All, Innovation

When growth went exponential, this CFO turned to co-sourcing

In private capital, growing from $1 billion to $5.5 billion of AUM entails confronting operational challenges and thinking through strategies to scale your business. 4Pines Fund Services helped BV Investment Partners Managing Director Jonathan Holmes, who oversees his portfolio companies’ CFOs and COOs, develop successful strategies for scaling in pace with this growth.  

“We focus on tech-enabled business services, IT services, and software,” Jonathan told 4Pines Fund Services Founder and CEO Michael Trinkaus in a recent episode of the Private Capital Strategy Series webcast. “There have been some operational challenges, some growth in terms of how we scale our business, and different things that we have thought through in terms of addressing those needs.” 

This experience led Jonathan to opt for co-sourcing his firm’s fund administration, a more scalable model that meets BV Investment Partners’ needs for rapid growth today and tomorrow. Co-sourcing is the innovative approach to fund administration that maximizes the benefits of outsourcing, protects data, makes compliance easier, and, perhaps most importantly in this case, ensures flexibility, as 4Pines’ Definitive Guide to Co-Sourcing explains.  

Before joining BV Investments in 2015, Jonathan was CFO at BayNorth Capital, a Boston-based real estate investment firm; vice president of Blackstone Group’s real estate opportunity funds division; and audit manager at PricewaterhouseCoopers. He’d seen firsthand how successful CFOs expanded their financial operations in pace with the new demands that their success brought. More AUM, more companies, and more GPs and LPs mean more reporting, more compliance, and more routine operations like capital calls and subscription documents. 

Among the most important and difficult challenges that growth posed for CFOs and COOs, Jonathan said, was knowing how and when to devote sufficient resources to managing the increasingly high volumes of requests and information that CFOs and COOs receive as they raise more funds. These sophisticated communications, which typically include nuanced conversations with LPs across various topics, are essentially customer service, said Jonathan. He believed, furthermore, that the best investment firms should strive to maintain the high-quality, high-touch service they offered to clients when the firms were smaller. 

These growing pains are welcome, of course, but they need careful management that CFOs can accomplish strategically to guide and benefit their firms.  Technology can mitigate them. Regardless of the size of their AUM, nearly every firm today can improve in general using the best SaaS tools on the market. Automation, for example, can greatly enhance scaling capacity.  

But people are always necessary to make sure these functions are executed properly, said Jonathan, a potentially tricky responsibility if one lacks in-house talent. These forces have driven the surge in outsourcing in the financial industry. A shortage of accountants and other talent has fueled the trend further. 

“That’s why we ultimately went down the co-sourcing route,” Jonathan said. “We have a great team internally, but we needed more people. We needed to be able to respond when there’s an unexpected continuation fund that adds a whole other fund within a couple of months that you didn’t see coming. How do you create the organizational structure and the team that can respond nimbly to it, with that shortage? Ultimately, we thought co-sourcing was kind of the best way to approach it because we had software that we were really happy with.” 

BV Investment Partners turned to 4Pines and co-sourcing to access the best talent in fund administration while retaining ownership of the firm’s data because 4Pines understood Jonathan’s situation. 

“As you start to evolve, and you get bigger as an organization, early on, you’re wearing lots of different hats as the CFO,” said Michael, a former CFO himself. “As you start to grow, the idea is to start bifurcating those responsibilities to perhaps putting some meat on the bone with each one of those items so that you can manage them properly, with the right teams, the right resources, etcetera.” 

Reversing the traditional fund administration model of the service provider retaining possession of the firm’s information and workflows for each fund, tax issues, cybersecurity, and monitoring valuations, co-sourcing firms grant their outsourced fund administrators access to their systems and data. The firms benefit from the expertise while assuming far less risk while accessing their data or changing fund administrators. 

“Co-sourcing allowed us to put the team in place pretty quickly and scale up within a few months,” said Jonathan. “We’ve done it gradually, over time, one fund at a time. It’s like building out a workflow using the first fund, and most recent fund. It’s the same thing. If you started a new fund and new team, you’re going to start making sure that you plug that fund into your policies and procedures. I viewed it as an extension of our team. To me, that’s what ultimately resonated with the co-sourcing decision for us.” 

Offering the security of in-house control and the flexibility of outside expertise, co-sourcing helped Jonathan and his CFOs not only keep up with expansion but drive it, too. 

To learn more, read the 4Pines’ Definitive Guide to Co-Sourcing.