A small number of funds have the luxury of a simple and straightforward expense allocation process and execution model that requires little to no oversight. Most of the clients that we have worked with have complex allocation policies and business cases that require a lot of supporting data sets. As a result, managers face the grueling process of determining the accurate allocation and an equally demanding vendor payment process.
These problems are only made worse when expense reallocation comes into the picture. The reallocation of an expense is required when the underlying expense allocation rules (read the entities that paid the expense) for an already paid/processed expense have changed and should now be done using an updated method.
As one can imagine, this process requires identifying the new entities that should pay (or should have paid) the expense, booking reversals and new journal entries, and making intercompany or interfund payments. At this stage, the vendor has already been paid so the new entities just need to reimburse the other entities that overpaid initially. The overall business of reallocation can take several days to several weeks depending upon the sophistication of reallocation and the number of entities involved.
Previously, the need and challenges of reallocation were repeatedly raised by private equity and credit shops whose investment styles are mostly deal driven. Based on changes to deal status, (e.g. from a prospect to a dead or closed deal) the allocation rules could change and would require expense reallocations. This problem is now being increasingly reported by hedge funds who want to pay the vendor upfront (likely from a management company account) and perform allocations later. Once the new expense allocations are determined, the management company seeks reimbursement from the funds or the other entities. The issue here is that the reallocations are done several weeks or months later and if a proper audit trail has not been maintained, chances are that many expenses may go unnoticed or could be misallocated due to changes in the underlying data. Additionally, the reallocation process itself is laborious and requires sharp attention.
Many of the challenges related to identifying the new entities, booking reversals and new entries in GL systems, as well as reimbursing the entities that overpaid, can be solved effectively and efficiently by the use of a well-designed expense allocation system. To achieve success, asset managers should ensure that their system:
- Can manage supporting reference data sets
- Has flexibility to accommodate allocation and reallocation rules
- Tracks deal status and identifies expenses that should be reallocated, and
- Integrates well with GL and payment systems
An expense allocation system that can support the most complex business cases will save hours of manual effort and frustration among the team, be more accurate and complete, and also boost compliance across the board.
IVP has created an Expense Management Solution for the asset management industry to efficiently and accurately allocate expenses and manage payments.