The Private Capital Strategy Series Episode 14: How BV Investment Partners does operations

BV Investment Partners has made headlines, including closing 2023 with a continuation vehicle after already entering its fifth decade with its largest fund to date. We ask BV’s Jonathan Holmes how he deploys his more than 15 years of finance and accounting experience to enable BV’s operations and strategy. And yes, we ask him about co-sourcing.

Mike Trinkaus  00:01 

Welcome, everyone. I appreciate you taking your time taking time out of your day to join us. I’m very excited for this little webinar. We’re going to have a great discussion on operations, the evolution of operations, and a view into the life of a CFO in the industry, how he has seen operations evolve over the year, and perhaps where he thinks some things are going. So, with that, I’m really excited to have Jonathan Holmes, managing director, CFO, and CCO of BV Investment Partners join me today. 

Jonathan, maybe take a couple seconds here to introduce yourself, a little bit of your background, and perhaps a bit on BV Investment Partners as well. 

Jonathan Holmes  00:45 

Excellent. Thank you, Mike. Thank you, Chris. It’s good to see everybody. As Mike said, my name is Jonathan Holmes. I’m the CFO and CCO here at BV. I’ve been at BV for about nine years now. Prior to that, I was the CFO for a real estate private equity firm here up in Boston and, before that, with Blackstone’s real estate private equity group down in New York. I started my career with PwC. In terms of BV, we are a middle-market buyout firm. We’ve been around since 1983. We just had our 40th anniversary. It’s hard to believe that we’re in our fifth decade of existence. There’s no one here at the firm today who was here in 1983. We’ve evolved a lot. In our third generation, we focus on tech-enabled business services, IT services, also some software. We partner with founders in terms of investing in their companies. In terms of our business, I’d say it’s a little bit fairly simple. It was a single strategy firm. But one thing that we’ve encountered is, we kind of set up this discussion regarding our operations. When I joined, we were just under $1 billion of AUM. Today, we sit at about $5.5 billion of AUM that we’ve grown over the past nine years. There’s 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. 

Mike Trinkaus  02:30 

Perfect – laying square in that middle market space. We’re seeing a lot of stuff that you guys are doing that is certainly prevalent in the market today – continuations, bonds, or add-on funds. You guys recently had a very successful closing in your latest fund. I think what’s interesting about that there’s is always an inflection point when it comes to operations or really any functional area that you have within an organization. But since you’re the CFO, we’ll try to keep on that from the operations standpoint. 

So, let’s start there – as the CFO of BV. Let’s talk about that journey along the operations line, starting way back when you were $1 billion to where you are today. What does that journey look like? What were some of the different inflection points that you faced from an operational perspective? Let’s see if that resonates with folks. 

Jonathan Holmes  03:34 

Thanks, Mike. It’s a combination of the pace of fundraising – how frequently you’re raising funds – and the size of the funds, and the structures of those funds. I think when I joined BV, we had 10 different entities. We’re probably up to over 70 now. There are only, you know, X number of funds you’re reporting, but it gets into the consolidation. We had probably 10 portfolio companies. We have 35. So, all of that plays into the amount of the transactions that are occurring – just the volume, right? We’ve been raising funds every two-and-a-half to three years. When you combine all of that, the workload kind of continually builds over time as a CFO. When you’re at that $400 or $500 million fund value, you’re very much a player-coach. In terms of the organization, we typically wear many hats, and as you grow and scale the business, you need to build out your team to have time to think about those issues, especially if you’re still where I am, where you’re still wearing the CCO hat, and you have to think about compliance. The good thing there is you can actually build that into your workflow, in terms of allocating expenses, etcetera. 

In terms of the inflection point, I would say it was probably once we crossed the $1 billion fund size. We actually closed at the end of February 2020. It’s an organization where you start needing to raise that fund, you start having, eight sets of fund financials, 10 sets of fund financials that are going out quarterly and annually. I’m a firm believer that, regardless of the size of your AUM, every firm can be best in class, I think, in terms of just the SaaS tools out there, the third-party service providers that you can put together, the resources that you need. In order to deliver both internally, I view it as client service. It’s LPs, right? GPs. It’s also just the internal operation of the firm. In my role, I look at it from a number of different areas in terms of the funds, tax, cybersecurity portfolio, monitoring valuations, and looking at each of those silos, as we build out our firm and our operations. As you get larger, you need to make sure you have the resources dedicated to making sure the volume of requests and information is coming through, to make sure that you can maintain that high-level quality, high touch that you had when you were a smaller firm. 

Mike Trinkaus  06:40 

In other words, as you start to evolve, and you get bigger as an organization, early on, you’re wearing lots of different hats as the CFO. But 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 team, the right resources, etcetera. Is that another way to say what you’re saying there?  

Jonathan Holmes  07:10 

Yes, absolutely. You need to be more strategic in scaling your organization and have the time when you’re responding. When you were responsible for all that, how can you find the time to step back, right? There’s a lot of smart people out, a lot of smart firms that can help you. You don’t need to the endpoint. You can get the right team in place to make sure you have everything covered. Then it frees you up to kind think about how you structure the organization of your firm. 

Mike Trinkaus  07:42 

How has your role as the CFO evolved, specifically, over time? One of the things that I think it makes sense to hit on in the context of this part of the conversation is the LP impact, the demands that limited partners have on you and your team as well as the regulatory environment. How has that shaped what you guys have done over time in the back office?  

Jonathan Holmes  08:09 

The biggest transformation that we have had is shifting from being reactive to proactive. When you have a small team, you’re just trying to keep everything going. It’s a small group. You’re addressing all the requests that are coming in as your LP base grows. The larger institutional LPs tend to have more and bigger information requests. I think anyone who’s gone to any of the CFL conferences, or looked at portfolio monitoring tools, has heard the term “single source of truth.” As we think about things in terms of data – you’ve got ELPA out there – we’re starting to see more of it in terms of those requests. We fought the good fight for a long time in terms of being able to do our reporting. But at the end of the day, that’s our client services, and I look at everything we do. The accounting system is just data that’s tagged. How do we build our organization to think about what are the things our LPs are asking us today? There are things during the fundraising process that they were okay with. But, if they’re asking for certain things, they might want them in the future. How do we prepare before the next time we go out and fundraise? Your time is super helpful in terms of being able to plan and set things up. 

We’re on our eleventh fund. We have 40 years plus of data, right? Again, they should be looking at the most recent funds, in terms of real, relevant teams, and how they can get organized. “Who can we partner with? How can we leverage the technology we have or bring in the right technology to make sure that we’re ready so that we can be proactive? Then we have the data and it’s just really manipulating the data, right?” Hopefully, they can build the right reports. It makes it much more turnkey. But I think everyone knows there are enough bespoke requests that come through as long as you have the data to be able to respond to them. It’s a time crunch. It’s tough. Fundraising is like running a marathon – “I need a break. I need to recover now.” But at the same time, we have just started getting ready for the next cycle. It’s not imminent. Then you throw in continuation funds. As the market evolves. There are just continuing demands on the finance team. 

Mike Trinkaus  10:44 

Let’s stay in that data feed because I think that’s an important one to touch on. It certainly sounds like you guys have at least put in some plan or vision around data, how you get the data, and what you’re using it for. As you said, if you’ve got the data, you can get it out. Perhaps the way you’re thinking about it now is, “Hey, we don’t just want to get it out. We want to get it out in the most efficient and effective manner for our LPs.” You know, it helps lower the risk profile when you have all of the data in a good spot. If you can automate the data, that’s even better. But what if I’m Jonathan Holmes four years ago, and I’m thinking, “Hey, I really need to start thinking about a data plan, having a vision.” Where would I get started? How did you get started? What put you down this path? What advice would you give somebody who is a younger version of yourself right now? 

Jonathan Holmes  11:40 

I would listen to all of the requests that come in from your limited partners. We also have the private funds rule, right? Everyone’s still figuring out the exact reporting templates. I’m not relying on the lawsuit that’s out there not to happen. I think we’re planning on adopting it. But I think you can learn a lot from it, even if it’s not necessary today. I truly believe that, if you can have things at the lowest common denominator, that makes sense. We’ve all seen a lot of information requests. You could have to go to an infinite level so you have to have a reasonable level at it. But I think you can just learn a lot by listening. That’s really helped me in terms of trying to anticipate it, even if an investor doesn’t come into your fund, you’re responding to diligence request, and you’re seeing what they’re asking, and you’re like, “Alright, this is a pretty large institutional investor. We’re planning that they hopefully invest this time, hopefully next time, or maybe we’re raising a bigger fund and want more of these types of investors. 

We did our first fundraiser. I was digging through cabinets for old investment memos. The paper was yellow. We’re trying to put things together as that doesn’t feel very good. I also think of it in terms of LP reporting and GP reporting. Act as if you’re an investor. What would you want with your own money invested? That’s usually a good compass to tell you if you are providing enough detail. Imagine if a significant amount of your net worth was invested in your firm and you didn’t have the visibility you do. Are you providing enough information? Can you answer the questions? The combination of all that has helped us evolve our reporting. We’re still evolving. We’re still learning. We’re still trying to get better. Also, don’t be complacent once you think you’ve figured it out, too. 

Mike Trinkaus  13:43 

That’s great advice. We always recommend that folks think about what the endgame is. Then you can figure out the path to get there. But it’s really around that reporting what you want to see. That’s a really good starting point for somebody that’s trying to figure out what to do next, and how to figure out their internal data plan that obviously becomes externally facing. Let’s discuss that theme about all the things that you need to do and all of the data you need to manage and get out both to your limited partners and to the regulators as well as the folks internally around the firm. One of the things that we’ve seen across the industry is the shortage of accountants. It doesn’t appear any relief is coming anytime soon. When you look at some of the different articles that have been written, accounting majors are way down from historical perspectives. There was a Wall Street Journal article that referenced the markets missing 300,000 accountants. How are you addressing this at BV? Are you seeing this as well? Are you running into that same challenge that a lot of folks are? 

Jonathan Holmes  14:52 

I used to think it was just easier to build out your own team. I could interview them. I could pick the people. They could sit down the hall and you can manage them. But it’s hard to find people with the right level of experience, and the right level of technical capabilities. We don’t have an in-house training function. We can spend time training people. But there’s only so much time that we have to do that. It’s hard to find the right people. That’s why we ultimately went down the co-sourcing route because we have a great team internally. But we needed more people. We needed to be able to also respond when I don’t think there’s another continuation fund coming. But if there is another one beyond the one that we did, that just adds a whole other fund within a couple of months that you didn’t see coming. How do you create the structure of an organization and the team with that shortage that can respond nimbly to it? Ultimately, we thought co-sourcing was kind of the best way to approach it because we had software that we were really happy with, which is all of you. We spent a lot of time and invested a lot of time when we did the implementation and built it out. Beyond finding enough people internally, we needed more resources in terms of that broader experience as well more than what we see day to hear day to day here. Because, you know, we’re living in our silo, our world, responding to everything here. There’s a lot of stuff that, when you look across different firms, that we’re all dealing with. There are a lot of conferences that we all go to and the peer connections are helpful for learning. But it’s great to be able to have a team internally. It’s really hard to be able to find because, if you look at the journey we’ve been on, we needed a whole other vertical. When I talk about supporting a fund team, you think about a vertical – comptroller, accounting manager, senior fund accountant, fund accountant, right.? You can imagine going to the managing partner firm and being like, “We need four more people,” and they’re going to be like, “Okay, why? You got to walk us through it.” Everyone’s supportive of giving the resources that you need to respond to your LPs, but what’s the best way to do it?  

Mike Trinkaus  17:26 

That’s a great segue into the next part of the conversation because we talked a little bit earlier about one of those pivotal moments. That was a pivotal moment for you guys, as a firm. You made a really big change in that you used to be self-administered, and you’ve recently moved to the outsourced model. You mentioned co-sourcing. We’ll touch on that in a second for those folks that aren’t familiar with that term. But maybe walk us through how you went from self-admin to the outsourcing market? What are some of the things that you were thinking about? What’s some of the advice that you can give to folks who are at that pivotal moment of, “Hey, do we stay doing what we’re doing? Or do we make a transformational shift in our approach to the back office in our firm? 

Jonathan Holmes  18:16 

Change is hard, right? It’s a trust issue. You’ve got to bring someone on and onboard them. You’re going to bring them into the process. But it’s really, really important. It comes down to people, processes, and technology. We’re very good with all of you. But I know that outsourced firms work with several clients, probably can get things set up better for us and more efficiently, and help us respond quicker in terms of the request on integrating them into our process. In terms of responding to our LPs, how do we respond to the volume of the requests and the increase with a growing firm, a growing number of funds, a growing number of LPs, etcetera? How do we make sure we quickly get a very highly capable, highly technical team that we can then plug in and who bring a lot of really good industry experience? 

We went through that process. We did an RFP. We call it a 4.0. Because of our 40 years. We looked and said, “Okay, we need a controller who can be responsible for price.” It just depends on where they are in their lifecycle. And then we need to be able to have an existing team. We need to look at bringing in a fund admin to also help us support it. We hired another controller and went through that process because, I think, even when you go from self-admin to co-sourcing or what might be called hybrid at this point – we fully outsource some funds – but you need to own it internally. You can fully outsource it. But at the end of the day, it’s our firm’s limited partners. It’s us doing the reporting. You need someone to sit on top of that fund admin, like you would a team internally, and review their work. When we looked at it, it’s making sure there’s the right workload, the right number of funds, etcetera per controller. You have the right people sitting on top, and then you think, “Okay, then who’s going to do the work on those funds? Who should you bring them?” That’s why we went through our RFP process. 

Mike Trinkaus  20:45 

That’s a great point that has been lost on a lot of folks on the GP side. They think, “Hey, I’m going to outsource this, and now I can detach from that responsibility.” But it’s just the opposite. You have the same responsibility that you did when you were self-administering. In my experience, again, that’s when the GP realizes there’s still this shared, very real responsibility. That’s usually when the relationship thrives because you’re both working towards the same goal. I think it’s the right attitude to have. For anybody who’s looking to make that particular transition and hit on the word “co-sourcing,” we have spent a lot of time at 4Pines Fund Services talking about co-sourcing in the market. It’s probably our favorite word internally. We’ve done several webinars on it. We’ve published a Definitive Guide and a bunch of other articles around the benefits of co-sourcing, the tradeoffs, pros and cons, and what to look for. You’ve made that transition to co-sourcing. Maybe talk to us for a minute or two about why co-sourcing was appealing to you and ultimately why you decided to go down that path. 

Jonathan Holmes  22:04 

It was appealing. We liked the software we’re on, Allvue. There are pros and cons for all of them. It’s an extension of your team. Mike, to your point, communication is critical the same way you do it with an internal team – or not. They truly are an extension of our team, in collaboration with it. When you go into co-sourcing arrangements, it’s also important to know who is on your team, and who are you working with. It’s great who you partner with. But every firm is going to give you an assigned team. You have got to be comfortable with that team that’s going to be working with you in the same way you would do if you were hiring them internally. From my perspective, it allowed us to put the team in place pretty quickly and scale up within a few months. We’ve done it gradually, over time, one fund at a time. It’s like building using the first fund, and most recent fund, to build out a workflow. It’s the same thing. If you did an internal team and you started a new fund, 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. 

Mike Trinkaus  23:31 

I couldn’t agree more. We see that as a big reason why some of our clients go down the co-sourcing path. It’s important. It brings folks together. We talk about partnership and collaboration a lot, internally and externally. It hits on those two items in a big way. That’s why it resonates with us because that’s how we try to interface with clients. 

We’re getting close to time. We do have a couple of questions. But let’s discuss one last question before I turn it over to the questions that have come into the queue. At this point, what advice do you have for anybody in your city, anything from an operations perspective, that you think is worth flagging from a risk profile? Or maybe you’ve talked to other colleagues who are ignoring things that you don’t think they should ignore? What are the one or two pieces of advice that you would give folks out there in your seat? Or maybe even a younger version of you? Not to say that you’re old; you’re not old at all. 

Jonathan Holmes  24:38 

It’s all right. I am when you start dating how long I’ve been in the industry. It scares me. The most important thing is, when you see a need, don’t be afraid to speak up. I think that’s the most important thing. Don’t wait until you hit an inflection point in crisis. From my experience in the firms where I’ve worked, like any firm, they’re going to ask you how close to the business you are from day to day.   

They might ask, “Why do you really need this?” Or “Do we need to spend this?” But if you’re able to articulate it well and make the business case, that’s important. You need to be an advocate for yourself. Otherwise, more and more will fall on your team. When you hit that point, you just have to trust your judgment. That’s something over time where we’ve always got to the right answer. There are times when we are like, “Oh, I did this six months, 12 months earlier, when it was tough. We just had to get through it. We did well, but all of us had to do a lot to get it done. That’s the biggest advice I’d give to someone as they’re facing the challenges and building out their team as their firms are growing. 

Mike Trinkaus  26:00 

That’s great advice. Let me ask you this: How long did it take you to personally learn that? 

Jonathan Holmes  26:07 

I’m stubborn, so probably longer than most. I would say I’m still learning at times. I’m a firm believer. I like a challenge. It took me longer. I had been a CFO for five years probably before I learned it because there are just different challenges. There’s a whole other set of challenges coming for us that I’m not even aware of. It feels good today. We have a plan. I guess the message is, don’t be stubborn like me.  

Mike Trinkaus  26:46 

Great advice. Let’s look at the questions that have come into the queue. Here’s one. Do you work with CFOs and finance leaders in the portfolio? If so, what does that look like right now? 

Jonathan Holmes  26:59 

I’m a resource for them. We’re building out a CFO network with our firm. Larger firms will typically have a finance operating partner that will bring all the CFOs together. I’ve historically been that connective glue among CFOs, also sharing best practices, and connecting with them. We’re pretty prescriptive on the audit and tax firms we work with, in terms of the CFOs. Similarly, you know, we’ve been pretty communicative in terms of working with them to make sure they also understand our internal reporting deadlines. 

We value the portfolio quarterly. For example, valuations here are 18 calendar days after the quarter ends, which means you need to have your monthly reporting packs hopefully done in 10 days. I wish I could say all of our companies do that. They don’t. But again, it’s that communication in terms of the interaction with the investment teams, asking what they do, what are some of BV’s internal reporting deadlines, as well as “Hey, you know, I can be a resource.” If you’re looking at doing an ERP implementation, for example, I have preferred pricing plans. Let’s just make sure you get plugged in. They say pretty meaningful amounts. I can connect you with a couple CFOs who’ve done implementations. Similar to having this discussion on operations, they can then have a peer group to share. I find it to be pretty rewarding. It’s very different to be a portfolio company CFO versus an investment company. We face different challenges. But at the end of the day, there is a common language among finance that we all understand where we know we can be helpful. 

Mike Trinkaus  28:53 

Perfect. We’re just about at the time here, but I’m going to try to squeeze in one more question for you before we end it. Can you share more of the priorities that you’re setting for your team in 2024 that may be different than in years past? Are there any different priorities this year relative to prior years? 

Jonathan Holmes  29:13 

Having just finished fundraising in 2023, there are some lessons I would say that I took from the fundraising in terms of what we went through for diligence. In terms of a single source of truth across the portfolio and streamlining the valuation process, we now have some alpha templates for CAP calls and distributions. Our priority this year is really, I would say, a single source of truth. In terms of LP requests, and valuations, we’ve always had it but there’s a bit of a manual element to it in terms of getting it right. We want to make sure we can leverage technology and, with the private funds rule, have a report under ELPA. We look for the same level of detail with our GPs streamlining and leveraging technology where we go through our normal correlate process. We run the reports. They’re good. That might be a high standard, but the goal is for that to be smooth and seamless. 

Mike Trinkaus  30:20 

Those are great goals. Nothing wrong with having high standards, especially around this sort of information that’s incredibly confidential and sensitive. High standards are probably the minimum bar we should all have. With that said, Jonathan, this was fantastic. I appreciate your time. I thought the conversation was great. You provided tremendous insights not from my perspective as a fund administrator but from somebody who has been in the industry for a long time, who is well respected, and with tremendous experience. Thank you. I hope everybody on the webinar enjoyed it as well. Thank you, everyone. Have a great day.  

Jonathan Holmes  30:58 

Thanks, Michael. It’s good to catch up. Thank you, everybody.