Private Equity Side Letters Post-ILPA 3.0

September 7, 2022

In June 2019, the Institutional Limited Partners Association (“ILPA”) released the third edition of its private equity industry best practices principles fostering transparency, governance and alignment of interests for general and limited partners (“ILPA 3.0”)1. ILPA’s aim for the various editions of its best practices document has always been to inform the discussions between each private equity fund general partner and the fund’s limited partners. ILPA 3.0 focuses on five main areas: (1) general partner and fund economics, (2) fund term and structure, (3) key person, (4) fund governance, and (5) disclosures.

Given the dramatic changes in the financial services industry over the past several years as a result of Covid-19 and other global macro factors, we have undertaken a comprehensive review of the side letters that our private equity fund clients have entered into2 since ILPA 3.0 was released, in order to identify important themes. We believe that the number of side letters we have reviewed is large enough to extract some important observations that are relevant to the private equity industry. Set forth below is a summary of our key findings organized based on ILPA 3.0’s five main areas:

(1) General Partner and Fund Economics

  • For purposes of maintaining alignment of interests, a number of limited partners secured a clause in which the general partner and its affiliates could not sell, transfer or otherwise encumber the management fee or the carried interest. Exceptions were typically built in for the general partner to pledge its interests in order to fund its commitments to the fund and other funds.
  • While not necessarily a new concept, most favored nations (“MFN”) clauses continued to be a popular ask among many large side letter investors. They typically were drafted on a looking-forward basis, and contained carveouts for insiders, family members, larger investors, strategic partners, regulatory reasons and different strategies. They also usually had a “package concept” whereby if another investor received a better term coupled with a worse term, the MFN holder would have to elect the whole package of terms and could not just cherry-pick the good one.
  • Some very large limited partners negotiated a clause whereby the preferred return was calculated without taking into account the impact of subscription credit facilities.

(2) Fund Term and Structure

  • A fair amount of the side letters addressed an event that has become a bit more common in recent years, in-kind distributions. Since many limited partners do not have the investment and operational expertise to handle this, we saw a variety of clauses addressing this issue in different ways: (i) a best efforts covenant from the general partner not to do it, (ii) a requirement to sell it on the limited partner’s behalf or work with the limited partner to sell it expeditiously, and/or (iii) a restriction from making distributions in-kind, unless the investor has hired a third party manager to manage the investment on its behalf.
  • Given the increased focus on ESG and other similar political, regulatory (e.g., sanctions) and social issues, more letters (especially from governmental type investors) contained limited partner “opt-out” clauses which allow those limited partners to avoid participation is certain forbidden investments. Note that in some cases, the limited partner requests were initially more proscriptive in seeking an outright prohibition on the fund from making certain investments, however, ultimately the opt-out solution prevailed.
  • As investors have become much more sensitive to privacy concerns and ensuring their limited liability, a clause now seen regularly is one relating to fund borrowings through credit facilities or other means. The clause requires a covenant that any such borrowing will not: impact the limited partner’s interest; change the limited partner’s limited liability status; require the limited partner to pledge its interest; or require the limited partner to disclose personal information.
  • As more managers uncover investment opportunities that do not necessarily fit into the main fund due to capacity or other constraints, there has been a significant increase in recent years in the establishment of one-off special purpose co-investment vehicles (“SPVs”)3 to hold these assets. Accordingly, limited partners who do not wish to miss out on these opportunities are asking that side letters provide for capacity rights with respect to such SPV structures.
  • There has been significant growth of late by advisory firms who represent many fund investors. These advisors are using the collective investment totals of their clients as leverage to increasingly ask that their individual clients be treated in the aggregate when dealing with the general partner and the fund.

(3) Key Person

  • Similar to the alignment of interests point under (1) above, some side letters required the manager’s “key persons” to receive the bulk of any carried interest.
  • It was fairly common to see clauses requiring key persons to maintain at least 51% economic and voting control, although there were usually exceptions for estate planning and for employee compensation reasons.

(4) Fund Governance

  • A number of letters provided very large limited partners with the right to appoint some sort of designated representative on any limited partner advisory committee (“LPAC”).
  • In a number of cases where the general partner was unwilling to provide the limited partner with a designated LPAC representative appointment right, the limited partner was provided with minutes of any recent LPAC meetings.
  • To ensure that any required limited partner votes are properly processed within many larger, complex limited partner organizations, such investors with multi-layered approval processes required that any limited partner consents sought must be affirmatively granted by them in writing, and cannot be elicited via a deemed negative consent process.

(5) Disclosures

  • In some cases, we have observed limited partners who have sought disclosure of the types of investors in the fund and the sizes of their commitments.
  • Some side letters required notice of certain events such as: service provider changes; key person situations; bad acts; final judgments, findings or pleas of guilt/nolo contendere of legal violations, gross negligence willful misconduct or fraud; and, a more recent type ask, indemnification requests above a certain dollar amount.
  • A number of large investors also asked for highly customized disclosure schedules relating to financial and other data in a very specific format. This raises questions that need to be addressed in terms of possible selective disclosure issues and the added costs associated with the production of such materials.

If you have any questions, please contact any of the Seward & Kissel Investment Management attorneys listed below.


1 A downloadable copy of ILPA 3.0 may be found at:

2 It should be noted that the average capital commitment size reflected in the side letters that we reviewed was in excess of $50,000,00 and the terms discussed herein may not have been offered via side letter to smaller investors.

3 For a more detailed discussion of the key issues associated with the establishment of SPVs, please download a copy of our memo on the subject at: