Side Letter Agreement Private Equity


At present, there is very little guidance or authority on the types of provisions that may be included in the letter annexes and, therefore, the options seem almost limitless. While this flexibility and freedom allows add-ons and sponsors to close their own deal, there are some practical concerns with an «Anything Goes» approach to secondary letters. These practical concerns are based on issues of fiduciary duty and contractual interpretation, given the inconsistency between the LPA and a specific subsidiary letter. To the extent that a fund has a credit facility and one of the provisions described above is also covered by the most severe right of relief, these problems may worsen, as several investors may be able to receive the problematic provisions. Directors may therefore include a separation in their most standard reference clause with respect to ancillary letter provisions that affect the Fund`s credit facility. In the opinion of the Securities and Exchange Commission (SEC), there is concern that an investor will receive preferential treatment in a secondary letter, which can have a negative impact on other investors, such as.B liquidity and preferential information rights. However, such provisions may be acceptable if sufficiently disclosed to other investors who are able to take the information into account in their investment decision. The more acute the conflict or the greater the potential impact on other investors, the more detailed and extensive the disclosure should be. SEC staff members who are under review are known to check the secondary letters to see if they are being complied with and if there has been proper disclosure. Deficiencies in this area may lead to negative written findings at the end of an examination and, in sufficiently serious cases, lead to a reference to enforcement. The Managed Funds Association (AMF), an American association The interprofessional organization recommends that hedge fund managers disclose to investors ancillary letters that have been granted to preferred investors and that have a «significant impact» on other investors. 3 The Committee of Asset Managers, a U.S. industry body, proposes that «in cases where secondary letters may affect other investors in the fund, the AIFM should advertise reasonably necessary to enable other investors to assess the potential impact of such secondary letters on their investments».

For example, subsidiary letters that may have negative effects on other investors are: (a) extensive control rights (through investment decisions or key personnel), (b) preferential liquidity/withdrawal rights (significant provisions for staff and withdrawal door waivers), (c) availability of preferential fees and (d) conditions that materially modify the investment program disclosed in the Fund offer documents. 4 The above is a summary of the usual mail requests….