Most Favored Nation (MFN) Clause

How an MFN election works

After the final closing the GP circulates a compendium of the side letter terms granted to other LPs, usually without naming them. Each LP with an MFN right has a stated period to elect the terms it wants. An elected term comes with any conditions and obligations attached to it in the original side letter.

Size tiers

Most MFN clauses let an LP elect terms granted to LPs whose commitments are equal to or smaller than its own. Commitments of affiliated entities, or of clients advised by the same consultant, are sometimes aggregated to reach a higher tier. The result is a tiered system in which the largest LPs can see and elect the most terms.

Common carve-outs

Terms that typically cannot be elected include: provisions tied to an investor's legal, regulatory, tax or policy status (for example, ERISA, public-records laws, sovereign immunity or religious investment restrictions); LPAC seats; co-investment rights; fee or carry concessions linked to commitment size or to closing early; terms given to seed or anchor investors; arrangements with the GP's affiliates and employees; and consents or waivers given in specific circumstances. The scope of carve-outs is a frequently negotiated point.

Fee classes and MFN

Some managers offer fee discounts through classes defined in the LPA (for example by commitment size or closing date) rather than through side letters, which keeps fee terms visible to all LPs and outside the MFN process. The Institutional Limited Partners Association (ILPA) makes the general point in its Principles 3.0: provisions common to most of a fund's side letters should, where possible, be written into the LPA itself.

Jurisdiction and status

EU. The Alternative Investment Fund Managers Directive (AIFMD) requires managers of alternative investment funds to treat all investors fairly, permits preferential treatment only if it is disclosed in the fund's rules or instruments of incorporation and, where an investor obtains preferential treatment or the right to it, requires a description of that treatment, the type of investors that obtain it and, where relevant, their links with the fund or its manager to be made available to investors before they invest. The 2024 amending Directive (EU) 2024/927 did not change these provisions. US. The private fund adviser rules adopted by the Securities and Exchange Commission in 2023 included a preferential treatment rule that would have prohibited certain preferential redemption and information rights and required disclosure of other preferential terms; the Fifth Circuit vacated those rules on 5 June 2024 and the Commission removed their text from the Code of Federal Regulations with effect from 19 November 2024. As of 2 October 2026 no Commission rule specifically requires side letter disclosure; disclosure among LPs rests on the LPA, MFN processes and the general antifraud provisions, including Advisers Act rule 206(4)-8, which prohibits an adviser to a pooled investment vehicle from making untrue or misleading statements of material fact to the vehicle's investors or prospective investors.

Not the same as

• Side Letter: A side letter is the agreement that grants investor-specific terms; the MFN is one of the terms it can grant.
• LP Consent Rights: Consent rights are votes on fund matters; an MFN is a right to elect other investors' terms.

Common mistakes

• Assuming an MFN gives access to every side letter term. Size tiers and carve-outs exclude many.
• Electing a term without its attached conditions.
• Missing the election window after the compendium is circulated.

Questions

Sources

1. Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). European Parliament and Council, Official Journal of the EU, L 174, 1.7.2011, Adopted 8 June 2011; transposition by 22 July 2013. Status: In force; amended by Directive (EU) 2024/927 (AIFMD II) (checked 2026-10-01). Art. 12(1)(f) and Art. 12(1) second subparagraph (fair treatment; preferential treatment only if disclosed in the AIF's rules or instruments of incorporation); Art. 23(1) opening words and point (j) (pre-investment description of preferential treatment) — supports: EU fair-treatment principle, disclosure condition for preferential treatment, and pre-investment disclosure of preferential treatment to investors
2. Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews (final rule), Release No. IA-6383. U.S. Securities and Exchange Commission, Adopted 2023-08-23. Status: vacated (checked 2026-10-01). Rule 211(h)(2)-3(a)-(b) (preferential treatment; vacated); text checked on eCFR point-in-time 2024-01-01 — supports: The 2023 rule would have prohibited certain preferential redemption and information rights and required disclosure of preferential treatment
3. National Association of Private Fund Managers v. SEC, No. 23-60471 (5th Cir. June 5, 2024). U.S. Court of Appeals for the Fifth Circuit (via govinfo, USCOURTS collection), Decided 2024-06-05. Status: final (checked 2026-10-01). Decided 2024-06-05 — supports: Fifth Circuit vacated the Private Fund Adviser Rules
4. Announcement Regarding the Private Fund Advisers Rules. U.S. Securities and Exchange Commission, 2024-10-31. Status: current (checked 2026-10-01). Announcement of 2024-10-31 — supports: Vacatur covers rule 211(h)(2)-3 (preferential treatment)
5. ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. Institutional Limited Partners Association, ILPA, Third edition, released 27 June 2019. Status: Current edition (no 4.0 found as of 2026-10-01) (checked 2026-10-01). p. 14 (Reasonable Organization and Partnership Expenses: Side Letters) — supports: GPs should seek to include provisions common across the majority of a fund's side letters in the LPA itself
6. Directive (EU) 2024/927 amending Directives 2011/61/EU and 2009/65/EC (AIFMD II). European Parliament and Council, Official Journal of the EU, L series, 26.3.2024, Adopted 13 March 2024; Member States to adopt and apply measures by 16 April 2026 (some reporting provisions later). Status: In force; transposition deadline passed 16 April 2026; national transposition status varies by Member State (checked 2026-10-01). Art. 1(5) (adds Art. 12(4) only) and Art. 1(11) (replaces Art. 23(1)(a) and (h), inserts (ia)); Art. 12(1)(f), its second subparagraph and Art. 23(1)(j) not amended — supports: AIFMD II leaves the fair-treatment, preferential-treatment and Art. 23(1)(j) disclosure provisions unchanged
7. Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews (final rule; technical amendments), 89 FR 91252. U.S. Securities and Exchange Commission (Federal Register via govinfo), Published and effective 2024-11-19. Status: in force (checked 2026-10-01). 89 FR 91252, DATES (effective 2024-11-19) and amendatory instructions removing 275.211(h)(2)-3 — supports: Removal of the vacated preferential treatment rule text from the CFR effective 19 November 2024
8. 17 CFR 275.206(4)-8 - Pooled investment vehicles. U.S. Securities and Exchange Commission (CFR text; LII mirror), Current CFR text as published by LII (accessed 2026-10-01); source 72 FR 44761, Aug. 9, 2007. Status: in force (checked 2026-10-01). 17 CFR 275.206(4)-8(a)(1)-(2), (b) — supports: Antifraud rule for advisers to pooled investment vehicles (including 3(c)(1) and 3(c)(7) funds): no untrue statement or misleading omission of material fact to investors or prospective investors

• Side Letter
• Limited Partnership Agreement (LPA)
• Limited Partner Advisory Committee (LPAC)
• Alternative Investment Fund Managers Directive (AIFMD)

• Final Close
• First Close