What is a Side Letter in Relation to Private Equity and Hedge Funds?
Commonly, private equity and hedge funds are structured as limited partnerships which are governed by the partnership agreement. A partnership agreement will generally determine the rights, actions, and responsibilities of the general partner and limited partners. One aspect that is currently used in the context of private equity and hedge funds is a concept called a side letter.
Side letters are used between limited and general partners regarding certain rights and responsibilities between them. Side letters typically address anything from administrative matters to substantive rights of the general partner and the individual limited partners.
A specific individual limited partner may not agree to certain aspects that are bound to all the limited partners as contained in the limited partnership agreement. Therefore, a specific or a series of individual limited partners may create a side letter. For example, there may be what is called a “lock-up” request regarding limited partners and the capital that they invest into the fund. The agreement may limit when an individual limited partner investor can withdraw money. In this example, a side-letter may be executed between the general partner and the investor regarding a different date when the investor can withdraw their investment.
The rules and regulations for starting a private equity or hedge fund are quite complex, especially when it comes to claiming the correct exemption from registration. You should never start a private equity fund without spending time discussing your business plan with an attorney.
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If you are considering starting a private equity fund and would like to speak with an attorney, please contact our office at (513) 241-0400 or visit our website. We look forward to hearing from you!