Yes — side letters are usually something to minimize, not celebrate, but banning them outright would make many funds less financeable.
Why allow them:
- Some LPs have legitimate LP-specific needs:
- regulatory or tax requirements
- government / nonprofit source-of-funds rules
- reporting obligations
- anchor LP accommodations based on check size, reputation, or network
- They let the main LPA stay standardized while handling exceptions separately.
When they make sense:
- enhanced reporting
- modest fee or carry breaks
- advisory board seat
- co-investment rights
Usually bad:
- veto rights
- strategy constraints
- anything creating unfair control or lasting GP-entity leakage
Best practice:
- keep them rare, narrow, disclosed, and operationally tracked.
References:
-
https://decilegroup.com/articles/anchor-lp
- https://decilehub.com/base/41-decile-hub/54352-how-could-the-side-letter-provision-section-8-3-create-an-unequal-partnership-even-with-the-disclosure-requirement
