In the second installment of our fundraising series, we delve into the capital providers supporting the emerging software aggregators, which are intensifying the competition against industry giants Constellation Software and Visma.
The OGs of software rollups
If you’re entrenched in the enterprise software world, the mere mention of Constellation Software likely resonates with awe. Established in 1995 by the legendary Canadian investor Mark Leonard, Constellation has mastered the art of acquiring vertical market software (VMS) businesses. These niche software providers cater to specific markets, offering mission-critical solutions that power entire industries.
With over 600 acquisitions under its belt, Constellation operates like a well-oiled machine. But here’s the twist: rather than being controlled by a central entity, each acquired business is managed independently within distinct operating groups. Names like Volaris, Harris, Jonas, and TSS command their own territories in this sprawling empire (full disclosure: I earned my stripes at Volaris).
With an annual M&A budget ranging between $1 billion and $2 billion, Constellation stands as the undisputed heavyweight in acquiring vertical market enterprise software companies, affectionately known as “VMSaaS” (Vertical Market Software as a Service).
Further reading:
1️⃣Colin Keeley’s insightful write-up on Mark Leonard’s operating manual.
Across the Atlantic, Constellation finds a worthy European counterpart in Visma. Founded in Norway in 1996, Visma boasts backing from heavyweights like Hg Capital, GIC, TPG, ICG, and General Atlantic. Fun fact: Visma’s origins can be traced back to Spectec, a software provider for the global marine industry. In a serendipitous turn, Spectec joined forces with Volaris in 2012 to establish its Marine Division, completing a full circle of evolution.
The seeds sown by Mark Leonard nearly three decades ago have blossomed into an industry of immense proportions, with numerous consolidators vying for dominance. In the following profiles, we shed light on some of the notable players in this ever-expanding landscape.
The primer
Here we categorize the software consolidators based on the type of capital backing those:
- Private equity “captive aggregators”
- Growth equity into sector plays
- PE and search funds looking to go downmarket
- “Patient capital” providers
In a way, all four categories can be considered patient capital given the time required to build up scale and credibility for a platform.
Category #1: PE “captive aggregators”
Here are software aggregators that have been either founded or acquired by private equity firms, often taking a majority position. Among these aggregators, Aquiline Capital Partners is widely recognized. Established in 2005 by Jeff Greenberg, who hails from the esteemed Greenberg insurance dynasty, Aquiline currently manages approximately $10 billion. Aquiline has launched five platforms to date, including Fullsteam, Cordance, Everfield, Setforth, and Clearcourse. The largest among them is Fullsteam, which has executed over 70 acquisitions since 2018. Aquiline’s newest platform, Everfield, focuses on Europe and has already completed four acquisitions within a little over a year. The company’s team consists of former executives from Constellation, such as Scott Saklad (formerly Group CEO of Jonas UK & Europe) and Marcin Szelag (former founder of Orbit Software, a Jonas platform for Central and Eastern European investments).
Alpine Software Group (ASG), founded in 2016 by Alpine Equity and Mark Strauch (founding partner of Alpine Equity), serves as another compelling case study. ASG focuses its investments on the emerging “SaaS 2.0” trend. In contrast to SaaS 1.0 businesses like Salesforce and Workday which targeted larger markets and relied on substantial venture capital, SaaS 2.0 businesses possess distinctive traits. These include being vertically oriented, profitable, located outside Silicon Valley, and not dependent on venture capital. These businesses have thrived due to advancements in cloud infrastructure, shifts in customer behaviour, and the widespread adoption of SaaS. The unique characteristics of SaaS 2.0 present an intriguing and often overlooked investment opportunity. For a more comprehensive exploration of this topic, I recommend reading the informative article titled “Mind the Gap.”
Further reading:
1️⃣Mind the Gap – Alpine Software Group
What’s in it for the PE shops? Two things:
- Opportunity to gain access to a new deal flow. Traditional buyout funds tend to compete for large deals, which are usually well-advised. As such, many acquisition processes involve a tightly run auction process, creating a winner’s curse. On the other hand, a platform gives PEs access to a vast universe of small companies, which combined can replicate capital deployment at scale (e.g., 10x acquisitions at $15M EV = $150M committed capital deployed).
- Significant multiple arbitrage. While a PE buyer acquiring a $50M ARR target would likely need to pay a “rich” multiple (say 10x+ ARR), it is possible to assemble the same ARR by paying 2-4x ARR, while reducing the overall investment risk (e.g., diversifying across end markets). The multiple arbitrage, if done correctly, can represent a significant upside.
Category #2: Growth equity into sector plays
Growth equity investors instinctively prefer sector plays over enterprise software. The default strategy is to assemble a toolkit for the same customer base. For example, AppHub co-founder Kris Eng suggested that “the eCommerce ecosystem has grown so fast that it’s often difficult for merchants to navigate and find the best partners and paths to grow their businesses. Our mission is to advance the future of commerce by providing a trusted toolkit that enables merchants to run their businesses better, grow faster, and deliver great products and experiences to their customers.”
In the same vein, Threecolts and Carbon6 are assembling a product suite for the Amazon ecosystem, while Appfire is targeting the Jira ecosystem. Time will show whether these strategies can scale.
The several exceptions to the rule are Valsoft and Abingdon Software Group.
Valsoft was started in 2007 by Canadians Stephane Manos and Ouissam Youssef with the proceeds of an M&A wave in another highly profitable industry. Fast forward, today Valsoft is one of Constellation’s biggest competitors. They’ve acquired ~70 businesses with an annual run-rate of 20-30. Last year, Valsoft raised $100M in funding from Viking Global, at a valuation of $1B+. Several alumni of Valsoft have gone on to set up their own shops, for example, Mohan Plakkot / Embrace Software.
Further reading:
1️⃣Growing through Multiple Roll-ups | Sam Youssef with Kison Patel
Abingdon, a recently established venture, was founded in 2022 by Asheque Shams, formerly a VP at General Atlantic. The initial seed funding for Abingdon was provided by UK venture investor Fuel Ventures. Abingdon’s strategy closely aligns with that of Constellation, focusing on the development, operation, and acquisition of mission-critical software businesses. The company has maintained a very low profile despite being backed by dozens of prominent software investors.
Category #3: PEs and search funds looking to go downmarket
In this category, we often find sponsors and investors that have backed search funds or similar businesses. And while consolidators are quite different from search funds, there are some similarities.
A prime example is Dura Software. Founded in 2017 by Paul Salisbury and Michael Girdley (both former Rackspace executives) in San Antonio, Texas, to date Dura has acquired 10 companies, giving it a turnover of over $40M. In 2020, Tobias Carlisle did an excellent interview with Michael Girdley diving deep into the story and inner workings of Dura (available here). Fun fact about Dura: in 2019 it acquired 6Connex, a virtual events platform that allows users to host online training sessions, trade shows and job fairs – or to stream events such as a town hall meeting. The timing was prescient due to Covid-19, which caused 6Connex’s revenues to surge.
Further reading:
1️⃣Michael Girdley – Niche Acquirer, Dura Software’s Hyper-Niche SME Acquisition Strategy
Dura was originally backed by Hampton River Partners, an-Austin based long-term investment vehicle of Matt Morris, and other investors from Texas, including Michael Girdley. In 2023, Dura received a commitment of up to $50M from Peterson Partners, a Salt-Lake city based PE firm. According to Peterson, “a buy-and-build strategy within the software is compelling, as it should diversify away much of the idiosyncratic individual portfolio company risk and provide a long-term durable stream of cash flows.”
Big Band Software, founded in 2023 by former SureSwift executives Chris Reedy, Kevin McArdle, and Jason Heath, follows a similar capital structure. The company’s primary objective is to acquire small B2B SaaS businesses and nurture their growth for long-term profitability. Big Band specifically targets businesses with strong customer retention, profitable growth, and revenue ranging from one to ten million. To support their endeavours, Big Band secured a $100M commitment from ParkerGale and Talisman Capital Partners, with the latter discussed in the subsequent section. ParkerGale, a Chicago-based private equity firm specialising in purchasing profitable software companies. Investment in Dura notably marks their first backing of a software aggregator.
Category #4: “Patient capital” providers
I first discovered patient capital providers through Arcadea Group, co-founded by former Constellation executives Paul Yanchich and Daniel Eisen. Arcadea claims to have a long-term permanent capital base from like-minded investors. It is supported by a mix of institutional and private investors, including Sator Grove, Berkshire Partners’ family office, Mitch Rales (founder of Danaher), Feroz Dewan (formerly from Tiger Global), Will Thorndike (founder and managing director of Housatonic Partners), and Graham Weaver (founder of Alpine Equity). These notable backers demonstrate a longer investment horizon compared to a typical rollup investor.
Further reading:
1️⃣Arcadea: Acquiring VSaas Businesses with Permanent Capital
Sator Grove Holdings, led by former University of Notre Dame endowment team members Rick Buhrman and Paul Buser, is a long-term investor actively seeking partnerships with company builders. With a total capital base of approximately $440 million, Sator Grove recently raised an additional $125 million in September 2022. The capital infusion includes contributions from “iconic investors and business leaders,” as well as the management team themselves.
In addition to Arcadea Group, Sator Grove has provided support to Expedition Holdings, an investment holding firm with a long-term capital approach that aims to create a portfolio of European software businesses. Expedition concentrates on making controlling investments in companies offering mission-critical or vertical market software solutions and maintaining strong leadership positions in their respective markets. Similar to Arcadea, the team at Expedition Holdings includes former executives from Constellation. Co-CEO Michael Hammerström previously worked at Juniper Group, while two of its M&A Directors, Sebastian Quarterman and Darko Mucić, have backgrounds at Jonas and Juniper, respectively.
This space will be intriguing to monitor as many private equity-backed players will eventually seek an exit to achieve returns for their investors. While traditional PE funds have typically pursued exits or secondary stake sales, certain aggregators have the capacity to generate enduring, tax-efficient returns akin to the remarkable success of Constellation Software, boasting impressive 20%+ IRRs and minimal volatility. This sets the stage for an exciting journey ahead for entities like Sator Grove and their investors over the next 10-15 years.
Summary
- The article explores capital providers in the software aggregator industry. The ecosystem is constantly growing, buoyed by continued capital injection from the (predominantly US based) financial sponsor community
- PE-backed “captive aggregators” (e.g. Aquiline) can be both focused (e.g. Fullsteam / payments) and have broad mandates similar to Constellation (e.g. Everfield Software).
- Growth equity investors focus on sector plays, creating product suites for specific customer bases, but not always. SmartBear is a good example.
- PE and search funds support software aggregators to gain access to smaller companies that fall outside of their minimum ticket size.
- Finally, “patient capital” providers, like Sator Grove, have the longest investment horizon (10+ years) and back software aggregators that may not have a short-term exit strategy.
In third part of our series we explore the world of venture debt.
