Side Letter Governance

Side Letter Governance refers to the process, controls, and policies used to negotiate, document, track, and operationalize side letters across an LP base. Side letters can grant fee breaks, reporting rights, co-invest rights, ESG disclosures, regulatory accommodations, or MFN terms. Over time, side letters can become a parallel rulebook that creates complexity and potential conflict.

From an allocator perspective, the key risk is not “side letters exist.” The risk is that side letters create uneven treatment, MFN contagion, or operational failures where promised rights aren’t delivered consistently.

How allocators define side letter governance risk drivers

Allocators evaluate side letter governance through:

• Term inventory control: centralized register of all side letter obligations
• MFN management: tracking which terms trigger MFN and who is eligible
• Operational delivery: systems to actually deliver reporting/rights promised
• Fairness and conflict controls: preventing hidden preferential treatment
• Amendment and consent logic: how side letter changes are approved
• Cross-fund consistency: preventing allocation conflicts across vehicles
• Auditability: ability to prove compliance with promised terms

Allocator framing:
“Are side letters a controlled system—or a growing set of exceptions that will break in stress?”

Where side letter governance matters most

• funds with many institutional LPs
• strategies where co-invest and fee breaks are common
• platforms with multiple funds and vehicles
• any fund offering MFN elections broadly

How side letter governance changes outcomes

Strong side letter governance:

• reduces MFN chaos and legal fatigue
• increases allocator trust and comfort in fairness
• prevents operational mistakes that create disputes
• improves ability to scale institutional capital

Weak side letter governance:

• creates MFN-driven renegotiations and time drain
• increases risk of undisclosed preferential treatment perceptions
• leads to operational failures (missed reporting rights)
• triggers reputational damage and future re-up risk

How allocators evaluate governance discipline

Conviction increases when GPs:

• show a clear MFN policy and election process
• maintain a side letter tracker tied to admin/reporting workflows
• define which terms are standard vs exceptional
• communicate clearly how obligations are operationalized

What slows allocator decision-making

• unclear MFN posture
• side letter terms that conflict with LPA mechanics
• inability to demonstrate operational tracking
• history of side letter disputes or inconsistent delivery

Common misconceptions

• “Side letters are just negotiation” → they are ongoing operational obligations.
• “MFN solves fairness” → MFN can create contagion and complexity.
• “We’ll track it manually” → manual tracking breaks at scale.

Key allocator questions during diligence

• Do you have a centralized tracker and who owns it?
• How do you handle MFN elections and eligibility?
• How do you ensure reporting rights are delivered consistently?
• Which terms are considered standard vs exceptional?
• How do side letters interact with co-invest and allocation policies?