Expense allocation
Also called fund expenses, partnership expenses, expense policy.
Expense allocation is the determination of who bears each cost: the fund and its limited partners, the management company out of its fee, or several funds and co-investment vehicles sharing a cost pro rata, according to the expense provisions of the limited partnership agreement and the manager's written allocation policy.
Example
A manager runs a $100M fund and a $20M co-investment vehicle that both invested in the same company, the fund putting in $8M and the vehicle $2M. Deal legal fees of $240,000 are shared by invested capital: $192,000 to the fund and $48,000 to the vehicle. The fund's $60,000 audit fee is a fund expense borne by LPs. The deal team's salaries, the office lease and the CRM subscription are management company costs paid from the fee. Legal fees on a deal that fell through before the vehicle joined sit wholly with the fund.
Confused with
Management fee. The fee pays for the manager's overhead. Fund expenses are charged to the fund on top of it, and the LPA lists which ones.
Organisational expenses. One category of fund expense, incurred at formation and subject to its own cap.
In practice
Expense allocation is a long-running area of regulatory examination for private fund advisers, and the recurring findings are the same: costs charged to the fund that the LPA does not list, broken-deal costs borne by the fund alone when co-investors benefited from the deals that closed, and shared costs split on an undocumented basis. A written policy, applied consistently and disclosed to LPs, is what examiners and auditors look for first.