Most favoured nation provisions and their use in private equity funds
Produced in partnership with William Jones of RPC
Most favoured nation provisions and their use in private equity funds

The following Corporate guidance note Produced in partnership with William Jones of RPC provides comprehensive and up to date legal information covering:

  • Most favoured nation provisions and their use in private equity funds
  • Introduction
  • Side letters and fundraising
  • Most favoured nation clauses
  • MFN carve-outs
  • MFN carve-outs and their impact on subscription backed credit facilities
  • Where to draft the MFN—LPA or side letter?
  • Transparency
  • Practical implications

Introduction

A most favoured nation (MFN) clause entitles an investor to have visibility of side letter entitlements of other investors in the private equity fund and, in certain circumstances, allows such investor to elect to benefit from those entitlements.

MFN clauses play a key role in the commercial negotiations of an investment in a modern private equity fund. The MFN clause and its interaction with investor side letters and the fund documentation can result in the disclosure of investors' side letter entitlements to other investors and even the right to take the benefit of preferential terms negotiated by other investors. However, MFN clauses can also lead to a range of issues surrounding lack of transparency for investors and be potentially detrimental to the fund's ability to obtain subscription backed borrowing.

Further, MFN clauses can lead to increased bureaucracy, increased administration and legal costs for the sponsor, ie typically the fund’s general partner or investment manager who establishes and promotes the fund, in negotiating and implementing complex and increasingly lengthy MFN clauses and side letters. Such side letter negotiations and the MFN election process can even delay fund closings.

MFN clauses have become a 'must have' for large institutional investors and fund sponsors should expect to receive lengthy side letter requests (invariably containing MFN clauses) and take the necessary steps to accommodate such