Shared costs by commitments, deal costs by participation, vehicle costs to the vehicle: why one allocation key moves money between two groups of investors.
Allocate each expense on the basis of the activity that caused it: shared fund costs by commitments, deal costs by each fund's share of that deal, and each vehicle's own costs to that vehicle alone. On an illustrative $600m main fund and $200m parallel fund with $8.8m of expenses, the parallel fund should bear $1.55m. A flat split by commitments charges it $2.2m, an overcharge of $0.65m, or 32.5 basis points of its commitments.
Worked in full in The Private Equity Fund Controller Playbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Parallel funds exist because some investors cannot or will not sit in the main partnership: a different tax position, a regulatory restriction, a sector exclusion. The same reasons mean the two vehicles do not always invest together, and they carry costs the other does not. A single allocation key cannot reflect that, however convenient it is at quarter end.
A main fund with $600m of commitments and a parallel fund with $200m invest side by side, 75 and 25 per cent, under the agreement's allocation clause. The parallel fund's investors exclude one sector, so it sits out Deal B, which the main fund takes in full. All figures are illustrative and in $m.
| Expense | Basis | Amount |
|---|---|---|
| Administration, audit and legal, shared | Commitments | 1.60 |
| Main fund's own audit and tax filings | Main only | 0.35 |
| Parallel fund's own audit and tax filings | Parallel only | 0.25 |
| Deal A transaction costs, both funds invest | Deal participation | 2.40 |
| Deal B transaction costs, parallel fund excluded | Deal participation | 3.00 |
| Broken deal C, both funds would have invested | Expected participation | 1.20 |
| Total | 8.80 |
Expense to fund i = Σ expense line × share of fund i in the driver of that line
Drivers: commitments for shared fund costs; equity actually invested for completed deals; the allocation the funds would have taken for broken deals; 100 per cent for vehicle-specific costs.
In Excel, with amounts in C2:C7 and the parallel fund's share of each driver in D2:D7:
=SUMPRODUCT(C2:C7,D2:D7)
The work is in column D, not in the formula. Each line needs a driver chosen before the number is known, and documented, so that the allocation does not drift toward whichever answer is easiest to explain.
| Expense | Main, correct | Parallel, correct | Parallel, flat 25% | Difference |
|---|---|---|---|---|
| Shared administration, audit, legal | 1.20 | 0.40 | 0.40 | 0.00 |
| Main fund's own costs | 0.35 | 0.00 | 0.09 | 0.09 |
| Parallel fund's own costs | 0.00 | 0.25 | 0.06 | −0.19 |
| Deal A | 1.80 | 0.60 | 0.60 | 0.00 |
| Deal B | 3.00 | 0.00 | 0.75 | 0.75 |
| Broken deal C | 0.90 | 0.30 | 0.30 | 0.00 |
| Total | 7.25 | 1.55 | 2.20 | 0.65 |
The parallel fund should bear $1.55m, 77.5 basis points of its commitments. The flat split charges it $2.2m, or 110.0 basis points: 41.9 per cent more than it owes. Almost all of the error, $0.75m, comes from Deal B, a transaction the parallel fund was barred from. The vehicle-specific audits partly offset it: under a flat key the parallel fund bears $0.15m of the two vehicles' own costs instead of its own $0.25m, a $0.10m undercharge, so the net overcharge is $0.65m.
The mirror image matters as much. On the correct basis the main fund's expense ratio is 120.8 basis points, not 110.0. The main fund's investors were being subsidised by the parallel fund's, and both sets of investors receive a capital account statement that is wrong.
Why this is a controller's problem. Agreements usually say expenses are borne by the funds in proportion to their interests in the relevant investment, or "as the general partner reasonably determines". The second wording is not permission to use one key. It is an obligation to choose a defensible key for each line.
| Scenario | Overcharge, $m | Basis points of parallel commitments |
|---|---|---|
| Parallel fund 10% of $800m, Deal B costs 3.00 | 0.11 | 13.8 |
| Parallel fund 25%, Deal B costs 3.00 | 0.65 | 32.5 |
| Parallel fund 40%, Deal B costs 3.00 | 1.19 | 37.2 |
| Parallel fund 25%, Deal B costs 1.00 | 0.15 | 7.5 |
| Parallel fund 25%, Deal B costs 6.00 | 1.40 | 70.0 |
The error scales with the cost of every deal the parallel fund does not join. A fund whose parallel vehicle sits out a large carve-out with heavy diligence costs can overcharge it by more than its whole shared expense budget.
The same driver logic applies one level out, between a fund and its co-investors, worked in how broken deal expenses should be allocated to co-investors; the expense ratio that results is computed in how to calculate a private fund expense ratio.
Classify every expense line by what caused it, give each a driver, and allocate line by line. Then compare the result with the flat split: if the two differ by more than a rounding error, the flat split was never a simplification. It was a transfer between two groups of investors. The capital call and allocation mechanics behind this are in the free workbook for this case.
Only the shared ones, such as administration, audit and legal work for both vehicles. Deal costs follow each fund's actual participation in the deal, and each vehicle's own costs stay with it. In the worked case a flat split by commitments charges the parallel fund $2.2m instead of $1.55m, mainly because it bears $0.75m of a deal it was excluded from.
On the share each fund would have taken had the deal closed. If both would have invested 75 and 25 per cent, a $1.20m broken deal splits $0.90m and $0.30m. If one fund would have been excluded by its investment restrictions, it should bear none of the cost.
It scales with the cost of the deals one fund sits out. In the worked case the parallel fund is overcharged $0.15m when the excluded deal costs $1.00m and $1.40m when it costs $6.00m, that is 70.0 basis points of its $200m of commitments in a single year.
This article is one calculation from The Private Equity Fund Controller Playbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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