Private Fund Side Letters: Negotiating and Drafting Key Terms, Financing and Other Concerns
Course Details
- smart_display Format
On-Demand
- signal_cellular_alt Difficulty Level
Intermediate
- work Practice Area
Banking and Finance
- event Date
Tuesday, July 18, 2023
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
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This 90-minute webinar is eligible in most states for 1.5 CLE credits.
This CLE course will discuss the documentation of side letters between private fund managers and investment partners who need or demand terms that may vary from the underlying partnership agreement. The panel will examine most favored nation (MFN) clauses, transfer rights, excusal rights, special reporting provisions, and other terms common to these arrangements. The panel will also discuss the potential administrative and legal ramifications of side letters that fund sponsors must consider before entering into side letters.
Mr. Tope provides investment fund sponsors, investors and principals with creative, commercial and realistic advice relating to fund formation and secondaries transactions. He brings a global perspective to his clients, having represented managers and investors in dozens of jurisdictions. Mr. Tope's sponsor-side clients regularly include prominent secondaries firms, private equity and hedge fund managers, real estate managers, middle market managers and startup managers/spinouts. He advises these clients with entity formation, introductions to service providers, discussions with placement agents, drafting of offering memorandums, negotiations with investors and Investment Advisers Act and Investment Company Act compliance, as well as guidance on ongoing operational funds. Mr. Tope has extensive experience with secondaries transactions including GP-led restructurings, tender offers, stapled secondaries and sales and purchases of significant pools of fund interests. Adam also draws on his experience as a former computer programmer to advise fund managers forming cryptofunds.
Mr. Posthuma is a partner in Ropes & Gray’s private investment funds group in Chicago who focuses on the formation of private investment funds and other transactions involving real estate companies, asset managers and financial institutions worldwide.
Mr. Goldman focuses his practice on legal and compliance matters for investment advisers and unregistered investment vehicles, including private equity funds, hedge funds, funds of funds, venture capital funds, continuation funds, special situation funds and other investment entities and separately managed accounts. Mr. Goldman advises clients on all aspects of private fund formation, including structuring, marketing and side letter negotiations, and top-level structuring of investment advisers and general partners, including governing documents, employment matters and restrictive covenants, incentive awards and ongoing compliance. He has launched private funds and negotiated joint ventures and other strategic relationships that invest in a variety of asset classes, from traditional investment securities to real estate, aircraft, credit instruments and other alternative assets. Mr. Goldman also represents investors and limited partners, including large family offices and institutional clients, in reviewing and investing in private investment vehicles.
Private fund side letters grant exclusive rights and privileges that modify the terms of a fund's partnership agreement. They are used increasingly in the fund formation process, often provided to seed or strategic investors, employees, friends, and family, to accommodate last-minute requests on the eve of the initial closing or to address the needs of limited partners participating in subsequent closings without amending the partnership agreement.
Many prospective limited partners will negotiate MFN provisions that permit the election of any benefits granted to other limited partners. MFN rights can significantly extend the fund's obligations. Fund managers and their counsel must determine whether an investor's terms are captured by MFN provisions when negotiating a side letter.
Other standard provisions may include transfer rights, excusal rights, limitations on fees, redemption rights, a notice of redemptions by other investors, additional reps and warranties, additional due diligence or inspection rights, and enhanced reporting obligations. Counsel must ensure that such provisions are commercially appropriate and operationally practical for the fund and its manager. Counsel must consider side letters in the context of any credit facilities or co-investment arrangements.
Listen as our authoritative panel discusses the provisions typically found in private fund side letters, the motivations behind limited partner requests for side letters, and the potential legal and administrative issues they present for fund managers.
- Introduction to side letters and circumstances under which they arise
- Common terms
- MFN
- Transfers
- Excusal rights
- Enhanced reporting
- Other
- Factors to consider in a negotiation
- Co-investments
- Credit facilities
- Regulatory concerns
- Impact on fund management: need for consistency
The panel will review these and other critical issues:
- When are side letters typically requested in a fund-raise and why are they often preferable to an amendment of the partnership agreement?
- How do MFN rights impact the ability of the fund manager to negotiate side letters?
- What are the most common points of contention concerning transfer rights? Excusal rights? Increased reporting obligations?
- Why is an understanding of any existing or future fund financing arrangements necessary when entering into side letters?
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