The Future of Side Letter Compliance: Unveiling SmartEsq’s Fully Automated MFN Election Tool

In today’s fast-paced private fund environment, legal and compliance teams are under increasing pressure to manage side letters with speed, consistency, and accuracy. Among the most time-consuming and error-prone of these processes is the enforcement of Most Favored Nations (MFN) provisions. Historically, this has been an entirely manual process, categorizing clauses one-by-one and individually determining investor eligibility, often resulting in hundreds of hours of work. Existing tools either require extensive manual tagging or only export compendiums in an alphabetic order. 

What is an MFN provision?

Most Favored Nation (MFN) clauses are a common feature in fund documents and side letters, designed to ensure that investors can access the most favorable terms granted to other limited partners (LPs). This ensures certain (often larger) investors receive the benefits of provisions given to other investors, though they are typically subject to certain thresholds, carveouts, and eligibility criteria. After the final closing, legal counsel compiles these terms and sends a curated list to each investor, reflecting the specific rights available under their MFN provisions. 

While conceptually straightforward, the operational burden of administering MFN elections can be significant. Traditionally, the process includes:

• Reviewing and categorizing each provision across every side letter
• Determining which clauses are subject to MFN and which are excluded
• Identifying which investors are eligible for each clause
• Compiling a comprehensive, election-ready compendium of eligible terms for each investor

Why is the MFN process challenging?

Typically a fund sponsor (the GP) is required to allow the LPs make MFN elections within 3-4 months following the final closing of a fund. The provisions in the side letters often lack consistent formatting or language and the electability thresholds vary by investor. Let’s use a fund with only 20 side letters as an example. Even if each side letter has only 20 provisions, completing this task will require a lawyer to make 20x20 = 400 low-to-mid level cognitive decisions for categorizing each provision and determining which provisions are electable by which investors. Even if each decision only takes 5 minutes, it will take 5x400 = 2,000 minutes or > 33 hours of legal time. This is a slow and costly process. 

Introducing SmartEsq’s MFN Election Tool

Created by seasoned funds lawyers together with veteran technologists, SmartEsq aims to simplify every step of the fund formation process using task-specific AI techniques. Our MFN Election tool automatically generates a comprehensive MFN side letter compendium and election forms without any manual tagging or extra work from users.‍

Our tool automatically extracts, compares, and catalogs each provision across all investor side letters. It then cross-references this data with the MFN rules to generate a tailored, election-ready compendium for every eligible LP.  The user simply drags and drops the side letters into our system and the compendium will be completed automatically.

Applying this to the 20 side letter example above, using our MFN Election Tool, the internal or external funds legal team will only need a few minutes to generate an MFN compendium, giving them more time to review and refine the final product.  In total, this entire SmartEsq-integrated workflow can be completed within days, or even hours. Customers have already witnessed a significantly increased productivity using the MFN Election Tool. 

This is not only a time-saver, but allows the attorneys to provide client advisory services. By fully automating one of the most tedious and risk-sensitive aspects of fund formation, SmartEsq’s MFN Election Tool enables legal professionals to operate at a higher level—focusing less on administrative burden and more on strategic oversight, investor engagement, and long-term value creation. As AI is integrated into workflows across fund operations and legal processes, tools like this are quickly becoming not just a competitive advantage, but the new industry standard.

To request a demo, visit smartesq.ai/get-in-touch.