A most favored nation clause, commonly called an MFN, is a side letter provision that gives an LP the right to elect any more favorable terms that the GP has granted to other investors of similar or smaller commitment size. It is a fairness mechanism that prevents a GP from quietly giving one LP a better deal than comparable investors receive.
The logic is straightforward. During a fundraise, the GP negotiates side letters with individual LPs. A pension fund might negotiate a reduced management fee. A sovereign wealth fund might secure expanded reporting rights. An endowment might get priority co-investment access. Without an MFN clause, each LP only knows what they negotiated, and a similarly sized investor might have received materially better terms without anyone being the wiser. The MFN ensures transparency after the fact.
The MFN process typically unfolds after final close. Once all subscription agreements and side letters are executed, the GP compiles a summary of all side letter terms granted to LPs at or below each commitment tier. LPs with MFN rights receive this summary and have a defined window, usually 30 to 60 days, to elect any terms they want to adopt. The elected terms are then incorporated into that LP’s side letter.
There are important boundaries. The MFN comparison is usually limited to LPs of equal or smaller commitment size. A $5 million LP cannot use MFN to claim the fee discount that a $50 million LP negotiated, because the larger commitment justified the concession. Additionally, most MFN clauses carve out terms that exist for regulatory or legal reasons. If an LP received a specific provision because of ERISA compliance requirements or tax treaty considerations, those terms are not available for MFN election by other LPs who do not face the same regulatory constraints.
For GPs, the MFN has a disciplining effect on side letter negotiations. Every concession you grant to one LP may be claimed by every MFN-eligible investor in the fund. A 25-basis-point fee reduction for one $10 million LP might seem harmless in isolation, but if ten other LPs at that commitment level elect the same terms, the revenue impact is significant. This forces GPs to be intentional about what they offer and to whom.
The Institutional Limited Partners Association (ILPA) has been a strong advocate for MFN transparency. Their guidance encourages GPs to proactively offer MFN provisions and to make the election process as clear and accessible as possible. For LPs, requesting MFN rights has become a standard part of the subscription process, particularly among institutional allocators who want assurance that they are not being disadvantaged relative to peers.
Frequently Asked Questions
How does the MFN election process work?
After final close, the GP discloses to MFN-eligible LPs the universe of side letter terms granted to other investors of equal or smaller commitment size. Each eligible LP can then elect to adopt any of those terms. The election is typically time-limited, with LPs given 30 to 60 days to review and respond. Terms elected through MFN become part of that LP's side letter as if originally negotiated.
Are there terms that are typically excluded from MFN?
Yes. Most MFN clauses carve out terms granted for regulatory or legal reasons (such as ERISA compliance or tax treaty provisions), terms specific to an LP's organizational structure, and sometimes terms granted to the GP's affiliates or employees. Reporting format requirements are also commonly excluded since they reflect operational needs rather than economic preferences.
Do all LPs get MFN rights?
Not automatically. MFN rights are themselves a negotiated side letter provision. In practice, most institutional LPs with meaningful commitment sizes request and receive MFN rights. Smaller LPs or those with less negotiating leverage may not. Some GPs grant MFN to all LPs above a certain commitment threshold, which simplifies the process and demonstrates fairness.
