What are LP side letters and what role do they play in PE fundraising?
Side letters are individual agreements between the GP and single LPs that modify the standard LPA for that LP.
- Most favored nation (MFN): the LP automatically receives all benefits from other LPs' side letters.
- Fee breaks: reduced management fee or carry for cornerstone LPs.
- Co-investment rights: direct stakes WITHOUT fee/carry.
- Advisory committee seat: a seat on the LPAC for conflicts votes.
- Excuse rights: the LP can opt out of certain investments.
Deep diveShow more details
| Content | Description |
|---|---|
| ESG reporting | extended reporting for ESG-focused LPs (pensions with SFDR obligations) |
| Key-person clause | extended clauses for GP key-person risk |
| Information rights | extended access to portfolio performance data |
| Tax reporting | specific reporting formats for US pensions, tax authorities in various jurisdictions |
Side letters are standard — around 80% of LPs have at least one. Larger cornerstone LPs (national development banks, large pension and sovereign funds) negotiate comprehensive side letters with all of the above clauses. ILPA has published standard side letters to increase transparency.
The MFN clause typically has a threshold (e.g. only LPs with a commitment over $100m) — protecting cornerstone LPs while leaving the GP flexibility with smaller LPs.
In the interview this is a pro move — knowing side letters shows you understand the buy-side relationship (LP-GP dynamics). Name co-investment rights as the most important clause — they are the main reason large LPs invest in PE funds at all.