One invoice covers the funds and the manager's own business; the first split is by coverage, and it moves the answer more than the key.
Split the premium by coverage first, then split the fund-borne part across the funds on the key the fund documents and the expense policy set. On an illustrative 480,000 package, the fund-related share of the GP liability cover and half the crime cover come to 292,500 borne by the funds and 187,500 by the management company, 1.22 basis points of commitments. Allocating the whole premium to the funds on commitments would overcharge them by 187,500 a year.
Worked in full in The Private Markets COO by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A private markets manager usually buys one insurance programme for the whole platform: GP liability (directors and officers plus professional indemnity for fund-related claims), crime, cyber, sometimes employment practices. Many fund agreements allow the fund to bear the cost of insurance that protects the fund and the people acting for it. Few allow it to bear cover that protects the management company's own business, and an expense the documents do not permit is a fee in disguise. Misallocated expenses are a recurring theme in regulatory examinations of private fund advisers, and insurance is one of the classic ones, because a single invoice covers both.
So the allocation has two steps, and the first is the one that is usually skipped: how much of each policy relates to the funds at all. Check the actual wording of each fund's agreement and the firm's expense allocation policy; the figures below are illustrative.
| Policy | Premium | Fund-related share | Fund-borne |
|---|---|---|---|
| GP liability: D&O and E&O | 360,000 | 75% | 270,000 |
| Crime | 45,000 | 50% | 22,500 |
| Cyber, manager systems | 75,000 | 0% | 0 |
| Total | 480,000 | 60.9% | 292,500 |
The fund-related shares come from the broker, not from the finance team: ask for the premium to be rated or apportioned by exposure, fund activity against management company activity, and keep the letter. The 75 per cent on the GP liability cover means the broker attributes a quarter of the risk priced to the management company's own business, its employees and its corporate decisions. The cyber policy here protects the manager's systems and is the manager's cost.
| Fund | Commitments | NAV |
|---|---|---|
| Fund I, harvesting | 400 | 300 |
| Fund II | 800 | 900 |
| Fund III, investing | 1,200 | 600 |
| Total | 2,400 | 1,800 |
Fund-borne premium = Σ (policy premium × fund-related share)
Fund share = fund-borne premium × fund key ÷ total key of every vehicle covered
Excel, premiums in B2:B4, shares in C2:C4, keys in F2:F4: =SUMPRODUCT($B$2:$B$4,$C$2:$C$4)*F2/SUM($F$2:$F$4)
Step 1, coverage. 360,000 × 75% + 45,000 × 50% + 75,000 × 0% = 292,500 for the funds. The management company keeps 90,000 of the GP liability cover, 22,500 of crime and all 75,000 of cyber: 187,500, 39.1 per cent of the premium.
Step 2, the key. The policy must name one and apply it consistently. Commitments and NAV give different answers:
| Fund | By commitments | By NAV | Difference |
|---|---|---|---|
| Fund I | 48,750 | 48,750 | 0 |
| Fund II | 97,500 | 146,250 | 48,750 |
| Fund III | 146,250 | 97,500 | -48,750 |
| Total | 292,500 | 292,500 | 0 |
On commitments every fund pays 1.22 basis points of its commitments; on NAV every fund pays 1.62 basis points of its NAV. The choice moves 48,750 a year between Fund II and Fund III, whose investors are not the same people. Commitments track the exposure of a fund that is still investing; NAV tracks the assets at risk in one that is harvesting. Either can be defended. Switching between them when it suits a fundraising cannot.
If a 150 co-investment vehicle is named on the policy and benefits from the cover, it belongs in the key. Leaving it out means the three funds pay its share. On commitments, including it gives the vehicle 17,205.88 and lowers Fund III's charge from 146,250 to 137,647.06, Fund II's by 5,735.29 and Fund I's by 2,867.65. The same applies to separately managed accounts covered by the programme.
| Fund-related share | Fund-borne | Management company | Fund III, by commitments |
|---|---|---|---|
| 50% | 202,500 | 277,500 | 101,250 |
| 60% | 238,500 | 241,500 | 119,250 |
| 75% | 292,500 | 187,500 | 146,250 |
| 90% | 346,500 | 133,500 | 173,250 |
| 100% | 382,500 | 97,500 | 191,250 |
The coverage split moves the answer more than the key. That is why the broker's apportionment should be documented each renewal rather than carried forward from the year the policy was first placed.
Charging the whole invoice to the funds on commitments: Fund I 80,000, Fund II 160,000, Fund III 240,000, 2.00 basis points instead of 1.22. The funds pay 187,500 a year of the manager's own insurance, and an investor with 50 in Fund III, 4.17 per cent of it, pays 10,000.00 instead of 6,093.75. Over a fund's life that is a reimbursable error, and once it is found the remediation commonly means reimbursement with interest and a letter to investors. The cost of a correction of this kind is worked in how to calculate the cost of a NAV error.
Keep three documents together for each renewal: the broker's apportionment by coverage, the allocation workpaper with the key, and the clause of each fund agreement that permits the charge. That is what an auditor or an examiner will ask for.
Expense allocation is one of the controls the book builds into the operating system, and the free workbooks for this book include the control library and obligations register it sits in. For expenses shared with a parallel vehicle, see how to split expenses between a main and a parallel fund.
Only the part the fund documents permit, typically cover that protects the fund and the people acting for it. Cover for the management company's own business stays with the manager. In the illustration the broker attributes 75 per cent of a 360,000 GP liability premium to fund activity, so the funds can bear 270,000 of it and the manager keeps 90,000.
Either, if the expense policy says which and it is applied consistently. On 292,500 of fund-borne premium, commitments charge Fund II 97,500 and Fund III 146,250; NAV reverses it, 146,250 and 97,500. The choice moves 48,750 a year between two sets of investors, so it should not change from year to year.
If they are covered by the policy, they should bear their share, or the funds subsidise them. Adding a 150 co-investment vehicle to a 2,400 commitment key gives it 17,205.88 of a 292,500 fund-borne premium and cuts the largest fund's charge from 146,250 to 137,647.06.
This article is one calculation from The Private Markets COO. 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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