Most favoured nation provisions and their use in private equity funds

Produced in partnership with William Jones of RPC
Practice notes

Most favoured nation provisions and their use in private equity funds

Produced in partnership with William Jones of RPC

Practice notes
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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

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Jurisdiction(s):
United Kingdom
Key definition:
Most favoured nation definition
What does Most favoured nation mean?

MFN stands for Most Favoured Nation. A Most Favoured Nation (MFN) condition will require any new additional debt (ie an incremental or accordion facility) to be priced within a certain parameter outside of the price of the existing debt, or otherwise require the price of the existing debt to be increased so that the parameter is maintained. Possible carve-outs include: the MFN applying to certain types of debt only, such as only providing pricing protection on same currency pari passu term debt that matures at a similar time to the existing debt; disapplying the MFN for the Freebie basket and/or to refinancing debt—‘sunsets’ on the MFN, meaning that the pricing protection only applies for a certain period after closing; linking the MFN to margin only, rather than yield. For more information, see Considerations for calculating additional debt capacity: no longer just a fixed number (2019) 7 JIBFL 464.

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