Side Letters and MFN Clauses

Large investors rarely accept a fund's standard terms as-is. Instead, a big pension fund or sovereign wealth fund negotiates a side letter — a private contract attached to the main partnership agreement that gives that one investor extra rights: lower fees, more frequent reporting, an easier exit if the manager breaches a rule, or a veto over certain conflicts of interest. Everyone else in the fund still signs the same standard documents and never sees these side deals directly.

To stop the biggest investors from quietly getting the best terms while smaller ones are kept in the dark, most side letters include a most-favoured-nation (MFN) clause. It promises that if the manager grants a better term to any other investor of similar or smaller size, this investor can elect to receive that same term too. In practice, at the end of fundraising the manager circulates an "MFN disclosure" listing every side-letter provision granted, and each MFN investor picks which ones it wants to add to its own letter.

MFN rights are usually tiered by commitment size — a $500 million investor can match terms given to any investor down to, say, $50 million, but not necessarily bespoke terms tied to a specific regulatory need (like a public pension's freedom-of-information carve-out), which are excluded from matching by design.