Most favoured nation clause
A right for an LP to choose better terms that the manager gave to another LP.
MFN rights are normally tiered by the size of the commitment, so an LP can elect terms given to investors of equal or smaller size. It keeps terms fair across investors.
MFN clauses usually exclude certain terms from election, such as LPAC seats, co-investment rights, terms tied to an investor's regulatory or tax status, and terms given to the GP's affiliates or for committing at the first close. Each carve-out is negotiated.
Some MFNs only apply to economic terms, while others cover all side letter provisions. Larger LPs often push for broad MFN rights, and GPs use size tiers to keep the obligation manageable.
Worked example
LP A commits $20M with an MFN covering terms given to LPs of $20M or less. LP B commits $25M and gets a fee discount, which LP A cannot elect. LP C commits $10M and gets a quarterly call with the partners, which LP A can elect because LP C is smaller.
Common questions about MFN
What does MFN mean in a fund?
Most favoured nation. It gives an LP the right to elect terms that the GP has given to other LPs of equal or smaller commitment, subject to agreed exceptions.
What is usually excluded from an MFN?
Typically LPAC seats, co-investment rights, terms linked to a specific investor's legal or tax status, and benefits tied to committing early or above a certain size.