Also, I have a couple sizeable holes (1/2" to 3/4") that need to be patched. What's the best method?

Since I am not sure on the age of your home. I will provide the best way that I know of for repairing the holes that you have. It will actually be better to remove a panel of vinyl covered wallboard from your closet and exchange it with the damaged piece. Since it is in the back of the closest you will not see it as readily. You should be able to pop the batten strips that hold it in place to take it out. Good Luck!

That sounds like alot of work. Plus if there are kids in the house, you'll likely have more holes and eventually run out of closet panels. I'd just get all rough edges out the holes, then put some dry wall tape over them and then use dry wall mud, then sand smooth. I don't know what to tell you about the bubbles. I have some places like around some of my windows were I think they maybe just tightened the screws too much and it casued the covering the wrinkle up. I just planned on painting over it since it will covered by curtains anyways. good luck.