Most Favored Nation (MFN)
An MFN clause allows an LP to elect into more favorable terms granted to other LPs, typically through side letters, subject to conditions.
Allocator relevance: A fairness and protection mechanism—reduces information asymmetry and protects against silent term dispersion.
Expanded Definition
MFN provisions are common in private funds where side letters create different economics, reporting rights, or governance terms across LPs. MFN helps ensure that if another LP negotiates better terms, eligible LPs can access those benefits. However, MFN clauses often include exclusions (e.g., strategic investors, large tickets, regulatory constraints) and procedural requirements.
Allocators care because term dispersion can materially affect net outcomes and governance rights.
How It Works in Practice
After fundraising, the GP circulates an MFN election package summarizing side letter terms. Eligible LPs select terms they want, subject to eligibility rules and deadlines.
Decision Authority and Governance
Governance requires careful review of MFN packages and internal tracking of elected rights. Legal teams often lead this work because details matter.
Common Misconceptions
- MFN guarantees you get the best economics.
- MFN automatically applies without action.
- MFN covers all terms (many terms are excluded).
Key Takeaways
- MFN reduces hidden term dispersion but has limits.
- Eligibility rules and timing are critical.
- MFN elections require operational discipline.