MFN Clause in Side Letters: Most-Favored-Nation for LPs

An MFN clause in a side letter is an election right: if the GP later grants another LP a better term, the MFN holder can take that term, subject to the carve-outs in its letter. This page is about that clause — election mechanics, size and strategic carve-outs, and the admin burden — not a second definition of what a side letter is.

This is general information, not legal advice. The side letters in SPVs page covers what a side letter is and when sponsors grant one. Read that first. Then use this page to draft, elect, and track the MFN itself.

How an MFN clause in a side letter is elected

An MFN is not an automatic upgrade. The usual machinery is:

1. After each close (or on a stated schedule), the GP circulates redacted copies of other side letters, or a schedule of terms, to each LP that has MFN.

2. The LP has a fixed window, stated in the letter, to elect in writing which terms it takes.

3. The election is all-or-nothing per term, or all-or-nothing per letter, depending on the draft. "Cherry-pick the fee cut and skip the extra reporting" is a drafting choice, not a default.

4. The GP confirms the election and updates the side-letter register. The operating agreement or LPA is not restated.

If the clause is silent on process, you will argue about it at the second close. Write the circulation trigger, the delivery method, the election window, and whether silence is a waiver.

Some drafts are "most favored" only against letters signed after the MFN holder's closing; some look backward as well. Backward-looking MFN is how a late closer pulls a first-close fee cut. Forward-only MFN is how a first closer protects itself against later concessions.

An MFN does not, by itself, give the LP a seat on the LPAC. If you want consultation rights, grant them as a separate clause. Do not bury them inside "more favorable terms."

What "better terms" means in the draft

Define the comparison set. Otherwise every sentence in every letter is an MFN event.

In: management fee, carry, GP commit, excuse rights, transfer rights, information rights, confidentiality, key-person, and other economic or governance terms that apply to the LP's own interest.

Usually out, if you say so: terms granted to a larger commitment, to a first closer, to a strategic or operating partner, to an ERISA or other regulated LP, to a sovereign, or to an affiliate of the GP. Those are carve-outs, not insults. They have to be listed.

Process terms that should be explicit: whether a most-favored fee is computed on the electing LP's own commitment (a 1% fee on $10 million is not "better" than 1.5% on $2 million in dollar terms, but it is better as a rate), and whether the LP must take a linked burden (lower fee in exchange for a longer lock, or extra reporting in exchange for a higher minimum).

The side letter sits next to the PPM, subscription agreement, and operating agreement. If the MFN would amend a provision those documents say can only change by a stated consent, the side letter has to fit that consent. An MFN cannot quietly rewrite the LPA for one LP if the LPA forbids it.

Registered advisers disclose compensation arrangements and conflicts on Form ADV. A fee or carry concession that one LP can pull across the base via MFN is a disclosure item, not only a closing-room item. (SEC, Form ADV instructions.) Counsel decides what goes in the brochure. This page does not complete Item 5 for you.

Common carve-outs

Write carve-outs as a closed list. Open-ended "strategic or similar" language is how two LPs spend a year arguing about a corporate LP that also happens to be a customer of a portfolio company.

• Size. Terms granted to an LP whose commitment equals or exceeds a stated amount, or a stated percentage of the fund. The MFN holder does not get those terms unless it matches the size.

• First close / early close. A closing discount or a reduced fee for LPs who fund by a date.

• Strategic or operating partner. Board help, customer intros, or a secondment. Economic most-favored treatment is a different ask; keep them separate.

• Regulated LPs. ERISA, Folio/BHC, insurance, or public-pension clauses that exist so that LP can subscribe at all. An unregulated LP who elects those clauses may break its own subscription.

• Sovereign / tax / exempt. Withholding, effectively connected income, or sovereign-immunity language that is meaningless to a taxable family office.

• Co-invest or excuse. A co-invest allocation or an excuse or exclude right granted so one LP can skip a deal. Electing that right without the matching policy stack is how you unbalance the vehicle.

• Affiliate of the GP or of another fund. Seed, friends-and-family, or warehouse vehicles.

Each carve-out should say whether it is automatic or whether the GP must notify the MFN holder that a carved-out term exists (so the LP can decide to increase its commitment and qualify). Notification without election is cheaper than a surprise at audit.

The admin burden: circulating other letters

MFN is an operations product. Someone has to:

• Keep a current register of every side-letter term, by LP and by close.

• Redact names, account numbers, and any term the LPA or a confidentiality clause says cannot be shown.

• Send the packet on the stated timetable and log who received it.

• Collect elections, reject elections that reach into a carve-out, and write back a confirmation.

• Feed the result into fee calculations, reporting calendars, and excuse lists so the next call notice is right.

That is why GPs cap the number of MFN letters, or grant MFN only above a commitment size. A fund with four MFN LPs and twelve other letters is a quarterly project. A fund that granted MFN to everyone is a second closing process after every closing.

Do not circulate full unredacted letters unless counsel says the LPA requires it. A term schedule — clause heading, operative sentence, carve-out flag — is enough for most elections and leaks less.

If two MFN holders elect the same fee cut, you now have three LPs on that fee (the original plus two elections). Run the management-fee waterfall from the register, not from the PPM's headline rate.

Election versus carve-out, in one place

Why SPVs often skip MFN entirely

A deal-by-deal SPV usually has one class of interest, one close, and a short life. There is no second close to protect against, and there is no multi-year fee schedule to most-favor. Granting MFN on an SPV means you may have to reopen the operating agreement after a late adder joins — for one company.

Sponsors still see MFN requests on large or institutional SPVs. The clean answers are: decline; grant a one-time fee cut without MFN; or move the relationship into a committed fund where an MFN process already exists. A side letter that only restates the operating agreement is not an MFN.

On Allocations, a Standard SPV is $9,950, a Premium SPV is $19,500, and a fund is $19,500 per year, with 0% platform carry. Those fees are flat. An MFN that cuts GP-level fees or carry is a GP concession, not a platform concession, and 0% platform carry does not change that.

If you grant MFN, put the election mechanics and the carve-out list in the letter, staff the register, and circulate after every close. If you cannot staff the register, do not sign the clause.