Side Letter

A supplemental agreement between a fund manager and an individual limited partner that modifies or supplements the terms of the fund's main governing documents as applied to that specific investor, commonly covering matters such as most-favored-nation rights to terms given to other investors, additional reporting or transparency commitments, co-investment rights, or specific regulatory or tax accommodations the investor requires. Side letters are typically kept confidential between the manager and the specific investor, subject to most-favored-nation provisions that may give other investors the right to request comparable terms, and managers must track the cumulative effect of multiple side letters carefully to ensure obligations to different investors do not conflict with one another or with the main fund agreement.

Large institutional investors in litigation finance funds routinely negotiate side letters covering enhanced reporting on portfolio valuation methodology and case-level detail beyond what the standard fund agreement provides, reflecting the asset class's inherent valuation opacity relative to more liquid alternatives. Fund managers managing multiple side letters across a large limited partner base must reconcile potentially overlapping most-favored-nation elections carefully, since granting an enhancement to one investor can trigger obligations to extend it to several others simultaneously.