Top 9 side letter trends in 2025

Side letter trends are impacting GPs’ side letter management and compliance processes. These agreements are growing longer, including more bespoke terms, and creating unique obligations across funds within the same firm, leading to a more challenging management process.

Growing side letter complexity highlights the challenges associated with spreadsheet-based compendia and manual processes. There are too many obligations for in-house legal and compliance teams to know what’s in all of their side letters off the top of their heads or answer questions quickly.

To keep up with side letter trends and their competitors in 2025, GPs can implement an AI-powered obligation management solution. Ontra’s Insight solution digitizes LPA and side letters, increases visibility through categorization and AI Search features, and enables GPs to proactively manage risk. More than 4,800 funds are managed in Insight with over 45,000 documents digitized with the help of AI.

#1 More & longer side letters

It’s no secret that more LPs have negotiated side letters in recent years, and those side letters are getting longer. Ontra saw the median number of obligations in the side letters it processed in 2024 rise to 20 — a total 33% increase since 2021. Many institutional investors have tax, regulatory, and other concerns that are more appropriately addressed outside of the fund’s governing documents. Side letters are also where investors can push for preferential and more individualized terms.

Cooley uncovered at the fall 2024 Private Equity Forward Forum that investors are becoming increasingly more sophisticated, and “the breadth and depth of their operational diligence and comments on documents does not correlate with the size of their commitment.” Smaller LPs are scrutinizing terms as closely as large LPs these days.

Additionally, the past two years created a difficult fundraising environment that led to LPs holding more negotiating power. Investors in 2024 became pickier than ever regarding where they committed new capital. In response, GPs faced a greater burden to negotiate side letters with LPs pushing for bespoke terms.

While the industry at large is optimistic that exits and fundraising will improve in 2025 as inflation settles and interest rates lower, it is uncertain whether side letter negotiations will wane.

#2 Varied levels of negotiating power

We’ve already mentioned greater LP negotiating power, but it’s important to examine the shifting dynamics between GPs and LPs further.

Cooley’s Private Equity Forward Forum found that LPs have been resisting “off-market” terms. LPs expect GPs to have strong reasons for seeking particular terms or material changes from prior fund terms. As Proskauer put it, investors are looking for “a clearly articulated case” if a GP wants to change the overall business arrangement.

LPs, particularly institutional investors, are more likely to negotiate heavily with emerging and first-time managers, according to law firm Thompson Hines. Since the Private Fund Adviser Rules were struck down, emerging funds now have the freedom to privately negotiate favorable terms with key investors. Meanwhile, mature fund managers have greater power to refuse to negotiate and have an established track record to support their terms.

#3 Fee discounts

While this may not be true across the board for all private fund types, Seward & Kissel’s 2023/2024 Hedge Fund Side Letter Study found fee discount terms were increasingly common. Fee discount clauses appeared in 46% of all side letters compared to only 27% of side letters in the prior study. Interestingly, the study found that none of the newer managers’ side letters contained a fee discount clause, which Seward & Kissel believed may be due to the presence of fee breaks built into founders’ classes in many new launches.

These findings might also reflect the current environment, in which private management equity fees hit a 20-year low in 2024. Larger, more established managers negotiating with investors that intend to invest a significant sum are more likely to have the flexibility to reduce management fees. Newer managers, however, have less room to navigate in terms of their management fees and may be less likely to agree to fee breaks in side letters.

#4 MFN rights

Since PFAR was vacated, GPs and LPs can be confident their side letter terms will remain private. However, MFN rights will continue to be important for many LPs in this environment. MFN rights give investors the opportunity to evaluate additional potential side letter clauses and elect clauses they may not have previously negotiated. This adds complexity to side letter negotiations and increases GPs’ workload.

The 2023/2024 Hedge Fund Side Letter Study found MFN provisions in side letters increased from 33% in 2022-23 to 41% this past year. They appeared in 40% of mature managers’ side letters and half of newer managers’ side letters.

Ontra now offers a digital MFN election process for the Premier tier of Insight. As of January 2025, over two dozen accounts have been early adopters of our dMFN feature and created a project in Insight. Those who have completed their projects took an average of only 10 hours in the solution to prepare MFN election forms for distribution to investors. 

#5 Co-investment rights

Both GPs and LPs are increasingly interested in co-investments, and co-investment rights for LPs are becoming more common in side letters. While offering co-investment rights may be a way for GPs to win over LPs during fundraising, GPs are also using co-investments to do bigger deals and nurture portfolio companies, Infrastructure Investor reported.

Since there’s no market standard for co-investment rights, GPs and LPs are free to negotiate bespoke terms. Typically, the larger the LP and the larger its commitment to the parent fund, the better their co-investment terms, the publication wrote.

#6 Secondaries side letters

Ontra has observed an increase in side letters for co-investments, single asset vehicles, continuation funds, and other secondaries. Historically, a secondary buyer acquired an as-is interest and didn’t have the leverage to negotiate side letter provisions. However, with a growing secondaries market, LPs are taking on a more meaningful approach.

GPs may have a greater compliance burden if they have different investors with different terms than those in the main fund. GPs might also deal with varied side letter provisions if different external counsel raises the secondary vehicle than the counsel responsible for the parent fund.

#7 GP consolidation

The asset management industry is undergoing a considerable amount of consolidation, which impacts GPs’ side letter management. According to Pitchbook, as of July 2024, asset managers had spent $14.2 billion on strategic acquisitions. Private equity firms spent $3.2 billion acquiring asset managers in Q2 2024 — the highest quarterly deal volume since Q1 2021. As a result, larger GPs are inheriting their peers’ side letters from ongoing funds. While GPs gain new investors, strategies, and markets, they’re also taking on a greater side letter burden and potential compliance challenges.

#8 Diversification of funds counsel

Another area impacting side letter terms and management is GPs choosing diverse funds counsel. When large, well-established GPs work with various external law firms, different lawyers take different approaches to negotiating side letters. As a result, side letters in various funds can have significantly different terms, creating complexity in the GPs’ compliance programs.

#9 NAV financing terms

While the GPs’ borrowing capabilities are broadly spelled out in the LPAs, some investors may negotiate limitations or notification provisions with regard to NAV or other financing initiatives. As GPs take advantage of NAV loans and other methods of providing a distribution or gaining capital for an investment, law firm Cadwalader, Wickersham & Taft advises a thorough side letter review. GPs may have agreed to notify investors or provide future reporting.

Handle any side letter trend with Insight

GPs can leverage Insight to be ready for any side letter trend in 2025 and beyond. Insight is an AI-backed platform that helps ease the burden of complex side letter management and supports GPs as they fundraise, invest, acquire, and scale.

Ready to learn more? Reach out for a customized Insight demo today.