund subscription and can cover: most-favored-nation (MFN) clauses, co-investment rights, reduced management fees or carry, additional reporting requirements, ESG exclusions, or ERISA-related provisions for US pension funds.

The MFN clause is the most common side letter provision: it entitles the LP to receive any more favorable terms granted to another LP of the same size or category. Side letters create a complex web of inter-LP obligations that GPs must manage carefully — a favorable side letter granted to one LP may trigger MFN claims from multiple others. The materiality of side letters in fund documentation has increased significantly with LP sophistication and institutional investor requirements.

In a Franco-Swiss context, side letter negotiations are conducted during the fund closing process and must be consistent with French and Swiss regulatory requirements for collective investment schemes. For Fonds Professionnels de Capital Investissement (FPCI) and Swiss limited partnership funds (sociétés en commandite de placements collectifs, SCPC), side letter terms must not contradict the regulatory filing and the constitutional documents. At Hectelion, we advise on side letter structuring in our fund structuring mandates.

At Hectelion, we advise on side letter structuring and MFN implications in our fund structuring and LP advisory mandates.