Reference
Side letters: what they cost and what belongs in the LPA instead
Side letters are negotiated one at a time and complied with forever. The LP-side guidance is clear about what should not be in one, and a first fund is where the habit gets set.
A side letter gives one investor terms the others do not have. They are negotiated once and complied with for the life of the fund, which is the asymmetry that matters: the cost is not the negotiation, it is the decade of operational obligation that follows.
For a first fund the pressure to grant them is highest, because an anchor investor has the most leverage precisely when you have the least.
The LP side does not actually want a thicket of them
This is the part first-time managers find counter-intuitive. ILPA — the limited partners’ own association, writing on behalf of LPs — treats side letter proliferation as a cost to be contained, not a prize to be won:
Side Letters—The cost of negotiating and complying with side letters can be sizeable. In order to minimize the cost and complexity of side letter compliance, GPs should seek whenever possible to include those provisions common across the majority of a fund’s side letters into the LPA itself.
That is the single most useful structural instruction available to a first-time manager. If three investors ask for the same protection, it belongs in the limited partnership agreement, where it is drafted once and administered once. Granting it three times in three separate letters produces three obligations to track, with three slightly different sets of words.
Who pays for them
The costs of negotiating the side letters should be considered an organizational expense and subject to any agreed cap in place. Any costs associated with negotiating side letters not subject to the agreed cap should be fully disclosed to LPs.
Two things follow. Side letter negotiation is an organisational expense, so it counts against whatever organisational expense cap the fund has agreed — and a first fund usually has one. And anything above the cap is disclosable. A manager who negotiates a dozen bespoke letters is spending a capped budget and then reporting the overrun to the same people who granted the cap.
Co-investment rights are disclosable
One category is singled out, and it is a common ask:
Where rights to evaluate or participate pro-rata in co-investment opportunities have been granted via side letters, GPs should disclose the existence of such arrangements to all LPs.
A co-investment preference given quietly to one investor is, on the LP-side standard, something the rest of the fund should be told about. If you would not be comfortable disclosing it, that is information about the term rather than about the disclosure.
On most-favoured-nation clauses
An MFN lets an investor elect into terms granted to others, usually subject to a commitment-size threshold. It is common enough that most first-time managers will be asked for one, and it interacts directly with everything above: an MFN turns a single concession into a fund-wide one, which is a strong argument for putting broadly-wanted terms in the LPA from the start.
We are not going to quote a market standard for MFN thresholds or election windows. ILPA’s Principles do not address MFN terms, and we have found no public dataset that measures them. If someone tells you what the market threshold is, ask what they are counting.
Primary sources
- LP-side standard on side letters and disclosure — ILPA Principles 3.0 (June 2019)
Quotations are from the official text as published, retrieved 2026-08-30. Statutes and rules change; check the current text before relying on any of this.
This is general information about how private funds are structured. It is not legal advice, it is not a recommendation, and it is not a substitute for advice about your own facts.
Independent publication. Advertising does not influence what is reported here.