Side Letters - The Times They Are a-Changin’ - Fund-Raise Negotiation Observations

Sep 16, 2026

Side letters in private equity funds are analyzed through the lens of MFN (most favored nation) provisions and the evolution of investor expectations. The discussion covers why side letter requests have expanded, how MFN rights are typically altered or supplemented through agreements with individual investors, and the common MFN carve-outs that keep fund operations stable. It also explains practical MFN workflows for sponsors and investors, and the regulatory disclosure pressures, including AIFMD and SEC fiduciary duty interpretations.

LanguageEnglish

CategoryLetters

FormatPDF

Pages2

Reading Time1 min

AccessFree to download

Side Letters: The Times They Are a-Changin’

MFN provisions and evolution

Common MFN carve-outs and investor review

MFN process workflows and regulatory disclosure

Side Letters: The Times They Are a-Changin’ A few observations on side letters, the process of negotiating a fund-raise and related regulatory developments. By: Mr. David Jones, Partner, Private Investment Funds Group While customized reporting, confidentiality, tax and regulatory undertakings and, in some cases, economics have become common elements of the current private equity fund raising environment, it was not so long ago that an investor granted “most favored nation” treatment could expect to receive the same (or substantially the same) rights as all other investors. The MFN assurance was the “self-help” remedy inan unregulated market reserved for investors that could help themselves. An investor in a private equity fund would often have only one request: MFN treatment. Times have changed. The MFN provision is a byproduct of the flexible private fund structure, the extended nature of a fundraise and the desire to meet the particular needs of investors that are otherwise generally not appropriate for inclusion in the partnership agreement or because of the stage of the fund-raising and closing schedule. Although the typical partnership agreement provides that it may only be amended with the consent of a majority in interest of the existing investors, the modern partnership agreement also typically allows for the general partner to enter a “side letter” agreement that alters or supplements the terms of the agreement as between the general partner and an investor. Since a typical private equity fund raises capital over a period of time with multiple closings, a side letter is a convenient way to address the specific concerns of an investor. The number and prevalence of side letter requests has increased exponentially in the last decade, a trend that reflects, among other factors: 􀂃 the more difficult fund-raising environment; 􀂃 globalization of the market and investor base; 􀂃 requests to address non U.S. tax and reporting requirements; 􀂃 increasing participation by state and local government plans, all of which have specific requirements imposed by their local law or governing boards; and 􀂃 regulatory burdens on investors such as banks and insurance companies. Broadly speaking, an MFN provision allows an investor to elect to receive the same rights granted by the sponsor to the other investors. However, MFN provisions have evolved due to the desire of sponsors to limit the side letter burden to the specific facts of the requesting investor. In general, there are a few customary carve-outs to an MFN provision which reflect the fact that the operation of the fund would become impractical or unstable if all investors had the same rights. These include: 􀂃 the ability to be excused from certain types of investments mandated by one investor’s policy concerns; 􀂃 the ability to appoint a representative to a fund’s advisory committee; 􀂃 the ability to transfer an interest; 􀂃 the ability to disclose information received from the fund (whether to satisfy public disclosure or other legal requirements or to upstream investors in a fund of funds); and 􀂃 provisions that relate to the tax, legal or regulatory status of an investor not shared by the electing investor. In recent years, carve outs based on size of investment, early bird discounts and co investment rights have become more common. Regardless of the carve outs, an important consideration from the investor’s perspective is the ability to review all of the side letters whether or not the investor has the ability to elect the other side letter provisions. The MFN process is generally handled in two ways. While some investors ask to see other side letters atthe time of their investment and before they invest, more often the sponsor agrees that after the final closing of the fund it will distribute the fully negotiated side letters (or a compilation of all of the side letters that remove duplicative or repetitive provisions) to all of the MFN re

FAQs

Why have side letter requests increased in private equity over the past decade?

They have grown due to a more difficult fundraising environment, globalization, demands for non-U.S. tax and reporting accommodations, increased state and local government plan participation, and heightened regulatory burdens on investors.

What does an MFN provision generally allow an investor to do?

Broadly, it lets an investor elect to receive the same rights granted by the sponsor to other investors, subject to customary carve-outs that prevent the fund from becoming impractical or unstable.

How is the MFN side letter process typically handled by sponsors?

It is often handled after the final closing, where the sponsor distributes fully negotiated side letters or a compiled set to MFN recipients. Distributing earlier can ease concerns but may prolong the closing due to iterative carve-out handling.

Sep 16, 2026

Upload by Bill Black