Side letters and MFN rights, what LPs typically negotiate

Terms and alignment
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A side letter gives an individual investor terms alongside the main fund documents. Most requests are administrative, such as reporting formats or tax and regulatory accommodations. A few change how the fund operates and deserve real negotiation on both sides. Most-favored-nation provisions then decide which of those terms other investors can also elect. Understanding both helps you ask for what you actually need and understand what other investors may receive.

What gets negotiated

Cooley's commentary lists twenty-one categories of side letter provisions, which makes it one of the most complete public references. Information rights are among the most common requests. Cooley notes that managers should preserve confidentiality carve-outs, because a fund may not always be able to share everything an investor asks for.

The provisions that change how the fund operates

  • Excuse rights. These let an investor be excused from an investment, or from future contributions, where participation would breach law, regulation, tax rules or specified internal policies. Foundations and mission-driven investors often need them.
  • Co-investment rights. The difference between a soft acknowledgment of interest and a hard allocation right is the whole question. See below.
  • Transfer rights. Side letters often soften transfer restrictions for affiliates, successors and related entities.
  • Fee and expense terms. Anything that changes economics for one investor changes the arithmetic for everyone else.

How most-favored-nation elections work

An MFN provision lets an investor elect certain rights granted to other investors, subject to agreed scope and exclusions.

  • Tiering by commitment size. In Cooley's illustration, an investor may elect provisions granted to investors at or below its commitment level, but not those granted to larger investors.
  • Exclusions. Some provisions are carved out entirely.
  • The election package. At the end of fundraising, investors with MFN rights typically receive a disclosure package and a period, often thirty days, to elect.
  • Benefit and burden. A well-drafted provision requires an investor electing a right to accept the obligations attached to it.

Co-investment rights, from softest to hardest

  • Acknowledgment of interest. The manager notes the investor's appetite and nothing more.
  • Good-faith consideration. The manager will consider the investor for available co-investments without guaranteeing allocation.
  • Priority or first look. The investor is considered ahead of others.
  • Right of first offer. The investor sees the opportunity before anyone outside the fund.

The harder the right, the more value to the investor and the less flexibility for the manager. For many family offices, co-investment is a central reason to invest in a fund, so it is worth being explicit about what you expect rather than assuming.

Questions to consider

  • Which of your requirements are genuinely necessary, such as regulatory or policy-driven excuse rights, and which are preferences?
  • Does the fund's partnership agreement authorize side letters broadly or with limits?
  • Which provisions will be available to you through MFN, and which are excluded?
  • How does the manager track side letter obligations after the close?

Why the operational side matters to you

Side letters create obligations that last for years. Cooley's point is that a side letter sitting in a closing binder without being operationalized becomes a future problem. A manager who keeps a matrix of who holds which right, and who is responsible for meeting it, is far more likely to honor your terms in year six.

Related questions

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Sources

This page describes market practice for context. It is not legal advice; review specific terms with qualified counsel.