Introduction

When setting up a Special Purpose Vehicle (SPV), most sponsors focus on the big items: entity formation, subscription agreements, KYC/AML, and compliance filings. But once investors begin reviewing documents, a new request often arises: “Can we have a side letter?”

Side letters are an important but sometimes misunderstood feature of private investments. They can help tailor agreements to specific investor needs, but they also introduce potential risks and complexities for sponsors.

This blog explains what side letters are in the context of SPVs, why they matter, what they typically include, and how to handle them responsibly.

What Is a Side Letter?

A side letter is a supplemental agreement between the SPV and one or more investors that modifies or adds terms to the standard documents (usually the operating agreement or subscription agreement).

Think of it as a “custom contract add-on” that sits alongside the main SPV paperwork. While the main documents apply equally to all investors, a side letter creates special rights, obligations, or accommodations for specific LPs.

Why Do Investors Request Side Letters?

Side letters are most often requested by institutional investors, family offices, or strategic LPs who want additional clarity or customized treatment. Common motivations include:

1. Regulatory compliance

   • Certain investors, like pension funds or endowments, must comply with special reporting or governance requirements.

2. Transparency & reporting

   • LPs may ask for enhanced reporting rights beyond what’s standard.

3. Fee concessions

   • Large check writers sometimes negotiate reduced management fees or carry.

4. Governance rights

   • Some LPs want consultation rights on key decisions, even in an SPV.

5. Most favored nation (MFN) protections

   • Investors want assurances that if others get better terms, they’ll be upgraded too.

Common Provisions in SPV Side Letters

While every side letter is unique, here are the most frequently negotiated clauses:

• Fee reductions or waivers
  Example: A $5M anchor investor negotiates a lower carried interest percentage than smaller LPs.

• Enhanced reporting
  Investor receives quarterly financials or ESG metrics, rather than just annual reports.

• Regulatory compliance carve-outs
  Certain investors may request representations to confirm the SPV won’t breach their home-jurisdiction rules.

• MFN (Most Favored Nation) clause
  Ensures the investor gets the benefit of any more favorable terms granted later to other LPs.

• Transfer or exit rights
  Ability to transfer interests more easily in secondary transactions.

• Confidentiality adjustments
  An investor may require stronger or weaker confidentiality obligations.

Risks and Challenges with Side Letters

While side letters can help secure strategic investors, they come with trade-offs:

1. Administrative complexity

Sponsors must track which investors have which rights and ensure compliance with multiple variations of terms.

2. Legal risk

If side letter terms conflict with the operating agreement, disputes can arise. Poorly drafted side letters may undermine the entire structure.

3. Investor fairness

Other LPs may feel disadvantaged if they learn certain investors have better terms. This can damage trust and relationships.

4. MFN ripple effects

A single fee concession granted via side letter could cascade into broader obligations if other LPs have MFN protections.

Best Practices for Managing Side Letters

To balance flexibility with fairness, sponsors should follow these best practices:

1. Use standardized templates

   • Work with counsel or a platform like Allocations to ensure side letter language is consistent and doesn’t unintentionally conflict with core documents.

2. Keep concessions minimal

   • Only grant side letters when absolutely necessary to secure anchor investors.

3. Track obligations carefully

   • Maintain a register of all side letter terms to avoid missing compliance obligations.

4. Disclose MFN clauses transparently

   • Make sure you understand the downstream impact of granting MFN protections.

5. Align with SPV size & scope

   • SPVs are typically single-deal vehicles. Adding complex side letters designed for large institutional funds may create unnecessary friction.

Side Letters in SPVs vs. Funds

Side letters are common in large funds, where big LPs often demand customized treatment. In SPVs, they’re less common but still appear in the following scenarios:

• Anchor investors in a large real estate or venture deal, asking for preferential economics.

• Institutional LPs who need bespoke reporting to satisfy regulatory obligations.

• Strategic investors who want influence or additional rights in connection with the portfolio company.

Because SPVs are usually one-off, single-asset vehicles, sponsors often push back on complex side letter requests. But in competitive deals, granting limited accommodations can make the difference between closing or losing an anchor investor.

How Allocations Simplifies Side Letter Management

Traditionally, managing side letters meant hiring lawyers, redlining dozens of drafts, and manually tracking who had what rights. Allocations streamlines this process by:

• Offering pre-vetted legal templates for common side letter provisions.

• Digitally tracking side letter obligations within the platform.

• Ensuring compliance alignment so side letters don’t conflict with Delaware SPV documents.

• Providing automated investor reporting, making it easy to honor enhanced disclosure requirements.

This allows sponsors to confidently grant side letters without creating unmanageable administrative burdens.

Should You Agree to Side Letters?

Ultimately, whether to agree to a side letter comes down to:

• Deal size and investor leverage – For small SPVs, saying “no” to side letters is often reasonable. For large anchor checks, limited accommodations may be worthwhile.

• Operational capacity – Only commit to obligations you can reliably track and fulfill.

• Long-term precedent – Be mindful of setting expectations that all future investors can negotiate special terms.

Conclusion

Side letters in SPVs can be powerful tools to attract key investors, but they introduce complexity and risk if not handled properly.

• For investors, side letters provide comfort, customized terms, or regulatory protections.

• For sponsors, they can help close large checks but may complicate administration and fairness across the cap table.

By using standardized templates, limiting concessions, and leveraging platforms like Allocations to track obligations, sponsors can strike the right balance—securing investor commitments without undermining simplicity.

Ready to launch your SPV with confidence?
Talk to Allocations today to streamline formation, investor onboarding, and side letter management.