US PFMs split on where to allocate expenses

Whether an expense is assigned to the fund or firm varies from manager to manager.

Almost one-fifth of private fund managers do not allocate travel or insurance expenses to their funds, a poll of US managers found.

In total, 17 percent of delegates at sister title Private Equity International’s Private Fund Finance and Compliance Forum in San Francisco on Wednesday said these costs were absorbed by the firm.

“I’m very surprised by this, they must have some seriously hard negotiators among their LPs,” the compliance officer at a small fund said.

Just under two-thirds of delegates – 63 percent and all four panelists said both of these costs were allocated to the fund. The panelists stressed that, in these cases, limited partnership agreements must be explicit as investors and the Securities and Exchange Commission are focused on the matter.

“Fees and expenses policies must be laid out, and if there are ever any deviations from this, no matter how small, they must be documented alongside the reason for doing so,” a second compliance officer said.

In this case of unexpected costs, the four panelists agreed the decisions were made by the back office as a whole. This makes the relationship between staff all the more important, they added.

“My relationship with my CFO is critical. Compliance can be seen as the bad guy, but I’ve got to defend the decision to LPs and the regulator,” the second CCO said, adding the process and decision have to be documented.

When new costs are incurred, such as a switch to outsourcing, firms should undertake a similar process. This is a situation encountered recently by two of the panelists’ firms.

“At first, expense allocation was clear because services were used on a deal-by-deal basis, so the fund which should bear the expense was obvious,” the first CCO said. “But now the service provider has offered us an annual subscription, so it is less clear who should be paying the costs.”

While an annual subscription is ultimately cheaper for the funds, it is hard to justify each paying the same amount when they are not striking the same number of deals, the CCO added. The second CCO said his firm now has a policy on third-party costs allocation after a similar situation arose.

“These costs are automatically allocated to the fund, under our policy. But we review this annually, to make sure that it is fair and to ensure that management isn’t getting a side deal as a result of the relationship it has with the third party,” he added.