Fee Validation: Point-in-Time vs. Ongoing Monitoring

February 1, 2023

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Fee validation is an indispensable aspect of private markets, as fund managers must provide ever greater transparency and detail for their clients. To ensure accuracy and consistency across the board, two common methodologies for fee validation have emerged: Point-in-time (PIT) and Ongoing monitoring.  

Point-In-Time (PIT) analysis is a critical component of Limited Partner (LP) management and understanding the performance of private equity funds. It’s a one-off exercise based upon a set time frame, in which all fees and expenses are re-modelled, and waterfalls are re-calculated to evaluate fund performance. This can be an important tool for LPs to assess the performance of their investments and ensure that their interests are being served by GPs.  

The primary advantage of PIT analysis is that it allows for a comprehensive appraisal of all fees, expenses, and other key metrics related to the investment. All discrepancies can be identified quickly and accurately, allowing LPs to take corrective action if desired. Additionally, this type of analysis offers stakeholders assurance that LP management has acted responsibly with regards to their investments. Finally, PIT analysis also allows GPs' reporting to be shared, which can provide further insight into fund performance.  

The cons associated with PIT analysis include the fact that it can be a costly and complex undertaking for both LPs and GPs. An extensive amount of information must be gathered from the GP for the analysis to be conducted properly, which can add an additional burden on them as well as administrative costs for LPs. Furthermore, goodwill may be lost if they do not accept LP's requests during the process. The length of time required for such an in-depth analysis can also cause delays in making decisions about future investments or divestments from funds.  

Ongoing monitoring is a process used to ensure that fund fees remain valid and accurate. It utilizes technology, benchmarking, and other resources to keep track of changes in the lifecycle of fund fees while also identifying any discrepancies.  

One of the main advantages of this approach is cost efficiency. Since on-going monitoring does not require additional information requests, there is no need to pay for additional services or resources. In addition, it offers a forward-looking view into fund fees which helps identify trends before they become issues. This makes it easier for investors to take proactive steps when necessary.  

The primary downside of an ongoing monitoring methodology is that it is not suitable for legacy funds. These funds often rely on processes and data sets that are not compatible with more modern approaches. Additionally, significant variances can occur which require GP interaction to resolve each issue individually. This consumes staff time and resources which can add up quickly if multiple significant variances exist, or new ones arise frequently.

Fortunately, there are now solution providers such as qashqade which can help investors conduct extensive fee validation forensics with a combination of both PIT and on-going monitoring processes. qashqade’s system allows investors to minimize the risk of mistakes while ensuring complete compliance with regulatory requirements quickly and efficiently.

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