Speakers: Debra K. Lussier, Paul F. Van Houten, Vikrant Raina

On this episode of Ropes & Gray's podcast series, A Word for Our Sponsors, hosts Paul Van Houten and Deb Lussier, the co-leaders of the sponsor solutions practice, chat with Vikrant Raina, CEO and managing partner at BV Investment Partners, about BV's successful first continuation fund.

Transcript:

Paul Van Houten: Hi, everyone. I'm Paul Van Houten. Welcome to our podcast, A Word for Our Sponsors, where we talk with private equity insiders about the issues that matter most to them. I'm here with my partner and the co-leader of the sponsor solutions practice at Ropes & Gray, Deb Lussier. Today, Deb and I are joined by Vik Raina, the CEO and managing partner at BV Investment Partners. Vik, welcome and thanks for joining us.

Vikrant Raina: Thank you for having me, Deb and Paul—excited to be here.

Deb Lussier: That's great, Vik—we're super excited to talk with you today. Maybe we can just kick it off with you telling our listeners a little bit about BV.

Vikrant Raina: BV just celebrated its 40th year—we started in Boston in 1983—and just finished raising Fund XI, which was a $1.7 billion fund. We focus on tech-enabled solutions in the North American market, partnering with founders and providing the first institutional equity into founder-owned businesses. We then do a majority partnership deal and control those businesses, and really work with them to scale perhaps a $25-50 million business to hopefully a $100-$200 million business, and then sell that along to strategics. So, been doing this for about 40 years as a firm and excited to be continuing to do it in our latest fund, Fund XI.

Deb Lussier: Fund XI was just a huge success. In this fundraising environment, to have met and exceeded your target is no small feat, so congratulations to you and to BV for that. With Fund XI well on its way, having already made seven platform investments, curious about your thoughts on the pace of middle-market deal activity for the first quarter of 2024.

Vikrant Raina: I think, Deb, there are two kinds of deal-making markets. As you noted from your comments, we've been pretty busy this year because the companies that are owned by founders, where they're willing to sell a 50%, 60%, 70% stake, the bid-and-ask gap has not been as much of a hurdle to doing deals because the founders can adjust for that by keeping a little bit extra stake in the business. Plus, the financing there is not as reliant on debt markets: Mainly these are deals that can be covered by private credit funds. So, we've in fact been very busy, as the founders contemplate the macroeconomic uncertainty and want to take some chips off the table by selling 50-60%. However, the market that is private equity-to-private equity, or markets that rely on syndicated loan markets, have been very difficult because the bid-ask spreads there are harder to bridge. My expectation is that rate cuts will start in the first half of 2024, and that should ease some of the financial conditions. So, I do expect activity in early 2024 to pick up from 2023 levels.

Paul Van Houten: That's great to hear that you've been busy, and I hope you're right that the deal market generally picks up in 2024. In particular, you've also been busy on the secondaries front, and did your own first GP-led secondary. Could you tell us more about that deal?

Vikrant Raina: Yes. It was exciting, both from the prospect of the Fund VIII investment that we'd made in the company Right Networks, now called Rightworks, and also for us to make our first foray into this new kind of asset class. Just a little bit of background on Rightworks. We made the investment in the company in 2016, and we bought 60% of the company—the founder owned 40%. We were able to grow the company 500% in our time of ownership—between 2016 and 2023—and we still were executing on a new strategic plan that we thought we could grow the company another 300-400% in the next five to six years. And so, trying to meet the objectives of an old fund that was coming towards the end of its life, trying to provide capital to the company to continue to grow, and also trying to stay on and share in the value-creation that would happen over the next four or five years, it made sense for us to look at a GP-led secondary for Rightworks. I must also add that at the end of 2022, we were able to buy the remaining stake of the founder in Fund XI—which was our latest fund, as I mentioned earlier—and so, the opportunity came to provide liquidity to Fund VIII and keep going for the next five years. We were excited that the GP-led secondary provided that opportunity.

Paul Van Houten: Was there anything in particular that surprised you about the process?

Vikrant Raina: As you're doing this for the first time, there clearly are things that you haven't thought through. It was nice to have Ropes & Gray by our side because you guys do a lot of these, and I think there wasn't a situation that came up that you hadn't seen. There were several things that came up for us that we certainly hadn't seen before. Amongst them, a couple of things I would call out are the investors in this market are different than traditional private equity investors or traditional strategic investors—they do a bottoms-up analysis of the company, but they're also very focused on the fund and the NAV that the companies carried in the fund, and things of that nature that were certainly new to us. We also wanted to make sure that the process hygiene was good, because obviously this is a process with a few conflicts, and we wanted to make sure that those conflicts were appropriately managed and disclosed on a transparent basis. The last thing I'd say is how long it took. We were expecting a fairly quick process, but in order to do things right, to give people enough time to make their decisions—both the new investors as well as the exiting and existing LPs—the things just need to go through a certain number of steps that take time. So, those would be the three things I'd say I probably had a different idea before doing the GP continuation fund.

Paul Van Houten: Yes, I think most participants in the GP-led secondary market would agree with you that these processes tend to take a little bit longer than expected, and certainly a little bit longer than a normal sale process for a portfolio company. Deb, how did this deal differ from some of the other continuation funds that you've worked on for other clients?

Deb Lussier: One important way, I think, is, Vik's and BV's creativity with the different share classes that they were going to offer as part of this continuation fund—the terms of which I won't go into specifically, but they didn't follow the cookie-cutter approach of continuation funds. Vik was seeking to meet certain limited partners' needs and commitments that BV had made to those investors with respect to co-investments, and the fee-and-carry arrangements that were offered to existing Fund VII investors reflected those obligations. And what I really appreciated about the experience working with BV on this continuation fund is that we weren't "in the box." We were being innovative, creative and thinking about what terms made rational and commercial sense for BV the organization and for BV's investors and weren't hemmed in by just the market norms. I think that sums up what was different about this continuation fund versus others that are in the market.

Vikrant Raina: Yes, I think, Deb, as you mentioned, it was very important to us to make sure that the original Fund VIII investors who wanted to come along for the next chapter of Rightworks were able to do it without any extra burdens—which, again, is not the norm in continuation fund markets. And then, secondly, it was also important for us to have a group of investors that were looking for potential co-invest opportunities to create this as part of that opportunity—again, not usual in a continuation fund construct. So, we were glad we were able to do that with your help, a few extra steps that you helped us navigate, but we were able to get there with a very successful outcome.

Deb Lussier: Vik, did it surprise you that, notwithstanding the fact that you were making this offer to the Fund VIII existing limited partners to not be additionally burdened by fees and expenses or fees-and-carry, so to speak, there was still a very high percentage of your Fund VIII limited partners who selected the liquidity option?

Vikrant Raina: Deb, I've been doing this for 25 years, and I've learned not to predict what LPs do because we are such a small piece of their holding, and they have portfolio decisions that they need to make based on things that we obviously are not aware of. Our goal was to provide them the option to decide what they wanted to do. And given the dearth of realizations in the market, and given the fact that people have been complaining about the investment-to-exit ratio—plus, for some LPs, the structural challenges of doing a single-asset continuation fund—it all makes sense that many of them chose to take what was an excellent outcome for the fund, which was a 10X return MOIC, and perhaps either deploy that in areas they found that they needed to, or keep the cash, or use the cash. But at the end of the day, it was their decision.

Paul Van Houten: Vik, having done this once now, do you think this was a one-off occurrence for BV or do you think it's now part of the playbook, and will you be thinking about other circumstances in the future where a continuation fund may be a useful liquidity tool?

Vikrant Raina: I think it's clearly, in the last year or two, established itself as a new kind of liquidity option for portfolio companies. We were certainly not the pioneers here, and we're following a long list of continuation funds. However, I think there was a unique set of circumstances that made sense for Rightworks to be that single-asset continuation fund. There was a tremendous opportunity for further continued growth in the company—it required some additional capital. There was a significant difference in the GP-carry of the old fund versus the folks here in going forward. And, most importantly, I think we were towards the end of the life of the fund with a great outcome of a 10X MOIC, as I mentioned. So, I wouldn't say, "No," but I think those lists of fairly unique circumstances would have to present themselves again for us to consider it. What we don't want to do is to do a continuation fund when there's a long life left in the fund itself because obviously, we want the LPs of that fund to benefit from the continued success of a company, but if we were to be coming towards the end of a fund, with some of these other factors, we would certainly consider that.

Deb Lussier: Vik, after you had internally determined that Rightworks was a good asset for a continuation fund, and you started to have conversations with your LPAC members from Fund VIII, what was their initial reaction to the idea?

Vikrant Raina: I think it varied, Deb, from those who had seen these before to those who were seeing it for the first time. For those who had seen these before, we benefited from their ask of making sure it was a good process that was open, that was transparent and that required checks and balances. So, we got some really good feedback from our existing LPAC who had seen this before. The ones that hadn't seen this before, we had to explain to them what the asset class was. Clearly, they identified some of the conflicts—we had to explain to them what we were doing to mitigate those conflicts. It was a dichotomy in terms of the folks that knew this asset class and focused on making sure a good process was run, and folks that didn't know this who had to have an additional round of explanations but obviously then also wanted to make sure it was a transparent process.

Deb Lussier: How about your limited partners?

Vikrant Raina: I think that they split into the same two camps. By the time we did this, which was summer of 2023, this had become a very established process—there'd been articles around it, Buyouts and so on—so people were mostly familiar with it. Given that they had the option to roll over, many of them wanted to do a re-underwrite of the company. So, we were very transparent about providing the same data, both to the new buyers as well as the sellers or rollover participants. A lot of them focused on really understanding the company, why we were doing it and how we wanted to make sure that they could continue if they wanted to. And then, for those that were thinking of exiting, making sure that we had an investment bank intermediary—we had a valuation firm that we were using that the GPs themselves were making sure that it was done appropriately. We were very thankful for the guidance that you guys provided to make sure that the process went off well.

Deb Lussier: As you know, we provide investors 20 business days to make a decision as to whether to cash out or roll. What we've heard from allocators is that 20 business days may not be long enough to underwrite the portfolio company. I think you guys did an excellent job of talking with limited partners in advance of the initiation of that 20-business-day period so that your investors knew what your thought process was in respect of Rightworks and were prepared to react within that 20-business-day period without feeling overly jammed.

Vikrant Raina: Yes, it's like in any other situation you've heard me describe. I actually don't like the word "LPs"—I think of them as "customers and clients." And so, in any situation where you're dealing with customers and clients, you want to make sure they get information in a timely manner, you make yourself available for any questions they have, the materials are self-explanatory and well-written, and you guide them through the various aspects not just of the deal, but the process itself. I think those things helped make sure that our limited partners had enough time to make whatever the right decision was for themselves.

Paul Van Houten: Vik, you mentioned that some of your limited partners—or clients or customers, as you like to say—were not particularly familiar with this type of transaction. That comes as a little bit of a surprise, given that these transactions aren't exactly new and have been in the market for a few years now. What particular types of clients or customers were dealing with this for the first time? Could you talk a little bit more maybe about what types of information-sharing or communication helped them get comfortable at the end of the day?

Vikrant Raina: I think probably a little bit of a reflection that every GP is going to have a unique mix of a client/LP base. I think the folks that were less aware of these transactions tended to be the family offices, high-net-worth individuals, some of the insurance companies that didn't have established programs, and then, to a degree, some of the non-U.S. customers and LPs, although many of them knew it because obviously it's a global business now. In terms of the documents that were helpful, again, you have to start the conversation early with these customers—they have to know what your plans are. Every year, we update our plans on every portfolio company, including Rightworks, so they were aware that we were thinking of liquidity options. And they were also aware that—as we had articulated—there was a long runway in front of us for the company. So, it starts with the annual report on the company.

When we decided to do the continuation fund, our first conversation was the LPAC—before we had even started the process of the continuation fund—to get their advice on what documents they wanted, what process they wanted to conduct and what some of their hot-button items were. Through the process we made sure—I mentioned this—that we had a very detailed information memorandum that was put together by the company, the investment bank and ourselves. We had an hour-long webinar for the BV folks that presented the rationale for the company and the future. We had an hour-long webinar from the management team to talk about their plans for the company. We had a third-party valuation done. All those things were made available to both sides of the transaction—obviously, the new investors that were coming in, but also the investors that had to make a decision to buy or sell the company. And we made ourselves—as I mentioned earlier—available for any follow-on questions or detailed questions, and so on. Obviously, there's a lot of legal documentation that goes in, as well. Again, with Deb and her team working with us, we shared those legal documents early with them and got their feedback on some of the key points. It was very transparent—everybody knew what the other side was doing. There were no special deals cut in the side—same access and same information was provided so folks could make the best decision for themselves.

Paul Van Houten: That's great, Vik. It sounds like you ran a very transparent and open process. I think sometimes some of our clients stumble a little bit in these transactions because they're new for them as well and aren't quite as prepared to engage with their clients and customers in the way that you have, and it's very refreshing to see how BV went into this process and really embraced the transaction in a very open, transparent manner.

Vikrant Raina: I have advice for some of my colleagues thinking about this: The easy advice is to call Ropes & Gray. But, more importantly, after you've called Ropes & Gray, make sure you keep calling them as questions come up, because it's very easy to get tripped up. I think, going into it, recognize that there are conflicts, make sure that you are doing everything you can to mitigate them, and take legal advice every step of the way. If GPs are doing it not just for the first time, but maybe the second and third time, every situation is unique, and I think it's very important to be very careful and deliberate and not try to rush things.

Deb Lussier: We appreciate that sentiment, Vik, very much. As we wrap up, I just want to ask you about your most recent annual meeting, which I had the pleasure of attending. You had commented to me during that annual meeting that it was BV's highest attendance ever. I'm curious about your thoughts on that—the engagement by your clients and customers, and the packed room that you had—to what do you ascribe that?

Vikrant Raina: I've been doing this for 25 years and have had the pleasure or the experience of having seen three or four cycles in private equity. I think everybody will acknowledge that we're going through a cycle right now that is driven by these interest rate increases that we talked about earlier. If you looked at the average or median age of a private equity professional, you would find for most folks, this is either the first or maybe the second time they're going through a cycle. So, I think folks are realizing that private equity is cyclical, and they are getting out of their offices and really seeing the people that they've invested with—they want to see them in person (obviously, have not had a chance to do that for a couple of years). They want to hear from portfolio management and make up their own mind on the strategies of GPs—how we're either using our experience or gaining experience to navigate this environment. And so, I would ascribe the strongest attendance we've ever had in our 20 years to both that we are now a global franchise of customers and clients in terms of where our investors come from—both in terms of numbers and geography—but, more importantly, what was done over Zoom now needs to be done in person. Also, really understanding each GP's unique strategy for their portfolios, and how we're thankfully not dealing with many of the leverage issues that many of our brethren are facing. For every GP, there's a bunch of issues on the client's mind, and I would say that's why they want to get there in person and hold us accountable in person.

Paul Van Houten: Congratulations on that great turnout. I think it's reflective of what we're seeing, as well, generally, and that is when markets are good and deals are easy to get done, it's very comfortable for people to do it remotely—but now that we're seeing issues in the market and troubled portfolio companies, there's nothing like getting together in a room, rolling up your sleeves together and addressing problems in person. I think a lot more can get accomplished that way, so it's good to see that your customers and clients are seeing it the same way and are coming to meet you and engaging with you and your team.

Vikrant Raina: It was very exciting to see many of them for the first time. We've raised two funds since COVID, so we were delighted to host them. And, from what I can tell, they had a good time.

Deb Lussier: Vik, thanks so much for joining us to talk about BV's first continuation fund. Again, congratulations on Fund XI, the continuation fund, and we know there's going be so much more in store for BV going forward. And we're happy to be a part of that, so thank you very much.

Paul Van Houten: I'd also like to thank our audience for joining us today. For more information on the topics that we discussed, please visit our website at ropesgray.com. Of course, we can help you navigate any of the topics we discussed—please don't hesitate to get in touch. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including on Apple and Spotify. Thanks again for joining us.

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