Transaction Fee Side Letter Clause
(Private Equity Fund)

Summary

This transaction fee side letter clause for a private equity fund (PEF) is to be used when the PEF is willing to give the investor additional written disclosures regarding fees paid to the General Partner and its affiliates. This clause includes practical guidance and drafting notes. Litigation Alert: In August 2023, the Securities and Exchange Commission (SEC) adopted new and amended rules (New Adviser Rules) that significantly increased the compliance and disclosure obligations of private fund advisers, with the stated goal of increasing visibility into and reforming the practices of advisers in order to protect investors. The rules were immediately challenged in the U.S. Court of Appeals for the Fifth Circuit, and on June 5, 2024, the court fully vacated the New Adviser Rules, holding that the SEC exceeded its statutory authority under the Investment Advisers Act of 1940 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Nat'l. Assn. of Private Fund Managers v. SEC, 2024 U.S. App. LEXIS 13645 (5th Cir. June 5, 2024). We may update this document's guidance as we monitor the litigation and any responsive or adjusted rulemaking by the SEC. The New Adviser Rules include specific requirements regarding quarterly disclosure to investors of fees paid to the fund sponsor or its affiliates. Specifically, private equity fund managers that are registered investment advisers are required to distribute quarterly reports to all investors that include, among other items: • A detailed accounting of all fees and expenses paid to the private equity fund manager and/or its related persons, including any management fee offsets; and • Any other fees and expenses that portfolio companies pay to the private equity fund manager and its related persons. The quarterly statement should set out each category of compensation, fees, and expenses with separate line items for each category, such as for advisory and sub-advisory fees, carried interest, and in each case presented both before and after any offsets, rebates, or waivers. The requirements under the New Adviser Rules—if they survive the ultimate outcome of the litigation described above—to afford all investors increased fee disclosure on a quarterly basis, could diminish the utility of this side letter clause. Even if the Fifth Circuit decision is not appealed, attorneys advising private fund advisors should consider the SEC's enforcement priorities as well as the possibility of new or amended SEC rulemaking. See Fee and Expense Disclosures in Private Equity for examples of SEC enforcement actions. This transaction fee side letter clause is drafted assuming that the PEF is a domestic limited partnership. Note that the legal form and jurisdiction of a PEF can vary, and accordingly, the terms of the transaction fee side letter clause can also take on several formulations, depending on structure. For example, if a PEF is a corporation or company, rather than a partnership, the clause would reference the investment manager and the PEF, instead of general partner and the partnership, respectively. See Onshore/Offshore Structuring Issues for Private Equity Funds for a discussion of PEF structuring variations. This clause should be read in conjunction with the practice notes Private Equity Fund Documents: Drafting and Review and Side Letter Drafting for a Private Equity Fund. This clause assumes that it will be included in a side letter with a PEF. See Side Letter for a Private Equity Fund for an example.