Study: More GPs implementing untested expense policies

Despite a marked increase in the percentage of private funds with written expense allocation policies, most managers are not testing those policies, an ACA Compliance survey reveals.

More managers are taking seriously the regulatory scrutiny around fees and expenses, as in the past two years, the percentage of private equity firms with written expense policies has spiked from 50 percent to 74 percent, according to the 2015 Alternative Fund Manager Compliance Survey from ACA Compliance.

However, despite this increase, more than half (55 percent) of private equity respondents are not employing any methods to test “the reasonableness” of those policies, the survey revealed. Most of the remaining respondents said they use internal staff to test their policies, either on an ad hoc or regular basis, while a small percentage use external resources.

“With the [US Securities and Exchange Commission’s] strong focus on expense allocations, the rate of 55 percent of firms saying they don’t do any testing was quite surprising,” said ACA senior principal consultant Colleen Marencik.

When it comes to expenses, 10 percent of private equity respondents said they bill in-house legal salaries to their funds, a practice that has been recently scrutinized by regulators and the media, while 8 percent bill in-house administrative salaries to their funds as well.

The survey also included a new section on advisers’ use and review of electronic communications. Most firms have a retention policy for all electronic communications, regardless of whether they are required under the Advisers Act books and records rule, and about three-quarters of respondents conduct communications reviews, the results showed.

In order to perform those reviews, most firms use a combination of key words, risk-based criteria and random sampling. The most commonly conducted risk-based searches target correspondence sent to personal email accounts with attachments, correspondence sent or received by terminated employees and correspondence relating to “Restricted List” companies.

The survey polled 73 private equity managers as well as 197 hedge fund managers, most of whom are US-based.