Expense Allocation Software: What Is Allocation & Apportionment, and Why Should You Care?

Introduction

Expense allocation software and expense apportionment/allocation as subjects are not exhilarating, it doesn’t fill you with joy and adrenaline at the prospect of finally finding a way to become a part of the expense allocation revolution. 

At least it shouldn’t if you’re conducting expense allocation / expense apportionment in a manner compliant with the Securities and Exchange Commission (“SEC”), the governing agency for securities in the U.S. 

What expense allocation and apportionment lacks in excitement, it makes up for in its importance for hedge funds, private equity funds and banks…and it’s not always straight forward.

Let’s first look at what expense allocation is (it’s also sometimes known as “expense apportionment”). Expense allocation, or apportionment, is the process of splitting expenses (in the form of invoices in most cases) across funds within a hedge fund or private equity fund, for example, so that each internal fund only pays its fair share of each expense the private equity or hedge fund incurs. This allocation process is intended to ensure that no one fund’s investor group is unfairly burdened with more than its fair share of costs related to the running of a private equity firm, fund of fund or others.

Expense Allocation is No Joke!

In February 2018, the SEC listed expense allocation as a compliance exam priority and reiterated the seriousness of this issue via a Risk Alert to all private advisers. For those who aren’t savvy to all of these regulations, private advisers are broadly defined as hedge funds and private equity funds, according to the SEC.Currently, private equity funds and hedge funds represent the vast majority of the enforcement targets of the agency, and one needs only simply Google “SEC expense misallocation” to see that enforcement in action, from KKR to Dyal Capital to Lightyear Capital and beyond:

Prior to 2010, the SEC allowed private advisers to be exempt from needing to worry about expense allocation. This exemption from SEC registration all changed with the Dodd-Frank Act in July 2010, which removed that exemption, and made these private equity and hedge funds subject to Rule 206(4)-7. That means that these funds must now have middle- and back-office teams that ensure all expenses are split in a way fair to LPs among the appropriate funds.

Typically these middle- and back-office finance teams will handle expense allocation manually with excel spreadsheets, and it’s not uncommon for the proper allocation of these expenses to change from month to month, depending on what type of invoices or costs a fund is incurring. To compound this nuance, private equity and hedge funds have deal-related expenses that are market dependent and different in their allocation rules.

Our Solution

To tackle this issue, we built an integrated (but modular) dual-solution, Resolvr and Bilr, to address the problems of both digital invoicing and expense allocation.

We realized with these solutions that we had to solve the most commonly faced hassles in expense allocation and expense apportionment by hedge funds and private equity funds. By integrating with commonly used fund accounting and expense software (HazelTree, QuickBooks, Concur etc.), Resolvr makes it easy for funds to get compliant expense allocation up and running in no time at all via simple web portal. Say goodbye to spreadsheets! Bilr works with a similar ethos of removing spreadsheets and improving interoperability, and it’s quite simply an invoicing tool for any and all vendors. Anyone who submits invoices to large clients should be using Bilr, or some sort of electronic invoicing format. This enables this expense to flow through the allocation process and any other related softwares, such as QuickBooks for accounting.

With $28B+ of AUM on the platform, we’re confident we can handle expenses for funds big and small with obvious benefits, and we’ve reduced invoice processing at our latest client from a week to ~30 minutes, and reallocated 4 members of their back office to tasks outside of expense management and compliance. 

Get In Touch!

If any of this strikes a chord with you or your firm, email [email protected] for more information, and we’d be happy to schedule a demo at your convenience.