Episode summary
Valuing Constellation Software's Spinoffs: Finding the Next 10-Bagger
The Intrinsic Value Podcast
· · Hosts: Daniel Mahncke, Shawn O'Malley
Summary
The discussion argues that Constellation Software’s biggest lesson may now be found in smaller businesses following the same vertical-market-software playbook, especially after Constellation itself has become so large that new acquisitions must be bigger to matter. The hosts frame vertical market software as niche, deeply embedded, and hard to displace, then contrast that with the scaling constraints of a company like CSU and the appeal of smaller “copycats” with more runway.
Topicus is presented as the closest analogue to Constellation: a decentralized European acquirer with strong margins, recurring revenue in the low-to-mid 80s, and a long list of acquisition targets across Europe. The hosts think its incentives are tightly aligned, but their models still point to only mid-single-digit to mid-teen annual returns unless Topicus can sustain unusually high reinvestment and returns on capital.
Lumine is viewed as more vertical-specific and more volatile. Its carve-out strategy can create cheap acquisitions and high near-term returns on capital, but organic growth has been weak because the company often has to rebuild what a parent company once provided. Signity is mentioned as an example of a legacy IT integrator that only later moved closer to the VMS model, underscoring why the hosts prefer software businesses with recurring demand and acquisition-driven compounding.
Key takeaways
- The hosts argue that Constellation’s size creates a law-of-large-numbers problem, making smaller spin-offs more interesting for future compounding.
- Topicus is described as the closest “baby Constellation,” with decentralized European acquisition capabilities and roughly 25 to 30 acquisitions a year.
- The Topicus model in the episode suggests roughly 6% to 7% returns in a bare case, about 14% to 17% in a base case, and around 25% in a bull case.
- Lumine’s carve-out strategy can produce high returns on capital, but the hosts see pipeline shrinkage and weak organic growth as its main risks.
- Signity is used to show how custom IT work historically produced low single-digit growth and low margins before moving toward a better software model.
How the episode opens
0:00Constellation Software has been one of the most successful compounders of the last decade. But every business at that scale faces a similar problem, the law 0:099 secondsof large numbers. But Constellation is a programmatic acquirer.
And that means there are other much smaller businesses out there following the exact same 0:1717 secondsplaybook. And many of them are even managed by Constellation since they were spin-offs or acquisitions. And they could be the next big thing.
And that's 0:2626 secondswhat we look for today. We analyze four constellation spin-offs and acquisitions and basically see which one is the best equipped to compound over the next decade. 0:4242 secondsAt the end of our consolation episode a couple of weeks ago, we couldn't shake the feeling that our money might be better off invested in smaller companies 0:5151 secondsrunning the exact same playbook.
these constellation copycats, spin-offs, and some companies where Mark Leonard is actually personally invested too. And 0:5959 secondsso, in the last few weeks, Daniel, I know you've dug into a handful of these companies. And in today's episodes, 1:051 minute, 5 secondswe'll be digging into all of them.
And those companies are Topicus, Lumine Group, Signity, and Aiko Poland. And 1:121 minute, 12 secondsknowing that we usually need about 90 minutes for just one company, I'm a little scared of how long that will go for today. But yeah, they all follow the 1:191 minute, 19 secondssame playbook.
So hopefully we can kind of keep it at a high level for each one. 1:241 minute, 24 secondsWell, obviously we can't go as in depth as we usually do, right?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- vms companies
- constellation software spinoffs
- acquirer motivations
- topicus vs constellation software
- adding a mini constellation portfolio
Companies and tickers mentioned
- Constellation Software
- Topicus
- Lumine
- Sygnity
- Asseco Poland
Watch the episode
Watch “Valuing Constellation Software's Spinoffs: Finding the Next 10-Bagger” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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