Side letters allow for the private equity fund to provide key investors with special contractual rights or privileges.
Side letters are supplementary contractual agreements between a fund and certain investors, and their use is now common practice in most private equity funds established in the Cayman Islands. They allow for the private equity fund to provide key investors with special contractual rights or privileges. As Cayman counsel, we are often asked to advise on the enforceability of investor side letters for strategic investors in a private equity fund context.
Whilst side letters are very useful for providing preferential treatment to important investors, an increasingly significant key issue with their use in private equity funds is their enforceability. Whether a side letter is enforceable will largely depend on the drafting of the fund's constitutional document, the side letter itself, and the provisions of any offering memorandum (if any). It is therefore important that potential use of side letters is considered throughout the entire fund formation process and legal advice is sought early on to ensure that the fund has the flexibility to provide side letters which are enforceable to its key investors.
For a breakdown of the use of Side Letters in the Cayman Islands, their common problem areas, regulatory concerns, and how to avoid these, see here: Side Letters in the Cayman Islands
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
