When a fund administrator or CFO reviews capital call notices, the distinction between what the fund pays directly versus what the management company covers determines how much capital remains available for investment. Misallocating even routine expenses can create audit findings, LP disputes, and compliance issues.
What Typically Qualifies as a Fund Expense?
Fund expenses are costs charged directly to the partnership and paid from LP capital. Common examples include:
Annual audit and tax preparation fees
Fund administration and accounting services
Legal costs related to fund formation, investments, and regulatory filings
Custody and banking fees
Annual meeting costs and LP communications
Broken deal expenses (transaction costs for deals that do not close)
Insurance (D&O, E&O) for the fund entity
Regulatory filing fees
Interest on subscription credit facilities
Organizational expenses (legal, accounting, and filing fees incurred during fund formation) typically fall under a separate cap defined in the limited partnership agreement (LPA).
What Does the Management Company Cover?
Management company expenses are paid from the management fee, not fund capital. These costs relate to running the investment management business itself:
Salaries, bonuses, and benefits for investment professionals and staff
Office rent, utilities, and equipment
General technology systems and software used across multiple funds
Marketing and investor relations (excluding fund-specific communications)
Travel for deal sourcing prior to a signed term sheet
Professional development and training
General legal and accounting for the management company entity
Where Do Gray Areas Emerge?
Several expense categories often require judgment calls and LPA interpretation:
Technology upgrades: Systems that benefit the GP across multiple funds typically belong to the management company. Fund-specific tools may qualify as fund expenses.
Internal legal counsel: Some funds allocate a portion of in-house legal time to the fund, though ILPA guidance indicates this is acceptable only when LPs are provided with the rationale and market basis for the charges.
Travel: Pre-term-sheet travel for deal sourcing commonly falls to the management company. Post-term-sheet due diligence travel often qualifies as a fund expense.
Conference attendance: Generally a management company expense unless directly tied to a specific investment.
How Should Expenses Be Documented?
Clear policies established before the fund's first close reduce disputes later. Capital call notices typically itemize fund expenses, and most LPAs require periodic disclosure to LPs and independent auditor review. Maintaining contemporaneous records of expense allocation decisions (particularly for gray-area items) supports audit defense and LP inquiries.
The delineation between fund and management company expenses affects everything from NAV calculations to LP net returns. Establishing clear internal policies and reviewing them against LPA language helps ensure allocations remain defensible across the fund's lifecycle.