Side Letter
Private Equity glossary · Private Equity Fundamentals
Definition
Individual agreement between an LP and the GP modifying the default LPA terms for that LP — the primary mechanism by which large or strategic LPs extract economic concessions, governance rights, or reporting enhancements beyond the LPA's baseline. Commonly negotiated terms: management-fee discounts (5-25 bps below base), accelerated step-downs, enhanced fee offsets (100% vs. 80%), carry discounts (17.5-18% vs. 20%), higher hurdle (9-10% vs. 8%), modified catch-up (50/50 vs. 100%), priority co-investment rights, key-person enhancements, LPAC seats, customized ESG and underlying-portfolio-company reporting. LP negotiating leverage scales with commitment size, anchor status, relationship history, and brand (CalPERS, Harvard, Yale command extensive modifications).
Side Letter in plain English
A fund has one big standard rulebook (the LPA) that everyone signs, but a side letter is a private add-on agreement between the manager and a single investor that tweaks those rules just for them. It's the main way a large or prestigious investor gets a better deal than the crowd — like a frequent-flyer with elite status quietly getting perks the average passenger never sees. Typical perks include lower management fees, a smaller cut of profits going to the manager (say 18% instead of 20%), a higher guaranteed minimum return, first dibs on investing alongside the fund, or a seat on an advisory committee. The bigger the check you write and the more famous your name (think a giant pension fund or Harvard's endowment), the more you can bargain for.
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