Shadow Contracts - Side Letters in Private Market Funds and Impact Investing - Vol 1 No 10

Sep 16, 2026

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Shadow Contracts examines side letters in private market funds—separate agreements between a fund and selected investors that function as an “invisible amendment” to the main contract. The article frames side letters as “shadow contracts” that implement the Easterbrook/Fischel inaction theory by tailoring terms to investor needs under corporate governance constraints, especially when managers pursue dual goals. Using hand-collected data, it studies their scope, the costs of contracting, and common provisions in impact investing, concluding that standardization, transparency, and potential disclosure can move key terms out of the shadows.

LanguageEnglish

CategoryGeneral

FormatPDF

Pages48

Reading Time17 min

AccessFree to download

Introduction

Contracts and visible amendments

Side letters as hidden mechanisms

Side Letters

Private Market Side Letters

Impact Investing Side Letters

Costs of Side Letters

Impact Investing: A Case Study

Data & Methodology

Common Impact Investing Side Letter Provisions

Investor Return Protections

Impact Protections & Compliance

Participatory Governance

Advisory Committees

Confidentiality and information rights

Discussion

Side Letters as Contracts

Costs of Side Letter Contracting

Writing your own “ticket” on impact

Conclusion

Shadow Contracts Jessica S. Jeffers & Anne M. Tucker* This project explores side letters in private market funds. Side letters, separate agreements between a fund and an investor, act as an invisible amendment to the main contract. This article introduces a new use case for side letters: impact investments, where funds target social, as well as financial returns. Using a hand-collected data set, we examine the scope and role of side letters in this growing space. Side letters as “shadow contracts” demonstrate the Easterbrook/Fischel theories inaction, namely that parties “write their own tickets,” tailoring agreement terms to their specific needs within the framework of corporate governance rules. Expressing preferences and constricting manager power through contracts is even more important when managers serve dual goals. However, side letters come with costs, including direct transactional fees and indirect costs such as additional complexity, slower adoption of best practices, and hidden hierarchies that advantage some parties to the detriment of others. The solution? Standardization and transparency. Common side letter provisions, such as information rights and advisory committees, should be addressed in the main agreement to reduce costs, increase transparency, and push contract innovations out of the shadows. Further, in line with recent SEC proposed rules, side letters should be disclosed. I. INTRODUCTION .........................................................................................260 II. SIDE LETTERS.........................................................................................266 A. Private Market Side Letters ....................................................266 B. Impact Investing Side Letters..................................................271 C. Costs of Side Letters.................................................................276 III. IMPACT INVESTING: A CASE STUDY .......................................................278 A. Data & Methodology .................................................................278 B. Common Impact Investing Side Letter Provisions .................283 1. Investor Return Protections..............................................283 2. Impact Protections & Compliance ....................................287 * Jessica S. Jeffers, Ph.D., Assistant Professor of Finance and David G. Booth Faculty Fellow, Booth School of Business, University of Chicago; Anne M. Tucker, Professor & Faculty Director of Legal Analytics & Innovation, Georgia State University College of Law. We are grateful to collaboration of Eighteen East Capital partners, Dave Portmann and Thomas Venon, Swedish International Development Agency, Global Affairs Canada, the Impact Finance Research Consortium, the Wharton Social Impact Initiative, and the Rustandy Center, in particular fellows, and participant fund general partners, for making this paper possible. Jim Hicks & Hanson Ho provided excellent research assistance; all errors are our own. 260 The University of Chicago Business Law Review [Vol. 1:259 3. Participatory Governance .................................................288 a) Advisory Committees..................................................288 b) Confidentiality and information rights......................293 IV. DISCUSSION ...........................................................................................300 A. Side Letters as Contracts .........................................................300 B. Costs of Side Letter Contracting..............................................302 C. Writing your own “ticket” on impact........................................304 V. CONCLUSION ...........................................................................................306 I. INTRODUCTION Contracts are legal artifacts that represent the best expression of parties’ agreement at the time that the deal is struck.1 Written contracts guide

FAQs

What are side letters, and how do they differ from amendments to the main contract?

Side letters are ancillary agreements negotiated by some parties (often selected investors) that provide terms not visible to all parties. Unlike typical amendments, they can change rights and obligations without broad disclosure or attachment to the main contract.

Why do side letters matter more in impact investing?

Impact investing adds layered objectives beyond financial returns, creating situations where managers pursue dual goals. The article argues that tailored side letter terms help express preferences and constrain manager power under corporate governance rules.

What costs are associated with using side letters?

Side letters can impose direct transactional fees and indirect costs such as added complexity, slower adoption of best practices, and hidden hierarchies that advantage some parties over others.

Sep 16, 2026

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