Side Letter

A Side Letter is a separate agreement between a fund sponsor and an individual investor that modifies or supplements terms in the main partnership agreement, granting bespoke rights or concessions such as fee reductions, reporting enhancements, or transfer flexibility. While side letters can facilitate strategic investor relationships, they create differential treatment among LPs. Lenders require disclosure of side letters because preferential terms can alter cash flows, voting dynamics, or transfer ability, potentially affecting the enforceability of lender remedies and the predictability of equity distributions supporting debt service.

Disclose any side letters during underwriting and provide copies to the lender so underwriters can assess their scope and impact. Lenders will review whether side letters change distribution priorities, provide redemption rights, or grant governance powers that could interfere with the lender’s security or recovery. Sponsors should be prepared to explain why side letters were granted and to demonstrate that such arrangements do not create a material funding or control risk. Transparent disclosure reduces the likelihood that undisclosed bespoke rights will disrupt closing or trigger post-closing lender concerns.

Side letters are important because they can materially change investor economics or rights in ways that affect the asset’s capital structure and the lender’s position. Preferential treatment may reduce the capital available to support debt service or complicate enforcement actions in distressed scenarios. From a lender’s perspective, undisclosed side letters increase underwriting risk and can lead to additional conditions or covenant adjustments. For sponsors, managing side-letter expectations and disclosing them early helps maintain lender confidence and avoids delays or renegotiations during financing.