Side Letter Agreements in M&A: 2020–2024 Case Study Case Study

Side letters in M&A have shifted from ancillary paperwork to a core part of deal structuring. In practice, these agreements now carry meaning that can influence post-close value, governance, and liquidity. I’m Angie Reed, and after years watching deals move from LOI to close, I’ve seen side letters become a standing item in the diligence playbook. The trend line is clear: more terms, more complexity, more leverage for LPs.

First, the data is telling. In 2024, Ontra reported a median of 20 obligations per side letter, up from prior years, with a 33% increase since 2021. That means more bespoke protections, more regulatory touch points, and more cross-checks with fund counsel and fund governance. It’s not just length; the content is broader. LPs are pushing for terms that matter to their risk, fee structure, and governance rights, and GPs are responding with more granular covenants and compliance constraints. This reality is changing how diligence is performed and how counsel scopes review.

The fundraising backdrop is a big driver. In 2024, LPs exercised tighter skepticism on new commitments, and that leverage shows up in side letters through MFN provisions, co-investment rights, and drafting around post-closing protections. MFN rights, in particular, remain a workhorse provision that gives LPs broad negotiation leverage across fund terms and future amendments.

Co-investment rights are increasingly common, especially for larger LPs with meaningful capital commitments. There’s no market standard for these rights, so expect highly customized terms that survive portfolio performance reviews and fund lifecycle dynamics.

From a deal flow perspective, the market signals are consistent with the data: a robust rise in asset manager activity and a notable shift toward secondaries, continuation funds, and single-asset vehicles. In 2024, the secondaries market saw more side letters tied to co-investments and continuation funds, reflecting an appetite for structured liquidity and tailored investment horizons. That same year, private equity spend on asset manager acquisitions hit $3.2 billion in Q2 alone, underscoring the capital intensity that often pairs with bespoke side letter terms. Asset managers as buyers chase terms that preserve optionality and manage tail risk.

Why are GPs feeling the pressure? Because deal complexity travels with the deal team. Larger GPs inheriting side letters through industry consolidation face heavier compliance burdens. A diversified funds counsel landscape means more varied drafting standards, more internal controls, and more ongoing monitoring obligations.

If you’ve got a mix of funds, co-investors, and continuation vehicles, you’re not just managing a single contract; you’re managing a system of interlocking commitments. The result is more governance overhead and more need for scalable compliance solutions, like robust side letter management platforms and centralized reporting.

A practical takeaway for practitioners is to align diligence with post-close integration early. Sell-side due diligence helps reduce post-LOI surprises and can expand enterprise value by validating representations and ensuring that side letter terms do not create unanticipated liabilities. In 2024, investors and advisors emphasized that diligence should probe side letter commitments with the same rigor as the target’s financials and legal structure. The emphasis on diligence is not an academic exercise; it translates to real capital protection and smoother close mechanics.

Now, a real-world frame: a case study illustrating how side letters play out in practice. Imagine a mid-market acquisition where a large private equity sponsor contemplates a platform investment in a manufacturing company. The sponsor brings a portfolio of co-investors who expect tailored economic protections and governance rights.

The buyer side negotiates with a suite of LPs that require MFN protections, co-investment rights, and specific post-closing covenants around ESG and controls. The seller’s team, mindful of retention risk and regulatory scrutiny, negotiates to maintain deal certainty while offering limited covenants that won’t derail closing or create excessive leakage.

In this hypothetical yet representative scenario, the side letter process becomes the fulcrum of the deal. The sponsor’s legal team drafts MFN-based language to preserve flexibility across future fund terms. Co-investment rights are carved to reflect different LP tiers, balancing larger commitments with more favorable access to follow-on opportunities. The diligence phase tests these terms against real-world compliance requirements, including SEC disclosures and benchmarking against market norms. The result is a set of side letters that is longer, more nuanced, and more enforceable, but also more integrated with the main purchase agreement and the financing plan. This is not a one-off; it’s a pattern we’re seeing across the market, particularly where independent sponsors or smaller funds participate in middle-market deals.

In terms of market signals, it’s important to anchor expectations to the broader M&A environment. U.S. deal values rose about 15% in H1 2025 year-over-year, even as deal volumes declined roughly 9%.

That dynamic, more value, less volume, puts pressure on buyers to maximize strategic value and to secure high-quality co-investors under terms that are defendable on governance and exit. For sellers, longer side letters can add a layer of complexity that stalls the final terms but can also deliver more certainty around post-close controls and vallue realization.

Legal and regulatory oversight continues to shape the term set. The SEC remains the gatekeeper for disclosures, and directors’ and officers’ duties in complex structures can influence side letter drafting, especially when MFN and co-investment rights interact with disclosure requirements. Law firms like Cooley and Proskauer have highlighted investor negotiation as a driver of these terms: LPs expect GPs to have strong reasons for seeking particular terms or material changes from prior fund terms. In practice, that means a better documented rationale for any deviation from standard side letter terms and a robust internal policy on how those terms will be monitored and reported.

From a governance perspective, the “diversification of funds counsel” trend means more voices in the drafting room. When you spread the legal advisory function across multiple firms or shop for specialists, you increase the likelihood of both thorough review and inconsistent drafting. The outcome: more clarity is required for post-close governance, more standardized internal processes for monitoring compliance, and more proactive communication with LPs about evolving terms.

Looking ahead, the market seems to expect continued emphasis on due diligence rigor and the selective use of bespoke side letter terms. The Goldman Sachs 2025 M&A Outlook notes a recovery to pre-2018 median activity levels possible in 2025, though with caution around valuation and diligence.

PwC’s mid-2025 outlook shows a 9% volume decline but 15% value growth, reinforcing the idea that buyers will prize terms that protect downside risk and maximize upside through structured co-investments and controlled governance. The pattern of 2024, heightened investor selectivity and leverage, will carry into 2025, particularly as LPs become more discerning about where they commit capital.

Practical notes for practitioners:
– Build a centralized side letter management framework to track MFN rights, co-investment terms, and ongoing compliance obligations across funds.
– Align diligence with post-close scenarios to avoid surprises that can derail integration or value realization.
– Document the rationale for deviations from prior fund terms and be prepared to justify them to LPs and regulators.
– Expect longer negotiation cycles in 3-6 month windows; plan for extended diligence and review timelines in the deal calendar.
– Monitor market trends in secondaries and continuation funds, where side letters are increasingly used to govern asset-specific or lifecycle-specific terms.

To keep learning, review the latest Matactic glossary entries on side letters and related terms, and consider enrolling in our free M&A course to sharpen your understanding of how these agreements shape deal outcomes. If you’re ready to deepen your knowledge, stay connected and keep exploring how side letters affect value and risk in real-world deals.

Peace out, and y’all keep pushing on. Trust me, this stuff matters. I’m reel about it, and I’m serious about helping you navigate the term-set that actually moves deals forward. Let’s continue.