The Down Side Of Side Letters In Private Equity

The use of side letters in Canadian private equity and venture capital funds continues to be a common practice, and can assist Funds to secure key investments. However, it is important to understand their legal implications and the limitations on entering into such side letters.

Use of Side Letters

Canadian private equity and venture capital funds are often structured as limited partnerships which are governed by limited partnership agreements (LPA). LPAs are multilateral agreements among the General Partner, the Fund and the limited partners. Certain investors will require side letters, providing them with additional or preferential rights to those granted under the LPA, as a condition to investing in a Fund. In effect, the side letters alter or add to the terms of the LPA for the benefit of a single investor.