Side letter

A side letter gives one investor terms that the fund documents do not give everyone. Typical terms cover fees, reporting and information rights, and the right to be excused from some investments. Many add investment restrictions, such as excluded sectors or a cap on a single holding.

Side letters create preferential treatment, which the AIFM Directive requires to be disclosed. Under Article 23(1)(j), investors must be told how the manager ensures fair treatment and what preferential treatment exists. The disclosure covers which types of investor obtain it and, where relevant, their legal or economic links to the fund or manager.

For monitoring, each restriction in a side letter is an obligation with its own source document. It may bind the whole fund or only the investor’s share. A side-letter exclusion becomes an exclusion screen or a prohibited list, linked to the letter’s clause.