This article was sponsored by Tripsware. It appeared in the Fund Services Special Report alongside the November 18 issue of Buyouts magazine.
Right now there’s an executive assistant out there trying to reconstruct a GP’s recent trip, with nothing but a pile of receipts and a calendar, trying to figure out who to bill for that trip to LA. Twenty years ago, a good guess might have sufficed, but today, an investment firm is liable to have fine print in that LPA assuring LPs that every bottle of Perrier will be tracked.
The SEC may not care about the bottle of water per se, but they do care about a GP living up to the travel and expense policy found in that agreement. So we spoke with Noel Furniss, principal and founder of TripsWare, an online expense reporting provider designed specifically for the PE and investment industry, about how to best track and recoup those travel and related expenses while at the same time adhering to regulatory scrutiny and best practices.
Your company specializes in an online solution devoted to T&E expense reporting for the private equity industry. What makes this process different to non-PE firms that it needs a separate system to manage?
One of the main differences is the fact that ongoing expenses need to be tracked for several months or longer until the outcome of the project becomes known, at which point the costs can be appropriately billed, written off or partially reclaimed. The investment professional will often have their assistant log their expenses into the firm’s expense system or Excel spreadsheet allocating as best they can, based on a calendar to see if they were visiting a portfolio company, fundraising or conducting due diligence into a potential investment.
Then the assistant will submit that report to the investment professional to review and approve, and then it goes into the workflow to a mid-level manager if applicable, or directly to the accounting department to review before integration to the GL. Can these expenses be recovered? If so, from where? The closing deal, after three to six months or more of due diligence? The fund, after a long period of fundraising? A portfolio company? How do travel expenses get handled versus professional fees such as legal service? All these moving parts, different people involved, and the uncertainty of what’s recoverable contribute to the complexity and the need for a dedicated solution to assist with handling these nuances.
Another issue is the timely recording of these expenses. If the credit card is a corporate paid account, quite common in the PE arena, the management company may front the payment but it might be a few months before the firm has real transparency around why these expenses were incurred. Do you expense these charges or put them on the balance sheet, as there is a high likelihood of recovering these expenses at some time in the future? What about handling Cash Out of Pocket expenses that may be submitted weeks or months after they are incurred? Regulators are focusing more and more on ensuring the recording and recovery of expenses are timely and accurate.
Automatic GL integration is key, and it’s important that your expense solution can easily sync with your GL to give you the details you need. Our goal at TripsWare is to automate the transactional nature of the monthly expense burden and enable you to get all this information into your GL, so you have the transparency and detail for reporting and bill back. This leverages the investment you have made in your GL system, minimizes the risk of errors and puts you in control.
But that headache isn’t just a matter of workload. Regulators have made the proper allocation of fees and expenses a priority, so the compliance angle gives this process real stakes. How do GPs ensure they stay in the good graces of, say, the SEC?
To remain in good stead, there needs to be alignment of internal policy and SEC/IRS or other regulatory oversight. Maybe the firm has adopted a legacy set of guidelines that govern what requires a receipt, what per diems might be in place etc. Is this in alignment with the IRS guidelines in terms of what constitutes proper substantiation and adequate records of those expenses? And then there’s the SEC. And their concern may be rooted in whether the GP is living up to terms spelled out in the LP agreement. TripsWare incorporates your firm’s policies to identify violations and assure compliance.
If your internal policy indicates that a receipt is required for all expenses, you may be called on to prove you are adhering to policy. But if regulatory guidelines state that receipts are only required for expenses over $75, you might be able to relax your receipts policy. The SEC wants to ensure you uphold the agreements you have in place for the fund or LP and remain consistent with your policies.
It seems a GP would be better off erring on the side of a policy that may be less rigorous, but one they can faithfully abide by.
Perhaps, but they’d still have to meet LP requirements. For example, a client who manages commitments from public funds may need to properly allocate that $2 cup of coffee across multiple funds or entities based on AUM or NAV or contribution to the deal. This may result in $0.02 of that $2 going to Fund VII – it’s required to be compliant. TripsWare can handle this type of splitting, but you need to ascertain if this detail is necessary. If so, make sure you can produce the transparency that the SEC requires.
What advice would you give to GPs seeking best practices for streamlining how they handle T&E recording and allocation?
The first thing is to ensure you have a policy that is compliant, is realistic and can be adhered to. Make sure this is consistent with other agreements with LPs, funds, etc, that you have in place. Next, optimize the workflow so that the allocations you get on the front line can be prepared by an executive assistant with little or no pre-requisite knowledge of what is recoverable or non-recoverable, billable or non-billable. The executive assistant should be able to allocate an airline cost to Portfolio Co. ABC and the system handles the details on the back end. Make it easy for the GPs or travelers to sign off on these expenses so that you are getting the most accurate information. Once you know you have the best information at the time, automate the import to the GL to minimize any transcription errors. When it’s time to bill back for these expenses, ensure you have an accurate invoicing system that properly tracks what is recoverable, and, of course, that you are only recovering expenses to which you are entitled.
Finally, you will need a way to be able to effectively and efficiently report on all this activity so that when the management committee wants an update on outstanding receivables or the SEC queries you on fundraising activity from three years ago, you are able to produce the necessary details. ‘Doing what’s always been done’ with regard to T&E, such as relying on Excel, manual processes and piece meal methods is inefficient and costly. And compliance violations can cost a lot more than just the late fees on your credit card.
Implementing a soup to nuts, automated T&E solution such as TripsWare will address many of the challenges faced by PE firms today with regard to T&E reporting and compliance.