Victoria Langley Private fund managers continue to grapple with manual, inefficient, and expensive Most Favored Nations (MFN) election processes. Creating and distributing MFN election forms, reviewing investors’ elections, and updating the fund compendium often require months of work and generate significant legal fees that often exceed expense caps. Throughout this process, private fund professionals have limited visibility into the MFN process and their ongoing obligations, putting their compliance processes at risk.
Let’s take a closer look at the current state of MFN election processes at many firms and the problems that arise from manual workflows.
The current state of MFN elections
Private investment firms typically rely on outside counsel to run MFN elections, and most law firms lack a software solution to support the election process. Instead, they continue to rely on manual tasks and decentralized sources of information, which limits the GP’s visibility into the process.
While most fund managers wish for their MFN elections to take fewer than 90 days after the fund’s final close, inefficient processes can push that timeline upwards of 9-12 months. Counsel spends weeks or even months creating the fund’s compendium, then puts the MFN election process on the back burner as it’s assigned new fundraises. Given that counsel uses slow, manual processes, it often requires weeks of tedious, detail-driven work to create and distribute MFN forms for investors, evaluate investors’ choices, and update the fund’s compendium.
Traditional MFN elections are also expensive, racking up significant legal fees. Many GPs worry that MFN expenses reflect inexperienced and inefficient associates taking too much time when the bill is subject to a cap.
Processes that slow MFN elections down & increase costs
Busy law firm associates are responsible for handling each aspect of an MFN election, and without software solutions to streamline their tasks, the manual steps outlined below slow them down while increasing the number of hours they bill.
1. Deciphering electable side letter provisions
Manually reviewing side letter terms during the MFN elections process has become a lot tougher. An increasing number of investors now demand longer and more complex side letters, which were once a privilege only given to cornerstone investors. When reviewing side letter provisions, GPs’ counsel identifies which investors are entitled to an MFN election and which provisions are electable to each investor based on carve-outs and capital requirements.
2. Creating MFN forms
Form creation is one of the more significant and time-consuming pain points for GPs and their law firms. They might navigate MFN election forms in several ways, though no option is particularly quick or efficient.
Outside counsel may choose a “universal” MFN form, using instructions or notes to provide investors with their electable options. However, complicated instructions on paper or PDF forms can confuse investors who have to sort through dozens of pages, increasing the risk of investors choosing provisions not applicable to them.
Counsel may create several MFN forms based on investor types by evaluating and grouping investors upfront to minimize the amount of confusing instructions or logic on each form. Another option is to create a form specific to each investor. These strategies may reduce the likelihood of investor errors, but they require a significant time investment and increase the number of hours associates bill for.
3. Reviewing investor elections
Because investors can make erroneous selections, GPs or their outside counsel need to carefully review investors’ elections. It’s not uncommon for GPs and their counsel to communicate with investors to correct and confirm their selections, adding additional weeks to the MFN election timeline.
4. Updating the compendium
After confirming investors’ selections, outside counsel updates the GP’s side letters and compendium. Updating a compendium can be incredibly time-consuming for firms relying on spreadsheets and word documents. The lawyers on the task must be meticulous in updating each investor’s provisions and the GP’s obligations correctly. Accurately reflecting investor elections in the fund compendium is essential to the GP’s ongoing contractual and regulatory compliance.
Streamline MFN elections with Insight
Insight from Ontra provides a new standard for efficient and transparent MFN elections.
With Insight’s digital MFN feature, private fund managers and their counsel can now:
- Generate MFN election forms based on a fund’s digitized side letters in minutes
- Distribute forms via a secure digital portal or PDF forms
- Track investors’ completion status
- Review and approve investor’s elections
- Automatically update the fund’s digital compendium based on investors’ approved elections
Insight’s dMFN feature streamlines the MFN process from form creation to ongoing obligation compliance while reducing election errors and costs. With this new functionality, private fund managers and their counsel can collaborate seamlessly to negotiate favorable side letter terms, run an efficient MFN process, and manage the resulting obligations in a single platform.
To see dMFN in action, schedule an Insight demo today.
