- Software firm provides expense allocation product to managers
- Automatic invoice processing, with outputs to accounting team
- Expense allocation a continuing SEC enforcement priority
When the SEC’s Office of Compliance Inspections and Examinations released its priorities for 2018, the agency made clear it intended to continue scrutinizing fees and expenses charged by private-fund managers.
That’s been an area of focus since 2012, says Mitch Schulman, founder and CEO of fintech firm IntegriDATA. During that time, 11 enforcement actions for misallocation of fees and expenses have resulted in penalties totaling $41 million.
IntegriDATA developed its Expense Allocation System in 2015. The company already offered tools for collateral management and wire payment to alternative investment managers, when one client asked for help automating allocation of expenses to its funds and management company. “We then pitched the idea to all of our other software clients, and two other firms agreed to work with us,” Schulman recalled.
The three firms that sponsored the project shared a common problem: They were “living in Excel spreadsheets,” a manual effort with high potential for errors and not a lot of transparency. “Excel is really good at doing the calculations, and that’s it,” Schulman said. “The process was inefficient, as well as highly fragmented in nature.” And there wasn’t an easy way to use the numbers for reporting purposes.
IntegriDATA’s solution “establish[es] position rules within the system that allow us to consistently and automatically compute the sharing of each expense,” he explained. The rules operate on invoices, with default allocations assigned to particular combinations of vendors and fund agreements (for instance, technology company and licensing fee).
Most of the inputs are operating expenses, but the system also handles travel-and-entertainment and compensation costs. “We do the allocation, it goes through our workflow, in the end we spit out journal entries and send them downstream to the management company and fund accounting teams,” Schulman said. “We fashion ourselves as an efficiency play as well as a compliance play.” IntegriDATA began marketing EAS in 2016 and last year closed on 10 deals for the product.
IntegriDATA started out as a consulting business in 2003, after Schuman left Citigroup, where he ran institutional operations following the acquisition of Salomon Brothers, his prior employer.
“We originally were doing a lot of project management, implementation of third-party software, business process and control improvements,” Schulman said. “Along the way we started building software, and then ultimately we began licensing software.” A turning point: the financial crisis, when consulting work dried up and clients were having trouble accounting for collateral for derivatives trades.
“We built it organically,” Schulman said of the company. “It’s easy to build software to meet one client’s needs; it’s a little different when you’re building software that’s configurable, that can serve multiple clients.” The process of developing and selling it “was all learning.”
Mitch Schulman, founder and CEO, IntegriDATA Business and Technology Solutions. Photo courtesy of the firm