[00:03:20] Clay Finck: During this episode I wanted to particularly talk about Constellation software, Topicus and Lumine.

[00:03:27] Clay Finck: But before we get to that, Chris, I just wanna start this by just saying congratulations. You shared with your audience that you had your best annual return since you started your fund in 2023. You had your best returns in 2023 since you started your fund and you managed not to sell any of your holdings during the year.

[00:03:44] Clay Finck: And I think back to our last chat you had mentioned you only sold one holding in 2022, so making progress on the little you had left to go. And I don’t think too many fund managers can say that they had zero turnover throughout a year. So I just really admire your ability to stick with the names you find and give them plenty of room to run.

[00:04:03] Clay Finck: So you can take this in any direction but I just wanted to give you an opportunity to share some of your thoughts and reflections from 2023. 

[00:04:11] Chris Mayer: Yeah 2023 you’re having a good year when your worst performer is up 19% of the year. That was A, but I had a couple that were up about 80%.

[00:04:22] Chris Mayer: I’m Tech Neon and Lumine, which we’ll talk about later. We’re both big winners. I think Copart was up 60% Constellation, which we’re gonna talk about was up about 60%, I think. And those, these are all big chunky positions. I run a concentrated fund, so it’s just everything really came together and I’ve owned all these positions for a while and it’s just it’s nice to see that.

[00:04:42] Chris Mayer: Other than that, I would say yeah, I didn’t sell anything, which was interesting. And I didn’t I had some inflows, so I had some chances to do some things and I had really. Two moves during the year that I made, and they were both very impactful. One was adding a lot to Lumine, which again, we’ll talk about.

[00:04:57] Chris Mayer: And and then also adding a lot to Technion when I had the chance. So those two worked out well. The other thing that’s always I like to do is you go back and look, just look at the high and low and the differences. And last year it was typical, even though. It was a very strong year that the difference between highs and lows and a lot of names was quite wide, 50% or more.

[00:05:19] Chris Mayer: And it wasn’t like it was just a straight line up through the year. I remember in October I had maybe two or three positions that were negative for the year. I think maybe I can’t remember specific, I think Lyfco might have been one of those. It was actually down year to date at one point and wound up finishing plus 40 or something.

[00:05:37] Chris Mayer: So it’s the lesson you get we get every year, which is, there’s lots of opportunities, even just within a year if you’re patient with these things. And maybe the last thing I’ll say about 2023 was it was another year where the market serves us some humble pie. As far as macro forecasting goes. How much talk we had about there being recession and slowdown and even if you knew the results ahead of time, I’ll take Old Dominion, which is a company I have in the portfolio, LTL Trucking company.

[00:06:03] Chris Mayer: If you knew what 2023 looked like, if I gave you the financials ahead of time, you would’ve seen a decline in revenues and a decline in earnings per share for the year. You would for sure not thought that the stock would be up 43%, which is what it was. Again, just it’s difficult to forecast on those kinds of macro variables and that’s why I like to just stick with really good companies that I’ve, that I know and then are.

[00:06:32] Chris Mayer: Compounding capital, high rates, and otherwise sit back and let them do their thing. 

[00:06:37] Clay Finck: It’s funny, when I look back over the past few years some of the narratives or best love ideas you have to overcome, as Munger says, and there are two that come to mind that just starting out as a newer investor and just developing over time and overcoming some of these narratives, there are two that sort of stick out to me.

[00:06:56] Clay Finck: The first is that markets are mostly driven by the Fed. It’s a narrative. I’ve heard some people tell me that there’s no use trying to pick individual companies because the Fed essentially just drives the entire market. And the second one I wanted to mention is that you need to own.

[00:07:13] Clay Finck: Fang stocks is, this is essentially developed to the be the Magnificent seven, but the addition of, I think NVIDIA and Tesla, you need to own these stocks in order to do well as an investor or maybe even outperform the market. As you mentioned, 20 twenty-two Fed raise rates. Many people were worried about a market crash, market correction and stocks overall were down.

[00:07:33] Clay Finck: But if you look at a lot of these great businesses, a lot of businesses that you own the drawdowns you could argue, weren’t really justified if you look at the actual business performance in 20 twenty-two, 20, twenty-three. So investors who were patient saw that opportunity ended up being rewarded handsomely like you were in 20 twenty-three with your muddier holdings being up over 60%.

[00:07:54] Clay Finck: And it’s ironic how, with the benefit of hindsight. What many people saw as bad things happening. All this uncertainty being around actually ended up being a blessing. And I remember actually one of your old tweets you posted that you had added to Tech Neon in late 2022 and you shared the multiple and it was like a 17 I.

[00:08:15] Clay Finck: And from that purchase you’ve got a hundred percent appreciation just from the multiple expansion. So it’s quite interesting to think about how this noise in the markets can really keep people out of it, wait for things to become more clear. So could you talk more about that distinguishing that signal and noise?

[00:08:34] Chris Mayer: Yeah that’s important to do. I, and I think one thing I do is I don’t spend time on that macro sort of guesswork. I can’t tell you how many times someone has sent me some kind of think piece about something or other, and I politely thank them and then I put that in the delete pile.

[00:08:51] Chris Mayer: I don’t spend any time on that. I spend more time on my names. Last year I met with several CEOs and of course then I spent time looking at new ideas, which is always fun. And so it’s really where you put your attention. I really guard that attention carefully. And if you. Allow yourself to read into these narratives that people create, then it makes it more difficult to make a good decision.

[00:09:13] Chris Mayer: I think another thing is just habits. I don’t, it’s taken a long time, but I don’t log into my account every day. I don’t, and I try not to look at stock prices during the day. I try, I usually will check in the morning, see what’s going on, and then I look again at the close.

[00:09:27] Chris Mayer: But even that’s probably too much for most people. I don’t think they should probably be looking at it every day. I think another key part of distinguishing the noise from the real signals is if you spend time on the businesses that you own and really try to drill down on what the essentials, figure out what the, what really will matter for this business over the next, say, 10 years.

[00:09:49] Chris Mayer: And when you make that your filter what are the critical success points for this thing over the next 10 years? What has to happen? A lot of these other details dissolve, talks about whether there might be a recession next year has then become very important. Because again you’re thinking way out.

[00:10:03] Chris Mayer: You’re thinking 10 years and you’re gonna own it through recession or two, and so I spent a lot of time in that figuring out what are the essential pieces of a business that will help it succeed? And identifying that and then really staying focused on that. 

[00:10:19] Clay Finck: And again, mentioning the Magnificent seven in the Fang, it’s probably been like a over a hundred times now, I’ve seen a chart where it shows.

[00:10:27] Clay Finck: The Magnificent seven performance being way up. And then after you take those companies out of the S&P, it’s just like a flat or it’s like a downside. So it gives this illusion to where there’s only a handful of companies that deliver returns in the market, but there’s plenty of names out there.

[00:10:41] Clay Finck: But when you put some of these great companies in with all these just straight up bad companies or poor performers it hides ’em. 

[00:10:49] Chris Mayer: Yeah this is another thing why I even hesitate to talk too much about the market. ’cause people will talk about the market as if it’s just one thing.

[00:10:57] Chris Mayer: But of course when you look within it, there’s huge variations. Even just looking at the S&P 500, as you mentioned, it’s huge variations within it. So you have to be careful about that. And then when you throw in overseas markets, I mean there’s a lot of diversity, a lot of stuff going on. 

[00:11:13] Clay Finck: I’m also reminded, I just recently shared a book review on Willis Johnson’s book, Junk to Gold.

[00:11:18] Clay Finck: And I mentioned during that episode that over the last 30 years, there’s a chart that was shared that showed the top performers over the past 30 years. Copart came in at number 14, and I think so many people would be surprised that Copart did better than companies like Google and Amazon.

[00:11:36] Clay Finck: Just it, like defies what you would really think about how, like you’d think like the Amazons of the world would be like by far the best performers. But there’s these regular everyday type companies that just show up every day. Compound. 

[00:11:50] Chris Mayer: Yeah. I love those kind off lists because those cause you always find lots of names like that.

[00:11:54] Chris Mayer: You look at the last 20 years or so old Dominion shows up there as well, way up there and you’re just like, wow. This little humble trucking company has been that much a performer. I know Monster Beverage I think was actually the number one performing stock over the last, maybe it was 20 or 30 years.

[00:12:07] Chris Mayer: I forget what the metric was. But again, it’s a little bit shocking ’cause you see this mix of businesses and you’re right, you expect it to be dominated by the Amazons and Googles and Microsoft, but there’s lots of pretty humble businesses in there that just compound at high rates for a long time.

[00:12:22] Clay Finck: Alright, so let’s turn here to Constellation Software. Most in our audience are gonna be aware of this company, and if you’re listening and you’re not quite as aware as what this company does, I did a deep dive on it and a deep dive on Mark Leonard’s wonderful letters back on episode 5 31. So you might go back and reference that.

[00:12:39] Clay Finck: And I have to give a thank you to Chris for putting this company on my radar last year. How about we started off by just talking about how you discovered this company and how long it really took you to coming around to really understanding its long-term potential. 

[00:12:56] Chris Mayer: Yep. That’s a good question. I’m not sure exactly when, I’m gonna guess it was somewhere around maybe, I don’t know, somewhere around say 2016 or so.

[00:13:04] Chris Mayer: And I remember being skeptical of it for a long, long while. It took years. I didn’t really, I knew of it, but I didn’t bother looking into it because I had such a bias at the time against a super-acquisitive company like that. And it was buying software companies. And I think the kind of a common area of doubt around it was I guess I remember this was my thought.

[00:13:23] Chris Mayer: His, they just must be buying a bunch of junky software companies and it has no terminal value and these things are all gonna eventually be zeros and they’re just gotta keep running faster and faster to keep it going. And I didn’t really spend a lot of time on it for several years.

[00:13:36] Chris Mayer: So I would say it was probably around maybe 2019 where I got more serious and I actually sat down and read Mark Leonard’s letters, and then I was like, wow this is worth digging into more. And yeah, so that’s, I started to do a lot more work then and shortly after, became shareholder in my fund.

[00:13:56] Clay Finck: When I released that episode I mentioned last year and purchased my first shares, the share price was around 2300 Canadian dollars. And at the time I was thinking, Hey, I’m paying up for quality. And now here we’re sitting today, February, 2024, share price is north of 3,700 Canadian dollars. So over the past year alone, share prices are up nearly 60%, and that’s quite high for a company like Constellation, where it’s compounding consistently at.

[00:14:26] Clay Finck: The 25% range and yeah I’d just like to get your thoughts on the recent run up because it’s easy to think it’s just a company that was overpriced is now more overpriced. Maybe there’s some developments within Constellation that potentially warrant such an increase over the past year.

[00:14:42] Chris Mayer: I would say the big thing is I think the market has come around to the idea that Constellation has found another gear when it comes to deploying capital. So if you look at 20 18, 20 19, 20 20, those years they were probably spending five or $600 million in acquisitions deploying capital.

[00:15:00] Chris Mayer: And then it’s really kicked up in, in recent years it did billion and a half, I think it was in 2021. And 2022 is similar. And then the results we have through three quarters of last year, they were over 2 billion in. Capital deployed. So you’re already through three quarters of a year last year they’re already three or four times more what they did in a full year just a few years ago.

[00:15:23] Chris Mayer: And the market knows that Constellation is deploying capital at high rates. And so when they deploy that much capital, it’s gonna be some nice growth in free cash flow. So I think that’s the big one. And I think there was a narrative that started a little bit that. They were butting up against limits of what they could do.

[00:15:41] Chris Mayer: And then they’ve just been able to put together some pretty attractive, larger deals. The one last year was with Optimal Blue where they bought a business for $700 million and they paid 200 million upfront, and they get a note for the 500 million. It doesn’t pay, you don’t have to pay any interest in it for five years.

[00:15:59] Chris Mayer: And it’s wow. How did you, how’d you come up with that idea? And that was a business that they bought it as complicated. It’s part of a transaction. Black Knight is merging with Intercontinental Exchange and they had to ditch this thing. So it was a really motivated seller.

[00:16:12] Chris Mayer: And Constellation stepped in and bought it. And this was a business that Black Knight had bought it for a valuation of like 1.8 billion in 2020. And then they bought another piece of it in 2022, where it was, I think it was like two something, 2.8 billion, let’s say. Something like that. And here’s Constellation swooping and buying it for 700 million with those kind of deals.

[00:16:32] Chris Mayer: So now I think Mark’s starting to think that yeah, Constellation’s got lots of room to deploy capital still, and we’ll figure out ways to put it to work. So that’s one. And then the other thing, I think that the other key part of Constellation’s new organic growth rate, and I think that’s been pretty strong.

[00:16:50] Chris Mayer: I think it’s maybe even surprised a lot of people. It’s been running about five or 6% all year and even better if you look at the core maintenance and recurring. So I think the combination of those things together you’ve got rocket fuel. So yeah, I’m really, I’m real excited to see what they do next.

[00:17:05] Clay Finck: So with regards to the optimal Blue deal, if I am understanding correctly, they put down around 200 million. The purchase price is around 700 million and this seems to be a case where their return on capital isn’t gonna be what they typically target like a 30% range. It sounds like it’s gonna be a lot higher in this case.

[00:17:25] Chris Mayer: Yeah, it could be. It seems like it, I don’t know. We’ll have to it’s still early. The usual rule of thumb is as the deals get bigger your IRR comes down, which I think is okay in Constellations case. ’cause like you mentioned, they were doing 30 and now if they do 25 or 20, but can deploy a whole lot more capital doing that, I think that’s still creating a tremendous amount of value.

[00:17:46] Chris Mayer: So yeah, we’ll have to see what the specifics of that, of the optimal Blue Deal are. But yeah, I’m pretty optimistic that they’re gonna do pretty well on that. It’s hard to not do well when you only put 200 million down for a business of that size, probably generating. A hundred million in profits

[00:18:02] Clay Finck: Over the years I think a lot of people assume that the competitive landscape is gonna get quite overwhelming for Constellation. Have you seen that intensify over the years since you’ve started researching it or first owned it? 

[00:18:16] Chris Mayer: Yes. I would say yes. There’s certainly been a lot more copycats and in practice as a firm has done some good work on this.

[00:18:25] Chris Mayer: And they identified at the time of their report, which I think was last year, something like 34 private VMS consolidators. So it’s quite a bit. But one thing that’s interesting is that they are trying to copy Constellation and there is, they’re trying, but when you look at the deals, it’s there is still quite a bit of difference.

[00:18:42] Chris Mayer: So for example, Constellation’s average a deal they’re buying a company at one time sales. These are very, those smaller deals I’m talking about now they may buy something, let’s say around 3 million in revenue. And their organic growth is like zero very little. But when you look at the private consolidators and the type of deals they’re doing, they are larger two to three times larger typically, and they have a lot more organic growth.

[00:19:03] Chris Mayer: They’re playing a little bit of a different game. A lot of them, they’re also because they’re also leveraging up a little more. So I would say yes, there’s more competition, but with kind of the niche that Constellation is in, I don’t know that they have still have that much competition on those small things.

[00:19:17] Chris Mayer: So it’s weird I would say yes, there’s more competition, but there’s still interesting nuances. And it seems like there’s plenty of room to deploy capital still. 

[00:19:26] Clay Finck: And since they’re getting such attractive returns on these deals, I’m sure many of these companies have options in terms of who they wanna sell to.

[00:19:34] Clay Finck: What do you think the main motivation is for them wanting to select Constellation? Given the attractive purchase price that Constellation is getting. 

[00:19:42] Chris Mayer: Yes. So this is something I had to spend some time on to get convinced of. There is some value in the idea that Constellation is a permanent home for these businesses, that they’re not going to fold it and lay off everyone, or kill the business or whatever.

[00:19:58] Chris Mayer: The owners who sell these businesses, if your goal is to sell for the top dollar, then Constellation is not likely going to be your buyer. But if you’re more concerned about you want to have a home for your business there, then that’s where Constellation has an advantage. I know that, and a lot of people are gonna be skeptical about that, but I’ve talked to enough people to know that is part of it. 

[00:20:16] Chris Mayer: Yeah other than that, again, Constellation is still you are dealing with businesses where they’re not, there’s not a whole lot of competition for some of these where there’s not a lot of organic growth and or no, no organic growth. So Constellation may still be the best option there in those cases.

[00:20:33] Clay Finck: And many people speak to the decentralization aspect of the Constellation business model, it really helps them scale their acquisitions over time. As many different people are making these acquisitions within the holding company, it gives each business the autonomy to make the decisions they feel is best for them, and it helps keep the corporate bureaucracy that Leonard wrote about in his letters.

[00:20:58] Clay Finck: He mentioned how corporate bureaucracy tends to creep up in businesses as they grow, but I think as with most things in life, there’s no free lunch. I. What do you believe are some of the drawbacks to decentralization? 

[00:21:11] Chris Mayer: First yeah, you’re right. The decentralization has been a, been a key thing.

[00:21:15] Chris Mayer: I think it is I think it was Larry Cunningham who said that the genius and CSI was that the people coming up with solutions to the problems were the ones who were closest to the problems, which I liked the way that was put. And they do have this culture of sharing knowledge. So it works really well for them.

[00:21:30] Chris Mayer: Drawbacks, I would say first it might be worth pointing out that they’re not all Decentralized. Like Lumine is not decentralized. They have a centralized M&A team that work together in Toronto with David Nyland. So I have heard that this is not necessarily I guess you could say it’s decentralized because Lumine is making their own decisions rather than consolation in HQ.

[00:21:51] Chris Mayer: I would say the biggest drawback talking to people is it seems to be perhaps around keeping your team together. There may be some thought that that retaining people that are flung out all over the place is harder than when you’re all working together. 

[00:22:06] Chris Mayer: I’ve heard that there might also be you might lose something by not having a closely knit team that works together versus teams that are spread out all over.

[00:22:14] Chris Mayer: But some of that is by design I think Constellation attracts a sort of person and for example, if you want to get rich very quickly, probably Constellation is not gonna be a place you’re gonna stay very long. So I would say yeah, the, it’s hard to say because they’re, they’ve got, they’re so good at it what’s the drawbacks for them specifically?

[00:22:34] Chris Mayer: I don’t know that there’s too many other than perhaps there’s something to this that. There may be some difficulty in retaining people again, part of that is by design and they seem to have managed through it pretty well. 

[00:22:46] Clay Finck: Yeah, and since I mentioned decentralization being a key aspect of Constellation, as they continue to grow, overall senior managers within Constellation are required to invest anywhere between, I think, 25 to 75% of their bonus into shares of Constellation.

[00:23:04] Clay Finck: So there’s a lot of skin in the game within these managers and a lot of an incentive to act in the best interest of shareholders. But as they grow, each senior manager has less of an impact on the overall performance of the conglomerate, and I could see that making some managers maybe a bit frustrated.

[00:23:25] Chris Mayer: Over time. I’m curious if this is a concern from your perspective. Yeah, I think it’s a concern from like the comp perspective, like in it’s compensation. If you’re suddenly, if what you do has your compensation is tied more toward the overall, then that could be a problem. But I, I. I think that Constellation spends a lot of time thinking about this.

[00:23:46] Chris Mayer: Mark Leonard certainly has mentioned it. This is the biggest challenge with them getting so large is how do you incentivize teams and keep it so that what they do they still have a big impact and can still do well for themselves. So yeah, that’s something they always keep an eye on and that’s where the experiments with the spin-offs are interesting too.

[00:24:04] Chris Mayer: There’s ways to harness incentives a little differently there, so definitely something to keep an eye on. 

[00:24:09] Clay Finck: It also reminds me Leonard historically he’s shown that he tries to talk the share price down at times, and I think that shares a Constellation have gone up 60% over the last year. So how many of these managers.

[00:24:21] Clay Finck: Wanna say, Hey, I wanna put a significant portion of my income into shares of Constellation. I’m sure there’s other things they might wanna do with their compensation. 

[00:24:30] Chris Mayer: Yeah, I’ve heard people say that they, when those concerns are 

[00:24:33] Chris Mayer: voiced Mark Leonard and the senior execs basically have this line where they tell them that evens out over the long run.

[00:24:38] Chris Mayer: And it’s think more like dollar cost averaging so far it’s worked very well. ’cause I’m sure there’s lots of times even recent years me owning in my fund how many times people have told me it’s expensive so far they, it’s they’ve it’s worked out 

[00:24:53] Clay Finck: In Leonard’s 2021 letter, he started talk about what we can call Constellation 2.0, where Constellation starts to.

[00:25:03] Clay Finck: Reinvent themselves. In that letter, he talked about how they needed to create new avenues to deploy capital. For those not familiar, their typical deal is around the $5 million purchase price. And just as business scales up, you can only do that for so long. And he mentioned two ways or two avenues they could go down to reinvent themselves.

[00:25:25] Clay Finck: The first of which was simply doing these bigger deals. For example, the Blue Optimal deal. You mentioned, and then the second way is to start venturing outside of the VMS space and start looking at new verticals, new industries. Maybe you could talk about how this has developed, Leonard wrote that letter in 2021, and it’s been a few years since then and take that whatever direction. 

[00:25:47] Chris Mayer: Yeah. Among Constellation shareholders, this is the talk like what’s Constellation 2.0 look like? And I think we’ve gotten a preview last year. We. We’ve seen them deploy bigger deals and do bigger deals, more complex deals will they drift outside of EMS? I think they’ve already done it to a degree.

[00:26:03] Chris Mayer: I talk to people, former CSI people, and they already own companies that are not really true VMs. They have some hms, they have some, they’re more service oriented. So I think in some ways they have crept a little more into adjacent software. And then I think it was in that last letter where they, he wrote about how they looked at a deal, came close to doing a deal that was oil and gas related and where the motivation was more taxes or something like that.

[00:26:28] Chris Mayer: I’m sure it would’ve been a really interesting deal. But that was. That was certainly something beyond VMS. So yes, I would say you have to be comfortable with this potential drift to be a shareholder today. ’cause I think that they will eventually do something outside of VMS in maybe a bigger way.

[00:26:45] Chris Mayer: And part of that you just have to given that a long track record, thoughtful capital allocation I feel pretty good. It’s not gonna be something dumb that we’re gonna wake up and go, gosh, why’d they do that? So yeah, I’m really interested to see what they did. And they may not find anything.

[00:26:59] Chris Mayer: They may, it may just be that Constellation 2.0 is what we see today, which is that they do. They still do these little tiny VMS deals, but they’re also deploying sizable amounts of capital in things like Optimal, blue Deal and O. Other things like that.

[00:27:13] Clay Finck: In terms of the runway and continuing to scale up the business, one of the parts that has been or is difficult for me to wrap my mind around is when I hear people say.

[00:27:23] Clay Finck: There’s a hundred thousand a database of a hundred thousand potential companies that they could acquire. It’s there’s only so many markets. There’s only so many niches that can be addressed, but a hundred thousand. So it almost sounds too good to be true. So could you talk about how it’s possible there?

[00:27:38] Clay Finck: The database? Is that large? 

[00:27:40] Chris Mayer: Yeah. I remember when I first started the a hundred thousand number, I was surprised too, but then I kept hearing it from different people who used to work at CSI. They’d keep putting that number. I, one, one person even said it was 200,000, I don’t know, but it’s a big number.

[00:27:52] Chris Mayer: And when they acquired, what was it, a hundred companies in 2022 or so, suddenly it puts that all in perspective. There’s a lot and part of it’s there are new companies being added to that pool all the time too. So it’s new software companies being created all the time, do all kinds of things.

[00:28:07] Chris Mayer: And it’s, I agree. It seems like it’s a huge number, but it’s real. I think about for every different business there is potentially who know how many different software. Potential software packages for that business. When you start to think about it across all kinds of geographies, it’s a big number.

[00:28:24] Clay Finck: So Constellation has spun off two different businesses into public companies. Topicus.com, which we’ll refer to as Topicus and Lumine, both holdings in your fund as well. Topicus was spun off in 2021 and Lu Mine was spun off in 2023. And since you were an owner of Constellation, you. Had these shares deposited into your account, which is a quite interesting dynamic, how you have this great performing stock and it just starts depositing these new companies in your account.

[00:28:56] Chris Mayer: That’s right. That reminds me when we talk about constellations gain a lot of times don’t you have to include the spinoffs in there. It’s even better. 

[00:29:04] Clay Finck: So maybe you could just talk about why they ventured into doing these spinoffs and how they’re value-accretive to constellation shareholders.

[00:29:13] Chris Mayer: I mean I think in Tous case it was an experiment, partly an experiment with incentives like we talked about before. I think it was a natural there because Constellation also didn’t own a hundred percent of it anyway. There was a cellar still owned a large block. So it was a natural, and my understanding is that they were their own little castle over there anyway but I keep hearing people refer to it as an experiment and.

[00:29:35] Chris Mayer: To see if, you know what Constellation might learn. There are some small, some differences top because organic growth rate, for example, is higher or has traditionally been higher. And I think that’s part of the motivation with Topicus and with Lumine, maybe it was a little different because Lumine is more tied, is tied to one vertical median communications.

[00:29:54] Chris Mayer: And that Spin-off came off a transaction they did with Wide orbit, pretty sizable transaction for that group and it allowed the owners of wide or orbit to roll over their shares into this thing and probably made the purchase price work there. So I think I’ve also heard that it’s Lumine was an experimental way for David Nyland to run his own thing.

[00:30:14] Chris Mayer: He’s a CEO of Lumine and he wanted to do that. Those are some of the reasons I’ve heard. But there are interesting differences and it will be, it’ll be interesting to see how they play out over the next five, 10 years. ’cause Topicus is, has, can go across any vertical. But they’re more supposed to be confined to Europe, and then Lumine is confined to one vertical, but they could go anywhere.

[00:30:35] Chris Mayer: So you have two little two different wrinkles there in how those play out. 

[00:30:40] Clay Finck: So if Topicus is as confined to Europe, does that mean Constellation isn’t going shopping in that market? 

[00:30:47] Chris Mayer: I think they can still do that. They have the way Constellation’s database works. So my understanding is that if you have a certain target and you’re in contact with that group regularly, it stays.

[00:30:58] Chris Mayer: It can’t be poached by another group. But if you did lose contact within, I think contact means having a meaningful conversation within a year. Then it’s open for anyone. I think Topicus has advantages in Europe because they’re actually there and there’s intricacies about that market. There’s different, obviously different rules and regulations for different European countries.

[00:31:20] Chris Mayer: There’s different languages and I think Topicus has an advantage there, but I don’t. Think that it means Constellation can’t do deals in Europe. Same with Lumine. When I talked to David Nylen about it, he’s pretty confident that he’s got a good lock on media and communications in that industry.

[00:31:36] Chris Mayer: But I suppose if another CSI group had a media and communications deal and they sourced themselves, then they can do that. 

[00:31:42] Clay Finck: Yeah. And from my understanding, Constellation still owns. A portion of topic is in Luma. It’s not like they completely sold it off. So it seems to me that these spinoffs are a tool for consolation and sort of a special situation type deal where it helps them make a certain type of acquisition.

[00:32:03] Clay Finck: Make the deal still work make everyone happy. For example, that CEO wanting his own company to manage. So it seems more it’s not so much a strategic play where they’re trying to arbitrage the public markets or do something to that extent. It’s more so a very special situation type, 

[00:32:24] Chris Mayer: Special situations. Yes. And I think in the future we will see more spinoffs. When I’ve talked to people there, yes. And it’s unequivocal. There will be more spinoffs. It’s just what it will look like. I think it will look more like Lumine. It will be those kinds of spinoffs. It’ll be part of a larger deal.

[00:32:40] Chris Mayer: And that will be the natural time to spin off something by itself. That’s what I suspect. And I think Jamal, the CFO at the Constellation may have said this at some point that. They’re not likely to just take Harris and spin it off of its own, one of its operating groups and just spin it off on its own.

[00:32:54] Chris Mayer: It’s more likely to come and be a specific vertical and my guess is that it will be a specific vertical in conjunction with some kind of larger transaction, like with Luma. That’s my guess. 

[00:33:05] Clay Finck: One aspect I particularly find interesting with these is that it can actually lead to. Pretty good investment opportunities from the aspect that institutions that own Constellation, they get these other shares deposited and just because of their mandates, they can’t hold Lumine or they can’t hold Topicus.

[00:33:25] Clay Finck: So they don’t even care about the price. They’re just selling it. And it can lead to the situation where you have four sellers. It overwhelms the market with sell pressure and gives long-term investors a pretty good opportunity in terms of. The entry point too. 

[00:33:40] Chris Mayer: I think with Constellation it’s maybe a little different because constantly shareholders, I think it’s a little different.

[00:33:45] Chris Mayer: Like with Topicus, I don’t think you saw a lot of that dumping early. And you can see it in like the volume. I remember doing this was, I saw the numbers might be wrong, but I did this at the time when you looked at like the first 10 days of trading a maybe it was like. 15% of the shares traded of those shares turned over.

[00:34:01] Chris Mayer: So a lot of Constellation shareholders kept it. And because Topicus was pretty sizable, even out of the gate, but Lumine, it was different. Lumine, it was like more than 50% of the shares traded hands in those first 10 days. Cause it was a lot smaller. And so I think even some of the large Constellation shareholders were just dumping it because it was just too.

[00:34:19] Chris Mayer: It was too tiny, it’s too small. So I think that plays into it. You have a little bit of a different dynamic that way, which makes it interesting. And with Topicus that was in twenty-twenty-one. I think it spun off in February. And if you remember twenty-twenty-one software and tech and stuff.

[00:34:32] Chris Mayer: Got, yeah, it was a very, a little bit frothy. And so I think that stock got caught up in that wave. I held it the whole time through, so I wrote it all the way up. I remember at one point, and maybe I was up a hundred and forty-some percent and then I wrote it all the way back and eventually I think it did touch my cost basis very briefly.

[00:34:49] Chris Mayer: So it’s been a wild ride. But if you look at the overall CAGR return that I have since I bought it, it’s been good. It’s been decent and I’ve used those times to acquire more. I, yeah I think the journey for those has been a little different. But the spin-off dynamic, I think definitely happened more with Lumine because that started trading again, if memory serves, it was like 17 out of the gate, and over the next several weeks it fell to 14.

[00:35:13] Chris Mayer: Think about that. And then it finished a year over 30. So quite, quite an opportunity that was, 

[00:35:20] Clay Finck: Yeah so you had these shares of Topicus deposited on the spinoff, and of course you could have decided to sell those shares, purchase another name in your portfolio, go back and purchase more shares of Constellation.

[00:35:32] Clay Finck: What was it about Topicus you think that warranted it, deserving a spot in your portfolio? 

[00:35:40] Chris Mayer: Yeah I’m intrigued by the whole thing. In some ways we talk about Constellation 2.0. Topicus is the next kind of little Constellation. I mean it’s it’s Constellation, but in Europe and a friend of mine pointed out to me by email that Topicus today is the same size as Constellation wasn’t 2013.

[00:35:57] Chris Mayer: So if you roll back, then you would probably be pretty delighted if you could go back and invest in Constellation in 2013. And I think you have that chance now. They have a very big fragmented Europe big market in Europe, I think to deploy capital. And it’s just a basic underlying algo.

[00:36:12] Chris Mayer: There is is attractive. You’re buying a company that I think should be able to grow at least 25% a year and they’re reinvesting everything 25% return on invested capital and they’re reinvesting everything. And you throw in some organic growth and you’ve got a company that could compound free cash flow per share 30% a year for years.

[00:36:31] Chris Mayer: So that’s the basic attraction. And you’re doing that. In a business without leverage, without, it’s not cyclical. It’s very sturdy, generates a lot of underlying cash. You’re, you’ve got great incentives, same incentive structure, it Constellation carries over to Topicus. You don’t have to worry about dilution.

[00:36:46] Chris Mayer: Another great thing about Constellation the share count stays the same. You don’t have to worry about necessarily them doing something really dumb with a lot of la so there are ways these companies get in trouble. I think you’re pretty safe there with Topicus. So that’s the appeal and it’s a little smaller.

[00:36:59] Chris Mayer: Like we said, the runway in theory should be greater. 

[00:37:03] Clay Finck: And in doing my research on Topicus, it seems that the private equity market in Europe is less developed, which potentially leads to less competition. For the likes of Topicus in terms of these acquisitions. And then another piece I thought interesting was that Europe seems to be a pretty fragmented market where you have one niche in France, another, the same niche in Italy, and you have two different companies operating within that.

[00:37:29] Clay Finck: So it’s difficult for companies to cross borders, I should say, or maybe more difficult than say the United States, for example. Is there anything that you maybe don’t like as much with Topicus relative to the other two? 

[00:37:42] Chris Mayer: If I had to complain about Topicus, it would be, I wish they could be a little more accessible.

[00:37:47] Chris Mayer: Let’s say, I’d love to see like a Robin, the CEO, write an annual letter to shareholders giving us the lay of the land from his point of view. I think like in general, I think sometimes it, the complexity of Topicus keeps. Shareholders away. There’s a little bit of a bar you gotta get over if you’re not familiar already with Constellation.

[00:38:06] Chris Mayer: There’s just this kind of bar you got to get. It’s almost like Mark has designed it so that there’s this hurdle you gotta get over to be a shareholder. It’s not so easy and I guess it works because it, I. Attracts a certain kind of shareholder, right? You’re not gonna get someone who’s just looking to make a quick trade because you have to put so much work in understanding it because there’s some accounting things that have been bizarre the way the deals have been structured and like I say, you don’t get a quarterly earnings call.

[00:38:29] Chris Mayer: You management’s not doing road shows, you don’t have a nice little presentation. All these things and investors love to digest. You get a very simple public disclosures and then Robin participates in the annual meeting that Constellation has. And sometimes there are questions put his way, but you don’t get a lot.

[00:38:43] Chris Mayer: And management doesn’t really talk to investors. So these are the hurdles and things that if I could change a little bit about topic, I would. Go in that direction. I don’t think they have to go so far as hold quarterly calls or do that, but I would like to see maybe Topicus hold their own annual meeting or or like I said, an annual letter from the shareholder CEO to shareholders.

[00:39:04] Chris Mayer: So if I had to say what I didn’t like about it, it would be along those lines. 

[00:39:08] Clay Finck: What’s also quite interesting about Topicus is the organic growth rates being higher of the companies they’re purchasing. Is this a strategic play in terms of the European market, or why do you think they’re approaching it a bit differently of looking for higher organic growth?

[00:39:24] Chris Mayer: Yeah this part of the original appeal of Topicus is a, they had this higher organic growth and it is higher. It’s probably run six to 8% and higher. When you look at, yeah, it’s higher, six to eight. And I would say like the maintenance recurring, the key piece is probably eight to nine, and I think in third quarter hit 11.

[00:39:40] Chris Mayer: It’s, the model works. Better. It’s easier when you have that organic growth, right? It’s just the math makes it easier to compel when you already start with your base assets are going 10% a year or whatever. So that’s always been part of the appeal and why that is. I think that’s, I think Mark Leonard’s talked about that it’s one of the things they wanna learn more from topic is how they achieve that organic growth.

[00:40:02] Chris Mayer: I think it comes down to being focused on it. We’ve talked already a lot about incentives on this interview, but from my understanding is constellations incentives, you get paid for deploying capital, making deals, and at least traditionally you haven’t been so much paid to create organic growth.

[00:40:16] Chris Mayer: ’cause create organic growth requires attention and expense and that’s, and when you look at it, it’s maybe not the best focus for that management team, but Topic is figured out a way to do it. So it’ll be interesting to see if they can keep that up and if some of that knowledge base transfers over to Constellation, I think maybe some of it has, I would be curious to hear what.

[00:40:34] Chris Mayer: Mark says on that because the Constellations organic growth, as we’ve talked about earlier, has, I think, been pretty strong. Stronger than most people would probably have guessed 5% plus in the last few quarters of last year. 

[00:40:47] Clay Finck: Let’s turn to Lumine Now. This one’s also different, just like Topicus is a little bit different.

[00:40:53] Clay Finck: This was the 2023 spinoff. It was merged with wide orbit. So Lumine seems to be doing fewer volumes of acquisitions and they’re doing larger deals and they don’t have a wide range of verticals they can go into. They just have one vertical they’re getting into, which is the media. In communications. So Lumine is another one that you got the shares and presumably added to them.

[00:41:18] Clay Finck: So I’d like for you to talk about this one as well. 

[00:41:21] Chris Mayer: Yeah when I first looked at Lumine and I remember talking to David Nyland, the CEO, and he trying to suss out what the differences would be, how Lumine would be different maybe than Constellation. And one of the things that appealed to me about it was this idea that Lumine would do.

[00:41:37] Chris Mayer: Would we have a heavier weight or tilt towards carve outs? I know that’s not the technical definition of a carve out what they’re doing, but that’s the kinda language they use is when they buy a subsidiary an orphan from a much larger company like they did with Nokia. And that was the deal that really put Rocket fuel in the share price at the end of the year there last year.

[00:41:56] Chris Mayer: So I like that, and I like that because there’s a lot less competition to do that there’s a lot more technical skills and things involved in doing those kinds of deals, so there’s not as much competition. And so I thought that would also yield lead to high returns and that David and his team have done this so they’ve they know what to do.

[00:42:14] Chris Mayer: So actually the way it’s played out is the way I thought it might, which is you wouldn’t see deals for a little while and then all of a sudden they would do something sizable and interesting. And I think that’s what we should expect from Lumine. So it’s really interesting because it’s, again, it’s Constellation it has the same incentives and the reporting is same.

[00:42:33] Chris Mayer: So it’s very similar. It feels familiar. But then they have this different tilt or bent they have this specific vertical, larger deals, carve outs. I think that’s very attractive. And they have a lot of room one, one of the things I’ve heard sometimes when I talk to people about Lumen earlier is they’re like, yeah it seems like it’s confined to one vertical and not as attractive, but it’s an enormous vertical.

[00:42:57] Chris Mayer: And when you talk to them, David, about what kind of pipeline they have they talk, we’re talking about low thousands is their pipeline. And they’re in touch with companies in the low hundreds. So again, this is a Lumen owns what less than 30 businesses today. So a lot of room, lot of space to grow.

[00:43:17] Chris Mayer: And I thought it was a really appealing setup and worth having its own real estate in the portfolio. 

[00:43:25] Clay Finck: With that spinoff in the acquisition of Wide Orbit, they paid 400 ninety-seven million dollars, and from what I’ve researched or picked up, it seems like they paid around 11 to 12 times EBIT, which.

[00:43:38] Clay Finck: Doesn’t seem like Constellation to pay that sort of multiple, but it does have a strong organic growth rate. In 2021, its organic growth was 10%. Have you thought about whether they’ve taken a lower hurdle rate in this deal or what have you found on this front? 

[00:43:54] Chris Mayer: Yeah, and the deal, it’s higher than what you would de what you would see typically for a CSI deal.

[00:43:59] Chris Mayer: But Wide Over is a very good business. They’ve got tremendous pricing power. It’s a business that’s involved with advertising for radios and TV stations, and it’s not something you can rip out. It’s really mission critical and functional to those businesses. So I suspected that because I know just culturally within CSI, how they cling to those hurdle rates.

[00:44:21] Chris Mayer: I don’t think that they lowered their hurdle rate on this deal. I suspect that they will get there or they must see a path to get there. And my suspicion is that it’s in that pricing power and the stickiness of that business. We’ll have to see. But I think it’s, it looks like a very good deal.

[00:44:37] Clay Finck: I could see one potential advantage for Loom Mine is the potential synergies within the subsidiaries I had. Found some notes that one company that sold to Lumine did so they could learn operational best practices, industry peers, and look at natural synergies and complementary product offerings.

[00:44:57] Clay Finck: So this seems to not be as big of a priority for the Constellation software, but maybe more an opportunity for Lumine. 

[00:45:08] Chris Mayer: Yeah, could be. I also think you look at media and communications and it’s, there’s a lot of these older media and communications that are not really growing.

[00:45:16] Chris Mayer: And so in that sense, it’s a very target rich environment for a CSI type mentality to come in and redeploy those cash flows. So I think that’s part of the appeal there as well. The other interesting thing is about Lumine is that David Nyland and his team, they have sourced all their own deals.

[00:45:34] Chris Mayer: At least up to the time when I talked to them, maybe the last couple deals. Maybe this isn’t true, but I think there’s quite a bit of talent in that team also that I think plays into it 

[00:45:44] Clay Finck: And Lumine it’s generally doing deals that are a bit larger. Do you expect the return on capital to be similar for them?

[00:45:53] Chris Mayer: Yeah this is another thing where, you know, again, like we talked about before, the larger deals in theory are gonna have lower irr. Lumine are doing these sort of quirky one-off deals. So it may surprise us. We’ll have to wait and see. I. But I suspect with Lumine, you’re still gonna get 25% type returns on capital in that business.

[00:46:13] Chris Mayer: Maybe even better with some of these. 

[00:46:16] Clay Finck: And one aspect that is probably pretty intriguing is the copy and paste format. For example, the incentive structure carrying over from Constellation to Topicus to Lumine. Have you seen that incentive structure overall carry over one-to-one essentially?

[00:46:35] Chris Mayer: Yep. It’s the same. And that’s part of the big appeal too. You, so you’re, they’re not handing out stock options and, comp is the same. So it’s something like seventy-five percent of CEOs bonus is used to purchase shares, and then those shares are locked up for three to five years.

[00:46:51] Chris Mayer: So I’ve always really liked that about Constellation. When I think about incentive structure in my portfolio companies, Constellation is the number one, the gold standard, and then the spin-offs are the same. So yeah, that’s a big part of the appeal. That’s exactly the kind of things we, they focus on are the kind of things we focus on as investors, which is turns on capital and growth and that’s what we want.

[00:47:12] Clay Finck: I also wanted to talk about the valuations. I had spoke with a member of our, I. Investment community that manages a fund. And he was sharing some of the information he had on these companies. And he owned all three. He was kind enough to share with me the analyst expectations that he had for these companies for 2024.

[00:47:32] Clay Finck: Take analyst expectations with the grain of salt, but it just points to what people are expecting. So the multiple, this is from mid-January, so prices change day to day. But just to give you a general direction, he shared a multiple of 36 on 2024 earnings for Constellation, a multiple of 32 for Topicus, and then 32 for Lumine as well.

[00:47:54] Clay Finck: So the market seems to be. Putting a bit of a premium on Constellation, they’re probably much more well-known, and a lot more investors probably know about them. And it seems a little bit counterintuitive given Constellation’s size that they would be trading at a higher multiple. So maybe you could just share your thoughts on their current valuations in light of everything we’ve talked about in light of the quality, the management teams and such.

[00:48:18] Chris Mayer: Taking those numbers at face value, it was thirty-six and thirty-two. To me, that’s in the realm of the error rounding error. So I don’t know that it would be that much different. I also think that if you’re a long-term investor in these, then you know the exact multiple maybe will fade in importance a little bit.

[00:48:34] Chris Mayer: And the way I think about it is I always think about things that kind of ten-year commitments. You look out and the basic math of it is if it’s twenty-five percent, let’s just say if it’s twenty-five percent CAGR over 10 years that’s nine X think about that. Nine x.

[00:48:50] Chris Mayer: So suddenly, and it doesn’t have to be that number make it, if it’s 20%, it’s, I think it’s six something. So suddenly whether it’s trading for twenty-five, or 30 or thirty-five kind of doesn’t take on as much of, if you knew it was gonna be nine times higher, or let’s say earnings gonna be nine times higher, 10 years from now then I think you’re not so much worried about whether you’re paying thirty-two or thirty-five or twenty-nine or so.

[00:49:11] Chris Mayer: That’s the frame of reference. Obviously you can’t pay 50 you can’t pay crazy multiples, but you have more room than you think with some of these. And then even if you wait, you almost always get chances. We talked about it. Lumine briefly hit got down to 17 handle, and I think it was October.

[00:49:28] Chris Mayer: And finished a year over 30. That’s dramatic. You might not get quite that swing, but for all these companies you’re gonna get some chances. So there’s two different ways. I always say if you really, if you love a company, you’ve done all the work. And for me the hurdle rates are high for me to find something.

[00:49:45] Chris Mayer: So if I find something, I’ll start small, even if it’s trading at 31 or 32 35, and then you can always build it up but up later. But the problem is if you wait too much sometimes it might go a year or two before you really get a shot, and then you would’ve been better off just.

[00:50:03] Chris Mayer: Buying it when you first wanted to buy it, so I don’t get too I don’t put too fine of a point on what the multiple is to that extent. The way I think about, it’s just a very simple model of they have so much capital today, they’re earning a return on that capital. You forecast that out, how much are they gonna reinvest of what they make?

[00:50:21] Chris Mayer: And you you get a number 10 years out, put a multiple on that. What’s your IR? So you’ve got quite a bit of room to play around with those variables and adjust them along the way. But I think these are pretty attractive to own over a 10 year period of time.

[00:50:36] Clay Finck: I love that you just kind of showcased the example of twenty-five percent over 10 years is a nine x in the earnings potential.

[00:50:43] Clay Finck: And I was actually on a call with our community yesterday talking about this idea of paying up for quality and I wanted to I. Tie in the numbers and share just something very similar to what you did. I don’t think enough people probably do this because they probably think 25% consistently isn’t likely, or it’s gonna be just extremely difficult to do.

[00:51:04] Clay Finck: So what I did is I spanned it out over five years and I said, what multiple could you pay today to get a 10% return? And then say you sell at a multiple of. 25. Many people would be surprised to hear that you could pay a multiple of forty-seven and get a 10% return over that period.

[00:51:22] Clay Finck: And there’s a few assumptions there that are baked in. So one, a Constellation has had return on capital over twenty-five percent over its tenure year today. So that’s if you had to modeled out Constellation five years ago, you would be underestimating its growth. And then you’re also underestimating the terminal multiple.

[00:51:37] Clay Finck: So you’re getting much higher returns in that example. And to your point looking out over 10 years that just lengthens your returns and increases your returns over time if you have that longer. Time horizon as well. 

[00:51:50] Chris Mayer: Yeah, this is a great secret of long-term investing in high quality businesses is that the compounding is amazing.

[00:51:59] Chris Mayer: When you more work it out on a spreadsheet, you can do 20%, 25%, whatever you want, over five and 10 years and see what those numbers are and then you can love what you did back into the multiple. I do that too all the time. I remember I did that for my investors in Copart my investors in my fund, I used Copart and I think it was 2022.

[00:52:16] Chris Mayer: ’cause I went back to 2012 and I said I. What multiple could you have paid back in Twenty-twelve and earned at least I don’t remember if it was 10 or 15% return that I used and the multiple was really high. It was like 60 some times you could have paid and still gotten 15% return your money.

[00:52:32] Chris Mayer: That’s what it was. And at the time, it was trading for 25. Terry Smith does this too. His letters. He’ll look back at some of these great compounders and say, you know what, you could have paid what the multiple could have been and you’ve still gotten a market return, or, and it’s always a surprisingly high number.

[00:52:47] Chris Mayer: Hey, you have to be a little careful with that, right? You can’t just willy-nilly start paying big multiples and thinking that you’re gonna get bailed out. But there are some companies that you do the work on it and you get conviction that they can repeat their formula over five and Ten-year periods of time, then it should work out.

[00:53:03] Chris Mayer: And you collect enough of those, right? We create it’s not like you have to make one bet. You can’t create a portfolio. You get 10 of these kinds of businesses. And that’s the other thing, when you do it on a portfolio basis that you’re doing 10 of them, how many do you really need to work out just like you think it’s.

[00:53:18] Chris Mayer: You get a couple, you’re gonna have, you’re gonna be very happy, especially if you let them just run and you don’t cut back and trim your winners all the time, which is what another thing people tend to do is sabotage their returns. 

[00:53:30] Clay Finck: Yeah. And I think it’s also important not to chase things chase something that’s gone up in price. Say, Hey, I’m paying up for quality. It’s a longterm compounder because. You mentioned 2023. A lot of these companies are very choppy. 40, 50% differences between the high it’s a lot and just within one year. And these are among the highest quality companies around. So yeah, you’re gonna get chances.

[00:53:56] Clay Finck: I’m curious if you were given Fresh Capital today, how would you think about allocating it? You don’t have to say Constellation topic you have 11 holding, so how would you generally think about putting it to work? 

[00:54:10] Chris Mayer: Like first I will, I think about position sizing. So sometimes like I don’t mind using Constellation here.

[00:54:16] Chris Mayer: I probably wouldn’t add to it if I got Fresh Capital, only because it’s my number one position now and I think it’s probably 12 or 13%. Whereas certain other positions are a lower percentage and perhaps just as attractive. Some of it is position sizing, guides where that fresh capital goes.

[00:54:33] Chris Mayer: But then also looking out on that sort of ten-year model that we looked at where’s the most attractive place to put it? And there’s always a couple that always that stand out as obvious places that I would put it, that are well below my thresholds on position sizing, because there is some guardrails that I put in place for myself.

[00:54:52] Chris Mayer: I don’t like to necessarily push anything above 10% with. Capital. I’m perfectly happy letting it compound. And if you know it gets to a bigger number, great. Totally willing to do that. But as I get inflows, I don’t like to push things above 10. So my positions tend to be right now, ’cause the fund’s still relatively young, it’s only five years.

[00:55:10] Chris Mayer: The span between kind of this positions are like eight to 12 kind of in that range. It’s not like I have three 15%, 20% position and then I have four or five, 3% positions. I don’t have that. To answer your question that’s the way I would think about it first, just looking at the position, sizing it, and then gauging attractiveness from there.

[00:55:28] Chris Mayer: And then it doesn’t bother me to hold cash for a while if I sit on cash for five or six months while I think about it. It’s okay. 

[00:55:36] Clay Finck: When I look at the stock chart for Constellation, I can’t help but draw parallels to something like Microsoft in 1999. I think Microsoft is like a 60 PE or something.

[00:55:48] Clay Finck: I mentioned a forward multiple for Constellation of 36. Is there ever a point where you’d trim it back if it became too big of a position in the portfolio or the valuation felt a little bit uncomfortable? 

[00:56:02] Chris Mayer: As a general rule, I don’t trim, so it would have to be like really egregious. So that’s number one.

[00:56:08] Chris Mayer: And even then Topicus, you could argue, got pretty egregious in 2021 and I never sold it. But that’s also because I didn’t necessarily have anything else that I was pounding on my anything else that I was really wanting to buy. Some times it’s dictated by what other opportunities there are.

[00:56:24] Chris Mayer: If I had something today that was like screaming by that I have to own. I have to give some hard thought to whether I wanted to trim something else or where I would get the capital, because right now I’m fully invested and I’ve been fully invested for a while. Cash is less than 1%, so it’s not like I have room to do anything right now other than sell something first.

[00:56:43] Chris Mayer: So all these considerations come into play, but in the general rule, I think source of outperformance comes from an investor’s willingness to let something become a bigger part of their portfolio. Let them really ride those winners. And if you do get something that the ideal would be you get something that sort of takes over you, and you look at it and it’s 20 twenty-five percent of your portfolio, and it’s just gone up 20 x and you’re delighted.

[00:57:06] Chris Mayer: So that’s how I think about it. 

[00:57:09] Clay Finck: It’s funny, there’s a few people I don’t know personally, just see ’em on Twitter, post their portfolios and constellations become an outsized portion because they’ve never sold a share. I also wanted to mention that you had a great conversation with my co-host, Kyle Grieve on our Millennial investing show.

[00:57:26] Clay Finck: You talked all about serial acquirers and that’s a bigger theme in your portfolio. We didn’t talk really too much about Technion or Lico or HiCo, and those are also in your portfolio. People would like to learn more about the serial acquirer model. I would point them to that episode that I’ll be sure to link in the show notes.

[00:57:45] Clay Finck: And for those in our audience, Chris, who would like to learn more about serial acquirers, other than referencing that episode, is there any other resources you would point to? 

[00:57:55] Chris Mayer: My friends at ImPractice have done a lot of good work on serial acquirers. That’s a paid subscription, but they have a lot of stuff on all the names we’ve talked about, serial acquirers, so that would be one.

[00:58:06] Chris Mayer: Definitely recommend that there’s a free site called acquirers.com. You could check that out. There’s a. Think there’s a free book there to that gives a overview of the serial acquirer model. So I’d recommend that my friend Oddbjorn over at REQ Capital, they’ve just released within the last, what was it, couple months?

[00:58:25] Chris Mayer: Huge mammoth, 300 page slide deck on serial acquirers. I saw. Definitely recommend that. So yeah, those are, those should definitely that’s enough to chew on for anybody there. I would say those things start there. 

[00:58:39] Clay Finck: Wonderful. Chris, always enjoy having you on the show. Feels like such a privilege to have a opportunity to chat with you and.

[00:58:48] Clay Finck: Sorry, pick your brain on some of these things. I wanna give you a final handoff for those in the audience who wanna learn more about you and what you’re up to do, please point them to any resources you’d like. 

[00:58:58] Chris Mayer: Sure. Thank you Clay. It’s it’s always good to be on. You always agree. ’cause it’s we have good conversations, you ask good questions, so I enjoy it as well.

[00:59:06] Chris Mayer: Yeah if people wanna find me Woodlock house family Capital is named my firm and there’s I write a very occasional blog and I haven’t really written it in a while. I know. But there’s a lot of stuff on there to read from the past. And I’m still active on we used to be Twitter and now X, and not as much, but I still will post things occasionally there.

[00:59:27] Chris Mayer: Those are two ways to keep up with what I’m doing. 

[00:59:31] Clay Finck: Great. Thanks a lot Chris. And I’m excited to watch the Constellation story play out over the next 10 years and see how it ends up.

[00:59:40] Chris Mayer: Yep. Great. Thank you.

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