Compliance and Investor Relations: The Importance of Managing Your Side Letters

What is a Side Letter?

In private funds, side letters supplement the limited partnership agreement, which outlines the essential terms and conditions governing the investment vehicle, including the roles and responsibilities of the general partner, who manages the fund, and the limited partners, who are the investors. While all investors must adhere to the terms of the LPA to ensure a consistent operational framework, side letters provide changes to terms for specific investors, addressing their unique needs and preferred requirements. These letters, tailored to individual investors, cover a range of critical areas, highlighting their significance in customizing investment terms and fostering investor relationships.

Critical Areas of a Side Letter

Side letters address several important aspects specific to an investor, including:

  • Portfolio Positions, Fees and Expenses: Detailing preferential terms regarding investment positions, fees, and expenses tailored for specific investors.
  • Regulatory Needs: Ensuring compliance with varying regulatory requirements specific to an investor’s jurisdiction and type.
  • Transparency Reporting: Addressing complex reporting requests and requirements on portfolio and specific events to ensure transparency and compliance with laws.
  • Liquidity Rights: Providing preferential withdrawal rights for partnership interests, addressing investor concerns and regulatory requirements, including waivers of notice periods and gates.

The Importance of Managing Side Letters

Proper management of side letters is crucial for several reasons:

Management of Obligations:

Effective management of side letters helps track and fulfill all obligations outlined in these contracts. This ensures that all commitments to investors are met, fostering trust, and avoiding defaults. Managing these obligations manually can be challenging and time-consuming. The QDS Platform provides an automated solution that includes tasks with reminders, ensuring timely attention and compliance.

Comparison of Terms Across Side LEtters:

By comparing terms across side letters, investment managers can track and manage the obligations, variations and similarities in these letters. This analysis is invaluable for negotiating new side letters and ensuring proper treatment of investors.

Compliance with Firm Policies and Procedures:

Investment managers have compliance manuals that include policies and procedures for managing side letters. These manuals are not just guidelines—they are mandatory frameworks that must be adhered to. Effective management ensures that all side letters satisfy the firm’s overall compliance requirements.

Consequences of Non-Compliance

Failing to follow the firm’s policies and procedures on side letters can result in regulatory action. Regulators regularly conduct reviews of compliance with the investment manager’s manual, including the management of side letters. Non-compliance can lead to significant regulatory action, which may damage the firm’s reputation and financial standing.

Conclusion

Properly managing side letters is essential for investment managers to avoid regulatory action and breaches with investors. QDS offers a software-enabled service to help you stay on top of your obligations. QDS’s proprietary SaaS platform can store, extract, remind, and report on the terms within each side letter. Obligations and action items from these letters can be linked to your calendar for reminders, enabling proactive and timely management to ensure compliance. Stay ahead of all your obligations and remain compliant with QDS’s platform solution.

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