Most Favored Nation (MFN) Clause
A most favored nation (MFN) clause in a private fund is a contractual right that can allow an investor to review and elect specified more favorable side-letter terms granted to other investors, subject to eligibility thresholds, exclusions and procedures.
MFN does not mean every investor receives identical terms
A most favored nation clause is a negotiated mechanism for dealing with differences among private-fund side letters. Depending on the agreement, an LP may receive a compendium or notice of terms granted to other investors and may elect some of those provisions for itself.[1][2]
The right is usually constrained.
Eligibility can depend on:
- commitment size
- investor type
- regulatory status
- tax circumstances
- timing of admission
- whether the term is personal to another investor
- whether the provision can logically apply to the electing LP
MFN is therefore a process, not a promise of perfect equality.
A typical election structure
Assume three LPs commit:
- LP A: $100 million
- LP B: $40 million
- LP C: $10 million
LP A negotiates a fee break and enhanced reporting. LP B has an MFN right that applies to provisions granted to investors committing $25 million or more. LP C has an MFN right only for non-economic regulatory provisions.
After closing, LP B may be allowed to elect some of LP A's terms. LP C may not qualify for the fee provision because of its commitment-size limitation.
The exact outcome comes from the side-letter language.
Why funds use thresholds and exclusions
Some benefits are economically tied to scale. A fee discount negotiated for a $200 million commitment may not be intended for a $2 million investor.
Other terms solve investor-specific legal problems. A sovereign-immunity provision or a tax representation may be meaningless for another LP.
Well-drafted MFN language identifies which provisions are electable and which are excluded rather than treating every side-letter clause as interchangeable.
Transparency is the core economic issue
ILPA has argued that a well-run MFN process can give LPs visibility into relevant terms agreed with other investors and improve transparency during fund negotiations.[2]
That does not make an MFN clause a regulatory requirement. The SEC's 2023 private-fund preferential-treatment rules were vacated in 2024.[3]
The clause remains fundamentally contractual.
MFN versus side letter
A side letter is the agreement containing investor-specific terms.
An MFN clause is one possible provision within that arrangement. It creates a mechanism for comparing or electing eligible terms offered elsewhere.
Common mistakes
“MFN guarantees the best term in the fund.”
Usually not. Thresholds, exclusions and election procedures can materially limit the right.
“A smaller investor can always elect a larger investor's fee break.”
No. Commitment-size carve-outs are common.
“MFN automatically applies forever.”
The timing and process depend on the contract. Election windows can be limited.
“MFN removes all side-letter conflicts.”
No. It can improve transparency and parity for eligible terms but does not eliminate every economic difference among investors.
Example
An investor evaluating Most Favored Nation (MFN) Clause should read the governing documents and identify the specific convention, rights or obligations that apply rather than relying on the label alone.
Professional note
An MFN clause should be reviewed operationally, not just rhetorically. Identify the comparison universe, exclusions, commitment thresholds, delivery format, election deadline and whether elected provisions carry related burdens. A right to elect a benefit can be less valuable if the associated conditions are overlooked.
Related terms
- Limited Partner (LP)
A limited partner (LP) is an investor or other partner in a limited partnership whose rights, obligations, capital commitment and economic participation are governed by the partnership agreement and applicable law.
- Limited Partnership Agreement (LPA)
A limited partnership agreement (LPA) is the governing contract of a fund organized as a limited partnership, defining the rights, duties, economics, governance rules and operating mechanics of the general partner and limited partners.
- Side Letter
A side letter is an agreement between a private-fund sponsor or related party and a specific investor that grants, clarifies, modifies or supplements rights or obligations beyond the generally applicable fund documents.
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