Expense Management for Private Equity – Best Practices We’ve Seen in our 20 Year History
TripsWare was originally started in 2006 to solve the most complicated needs for private equity managers. While we’ve expanded to other areas, private equity is still core to what we do. Private equity faces some of the most complex splitting and allocation problems of any business, which is why we created a software platform to handle these problems. Our customers tell us that they save 10+ hours every week using TripsWare, and also better track reimbursable expenses. Ultimately this results in time savings, lower management company expenses, and better compliance for SEC / LP requirements.
In this blog post, we’ll discuss some of the challenges that private equity accounting teams face, and some best practices / tips that we’ve seen over the years.
Problem #1: Multi-entity accounting / recovery
Private equity and other alternative asset managers have unique processes in that many of their expenses are recoverable from portfolio companies, funds, or LPs. However, over the last decade, the SEC and LP community have increasingly scrutinized these practices. The SEC in particular has levied tens of millions of dollars in fines against private equity funds, something we expect to continue as the private equity industry pushes towards retail access. Private equity accounting teams are left with a difficult problem: how to ensure maximum recoverability of expenses while staying within the bounds of LP agreements?
What makes the process even more complex is that there are usually multiple entities that a private equity manager can recover expenses from – portCos, funds, and LPs typically. This can create a manual process to keep track of everything since generic expense management software does not have the capability to capture everything accurately.
At TripsWare, we’ve designed a system that allows better expense tracking and recovery for recoveries across multiple entities. We can write custom rules to hit specific general ledger accounts to make multi-entity recovery much easier. The simplest way we’ve found our clients deal with the multi-entity issue is to have specific receivable and payable accounts with each relevant entity. From there, having information-rich journal entries allows streamlined offsetting transactions at the entity level from the management company receivable account.
Problem #2: Automatic expense splitting by AUM / NAV / commitments
Especially as firms get larger, they’re usually dealing with a multitude of different funds, SPVs, permanent capital vehicles, etc. In some of the more complicated setups we see, a private equity manager will own a portCo across 5-10 different entities. When it comes time to split a recoverable expense across these 5-10 different entities, oftentimes the PE fund manager will need to split those expenses by commitment percentage. This process is oftentimes a tedious and inefficient workflow in excel
To solve this issue, TripsWare has automatic rules that allows splitting of these expenses by AUM, NAV, commitments, or any other metric you desire. One fund-of-funds client told us that before using TripsWare for this functionality, they had a dedicated person and an excel sheet running 24/7 (that was prone to crashing) to solve this issue. After switching to TripsWare, the process has streamlined and more accurate.
Problem #3: Tracking expenses that become recoverable in the deal process
We find that many private equity firms typically ‘eat’ due diligence expenses for prospective deals that do not close, and move them to recoverable if the acquisition is successful. In the event that the correct processes are not set up, the management company ends up ‘eating’ more recoverable expenses than intended simply because the expenses were not tracked as accurately during diligence processes. Having better processes in place allows better recovery on deal/diligence related expenses.
The best practice we’ve seen is to automatically tag a certain Project ID, class, or equivalent in your accounting system for each expense that’s applicable for that specific deal. Oftentimes these journal entries sit in a suspense account until further clarification of the deal status. From there, the accounting team can bulk select expenses related to that deal and move them to a receivable when the transaction closes. TripsWare helps enable all of these actions, or however else you may want to customize this process.
TripsWare has been around for 20 years, and so we really have seen all of the problems that private equity managers face. We have deep domain expertise and can customize our software platform to fit your needs.
