What is a Side Letter? LP Side Letters and MFN Clauses Explained

Q: What is an MFN clause?

A most-favoured-nation clause lets an LP elect to receive terms granted to other LPs, usually only those with equal or smaller commitments.

Q: Are side letters disclosed to other LPs?

Practice varies. MFN mechanics typically require the GP to share the relevant terms after closing, and industry guidance encourages transparency.

Q: Does a side letter override the LPA?

Only as stated in the side letter and the LPA. The documents should set a clear order of precedence.

By aama.io Fund Operations Team · Last reviewed 2 October 2026

A side letter is a separate agreement between a fund and an individual limited partner that grants that investor rights or terms beyond the limited partnership agreement, such as fee discounts, co-investment rights, extra reporting or excuse rights. Most LPs of meaningful size also negotiate a most-favoured-nation (MFN) clause.

Sourced information — it can change

This page is compiled from public sources (listed at the bottom) and last reviewed on 2 October 2026. Regulations, thresholds, fees and market practice change, so it may not reflect the latest position. Check with your fund documents (LPA) and legal counsel before acting.

Key facts

Parties	The fund (and usually the GP) and one LP
Common terms	Fee discounts, co-invest rights, reporting and information rights, excuse rights, regulatory carve-outs
MFN clause	Lets an LP elect terms granted to other LPs, usually within a commitment-size tier
Governs	Only the LP that signed it, but it binds the fund and so affects the administrator's process
Timing	Usually negotiated before the LP is admitted

How it works

LP negotiates its terms. Large or regulated investors ask for terms their own policies require, such as specific reporting or regulatory carve-outs.
The GP agrees and documents. Agreed terms are written into a side letter signed by the fund and the LP, supplementing the LPA for that investor.
MFN elections follow. After the final closing, the GP circulates the side letters, and LPs with MFN rights may elect eligible terms granted to others.
Obligations are tracked. Each term, such as a reduced fee or a special report, becomes an operational obligation the administrator must apply to that LP.

Worked example: MFN tiers

LP B ($30M) negotiates a fee discount. MFN rights allow an LP to elect terms granted to LPs with equal or smaller commitments.

LP A ($75M): holds MFN, can elect B's discount?	Yes ($30M is smaller)
LP C ($40M): holds MFN, can elect B's discount?	Yes ($30M is smaller)
LP D ($20M): holds MFN, can elect B's discount?	No ($30M is larger)

The tiering protects bigger investors from being treated worse than smaller ones, while smaller LPs cannot claim terms won by larger ones.

Common mistakes

Granting a term to one LP without checking the MFN rights of others.
Failing to carry side-letter terms into the administrator's fee and reporting rules.
Inconsistent disclosure of side letters to other LPs.
Letting side-letter terms conflict with the LPA without a clear order of precedence.

The Singapore and APAC angle

In a VCC, different sub-funds can have different investors and side-letter terms, so obligations must be tracked at investor and sub-fund level. Terms linked to regulatory carve-outs or tax incentive conditions should be reviewed with counsel.

Frequently asked questions

What is an MFN clause?

Are side letters disclosed to other LPs?

Does a side letter override the LPA?

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Related terms

Management Fee

A management fee is the annual fee a fund pays its manager to cover operating costs, regardless of performance. In private equity and venture capital it is commonly around 2% a year, charged on committed capital during the investment period and on invested capital afterwards, and it is funded through capital calls.

Fund Administrator

A fund administrator is the firm, or in-house team, that runs a fund's back office: calculating NAV, keeping the books, processing capital calls and distributions, maintaining investor records and producing reports. It is distinct from the fund manager, which makes the investment decisions.

Sources

ILPA Principles 3.0

General information, not tax, legal, accounting or investment advice. This content is sourced from the references above and from public regulatory material, and it can become outdated. Always confirm the current position with your fund documents (LPA) and legal counsel, and take professional advice for your specific situation, before relying on it.