Updated 2025

Introduction

The terms of the business arrangement between a private equity fund (a “Fund”) and an investor (an “Investor”) are generally contained in the constituent documents of the Fund, often a limited partnership agreement (an “LPA”), which sets forth the rights and obligations of the general partner and each Investor. An LPA typically will address, among other things, capital commitments, the general partner’s right to call capital, each Investor’s right to partnership distributions, transfer and withdrawal rights, and indemnification obligations. In addition to the LPA, an Investor will likely execute a subscription agreement that often includes, among other terms and provisions, a power of attorney over the Investor, which permits the general partner to execute the LPA on the Investor’s behalf. The subscription agreement and the LPA form the basis of the Investor’s commitment to the Fund and are generally consistent among all Investors in a Fund.

In certain negotiations with potential Investors where the Fund does not want to alter the LPA or subscription agreement, the Fund and an Investor will execute a side letter that will serve, separate and apart from any other Investor’s agreement with the Fund, to modify the terms of that Investor’s subscription agreement and/or the LPA. A side letter generally grants an Investor additional rights or privileges or otherwise limits the applicability of certain LPA provisions as applied to the Investor. While side letters are, by design, Investor-specific, the inclusion of a Most Favored Nations clause (“MFN”) changes that dynamic and potentially could make every provision of all side letters available to every other Investor.

MFNs have become more common with the proliferation of side letters and side letter requests from Investors. For the reasons discussed below, MFNs can have significant, negative effects on a Fund’s subscription-backed credit facility (a “Credit Facility”)....