Stephen Holmes receives 2013 PEM award

Engage regulators now on the emerging issue of ‘decimalization’, urged InterWest Partners chief operating officer Stephen Holmes during his acceptance speech at the PEI CFOs and COOs forum in New York.

On Thursday Stephen Holmes, chief operating officer and general partner at California-based venture capital firm InterWest Partners, accepted the 2013 Private Equity Manager Leadership Award.

Holmes, who is credited by many with help laying the groundwork on fair value reporting and elevating the role back office professionals play within the industry, received the recognition at the 2013 Private Equity International CFOs and COOs Forum in New York.

During his acceptance speech, Holmes used his time to urge delegates to engage regulators on the impact of decimal-based stock trading, among other rules written by the US Securities and Exchange Commission (SEC) in the late 90s covering small and micro-cap companies (or, to use the catch-all term for the regulations, “decimalization”).

“This is an emerging topic, probably not well known yet, but I predict everyone here will become very familiar with it as time goes on,” Holmes said. 

On 5 February the SEC will host a series of roundtables on decimalization, which will be open to the public and webcast live on the SEC’s website. US stock markets adopted decimal pricing increments in 2001 with the hope of reducing artificially wide spreads under the previous fractional pricing system. However critics of the switch argue decimalization can make it more difficult for small and micro-cap companies to gain adequate liquidity, which in a downward cycle, means they do not capture the attention of research analysts who are often used by public-market investors to select stocks. 

[Decimilization] is an emerging topic, probably not well known yet, but I predict everyone here will become very familiar with it as time goes on

“This is not an all or nothing issue,” Holmes explained to PE Manager during a sideline interview. “Decimalization is probably very appropriate for highly liquid large to mid-cap stocks. However, decimalization is probably not in the best interests of small and micro-cap stock investors. Quoting small and mid-cap companies in penny increments reduces broker-dealers’ economic incentive to make markets in less liquid stocks, such as those of smaller companies. It is also argued that the illiquidity of the many thinly-traded stocks is at least partially the result of decimalization. However others would argue that the low level of IPOs and illiquidity is aggravated by macro factors other than decimalization,” he elaborated.

“Fasten your seat belts, because decimalization is a debate that’s going to last at least three years,” Holmes said during his speech. “But the time to make the most impact on the topic is now. Last year we helped Congress pass an IPO On-Ramp. In 2013 we need to start building the interstate freeway on which this On-Ramp feeds small-cap portfolio companies to raise capital and grow.”

Holmes, who follows past winners including Adams Street Partners chief financial officer William Hupp and The Riverside Company chief operating officer Pam Hendrickson, has long been an industry advocate and voice on issues important to back office private equity professionals. He is considered by many within the industry as a pacesetter in financial reporting, investor relations and administrative issues.

“I’m always looking for a better way to communicate with LPs,” said Holmes during the interview. He briefly described a “term paper” included in InterWest LP reports that summarises a fund’s key information and is written in a way that allows investors to copy and paste the content for their own internal reporting purposes. “It would be silly for them to have to rewrite that summary for each GP relationship they hold.”

Holmes, a frequent speaker and contributor to industry conferences, is also a founding member of the Private Equity Industry Guidelines Group (PEIGG). Created in 2002, the organisation aims to promote consistent and transparent valuation and reporting guidelines for the private equity industry. Sources describe the PEIGG as laying the groundwork for fair value reporting, which is now mandatory under US and international accounting standards.

At a more international level, Holmes has made his mark through work done with the International Private Equity and Venture Capital Valuation board (IPEV). In 2005 the board was created to provide GPs a consistent set of guidelines to use when calculating the valuation of illiquid assets. Later the group would release reporting guidelines designed to help standardise the way GPs communicate fund information to investors.

Holmes is also a founding member of the US Financial Accounting Standards Board's Small Business Advisory Committee, as well as the National Venture Capital Association’s CFO Task Force. He served on the NVCA’s Board of Directors from 2008 to 2012.

More recently Holmes was appointed to the Security and Exchange Commission's newly-formed Investor Advisory Committee. The committee was created in June to provide investor perspectives on regulatory priorities, fee structures, disclosure policies and other topics important to investors.