"Side Letters" in syndications / syndicates

[DongHui Patel]

Anyone dealt with "side letters" before for investments? What are the terms of these usually? 

Please dont reply "it depends" - would be good to have some real examples of what youve seen (Total fund $, amount invested by investor, original terms, and new 'side letter' enhanced terms)

[Brian Burke]

I’ve seen side letters used mostly for whales. For example, someone wants to invest $5 million but wants special treatment in recognition of an unusually large investment.  So a side letter might be used to give that investor a higher preferred return, or an altered profit split, or some type of fee exemption. They can also be used to waive a minimum lock up period, or even something just as simple as altering a transfer provision.  The answer really is “it depends” because side letters are individually negotiated and it really just depends on what that investor’s pain point is that they are trying to solve.

Another application would be for a seed investor.  The thing with funds is that everyone wants to be the last investor and no one wants to be first.  So the fund could use a side letter to juice the return for the first few investors, for example.  Maybe their split is 10% higher or something…that type of thing.

For many sponsors side letters are very rare, while other sponsors might do them more often.  Here’s a real-world example: In my real estate funds I’ve never done a side letter. But I do have one unique fund (not a real estate investment fund) that has the ability to provide liquidity for investors.  The terms of the fund provide for a minimum one year investment period before the investor is eligible to request a liquidating distribution.  But I’ve done multiple side letters for this fund that waive the minimum investment period and provide the investor immediate liquidity if they are requesting a liquidation for the purpose of investing in one of my real estate funds.