What are MFN and co-investment rights?

How a most favoured nation election actually works

Five mechanics. The first two are where the negotiation happens and the last two are where the work happens.

• Tiering by commitment size. Cooley's illustration is that an investor at one commitment level may elect provisions granted to investors at or below that level but not those granted to larger investors, so the size of a commitment buys the breadth of the election rather than a fixed set of rights.
• Exclusions. Some provisions are carved out. Cooley names advisory committee seats, because the committee cannot have unlimited members, and co-investment rights, because allocation depends on opportunity size, investor capability, regulatory fit, and relationship factors.
• The election package. At the end of fundraising the manager or counsel typically prepares a disclosure package or election form, and investors with rights are given a period, often thirty days, to elect the provisions available to them.
• Benefit and burden. Cooley's principle is that a well-drafted provision requires an investor electing a right to accept the obligations attached to it, so an investor cannot take enhanced information rights without the enhanced confidentiality or cost-bearing that came with them.
• Administration. The same commentary describes most favoured nation provisions as administratively burdensome, requiring the manager to know which investor holds which right, which were elected, which were non-electable, and which obligations attach to each investor.

Co-investment rights, from softest to hardest

The tradeoffs run in one direction: the harder the right, the more capital it can attract and the less flexibility you retain. Read each option with what it costs you.

• Acknowledgement of interest. The manager notes the investor's appetite and nothing more. Cooley describes most managers as willing to acknowledge interest, and characterises such provisions as soft. Costs the manager almost nothing and promises the investor almost nothing.
• Good-faith consideration. The manager will consider the investor in good faith for available co-investments without guaranteeing allocation. Still soft, and Cooley's description of it makes clear it does not guarantee anything.
• Priority or first look. The investor is considered ahead of others. Meaningful to the investor, and it creates a sequencing obligation the manager has to be able to perform under time pressure.
• Right of first offer. The investor sees the opportunity before anyone outside the fund. Cooley groups this among the harder rights that can materially affect the manager's flexibility.
• Pro rata participation in all co-investments. The strongest common form, and the one that most constrains a manager's ability to allocate a scarce opportunity to whoever can best help the company.
• Fee and carry terms. Cooley's co-investment article records the typical arrangement in the vehicles it describes as full carry matching the underlying main fund and either no management fee or a small fee significantly reduced below the main fund's, on the reasoning that sourcing, monitoring, and exit work already happen for the fund.

What has to be true before you grant a co-investment right

Four checks, and the first is the one most often skipped.

• The partnership agreement has to permit it. Cooley's co-investment article is explicit about reviewing presentment obligations in the main fund's agreement before establishing a co-investment programme, and notes that such clauses have often been fairly permissive in allowing the general partner to offer opportunities to others. Fairly permissive is not the same as permissive, and it is a document question rather than an assumption.
• The allocation policy has to exist in writing, because an opportunity that could go to the fund, to a co-investor, or to a separate vehicle is a conflict before it is an opportunity. Blueprint's page on conflicts covers the five available responses.
• The capacity question has to be answerable. A co-investment right the manager can never satisfy because the fund rarely has excess allocation is a promise that produces disappointment rather than capital.
• The operational path has to be real. Somebody forms the vehicle, closes the investors, and reports on it, on a deal timetable. Blueprint's page on special purpose vehicles covers what that costs.

Information rights, and the limit on them

Co-investors and electing investors both end up with information rights, and the constraint is the same in each case.

A manager cannot grant information they are not free to give. Portfolio company confidentiality, securities law constraints on material non-public information, and obligations to other investors all limit what may be passed on, and Cooley's commentary treats the preservation of confidentiality carve-outs as the manager's own protection rather than as a concession.

The failure mode is a right granted in a side letter, elected by several investors through a most favoured nation provision, and then unperformable because the underlying company will not consent. The cost of that is not legal, it is relational, and it lands every quarter.

What limited partners are testing

Both mechanisms are a proxy for whether the manager understands their own obligations.

• Does the manager know what their partnership agreement permits them to grant?
• Is the most favoured nation tiering understood, or was it copied from a precedent?
• Is there an allocation policy for co-investment, or a case-by-case habit?
• Can the manager describe how a conflict between the fund and a co-investment vehicle is resolved?
• Will the reporting and information rights being promised actually be deliverable?

What this page does not do

It publishes no investor's election, no side letter, and no position any allocator has taken, because those are confidential to the parties.

It also states no market standard for tiering thresholds, election periods, or co-investment terms. The figures it quotes, including the thirty-day election period and the fee and carry arrangement on co-investment vehicles, are one law firm's published observations, attributed and dated, rather than requirements.

This page is educational and general. It is not legal advice. What a most favoured nation provision covers and what a co-investment right obliges you to do are determined by your fund documents and your executed side letters, and they should be settled with fund counsel.