Back To The Future: Why We At Asymmetric Invest In Acquisition Platforms

‍Image by Lael Rutherford.

We believe the maturation and commoditization of much of private markets investing calls for alternative approaches to creating excess return. This, in combination with technology’s continued forward march, are returning to the fore a set of equity value creation levers that first broadly demonstrated their strength in the original rise of leveraged buyout (LBO) private equity. In this piece we’re excited to explain our thinking and to share how we are positioning Asymmetric to capitalize.

Those following our new deal updates over the course of Fund I will have seen a meaningful share of invested capital to date in acquisition platforms. These businesses engage in serial M&A of small companies in service of building scale. Given we are an early-stage, tech-focused investment firm, it may seem unusual that we invest in these platforms. Today, we wanted to share some of our rationale for doing so and to explain why we believe that in select applications it represents an underappreciated, capital-efficient path to building best-in-class vertical software champions.

Simplistically, our acquisition platform program leans heavily on similar equity value creation levers as the best-known (and perhaps most successful) rollup in history: Constellation Software. Founded in 1995, Constellation has converted an original $18M USD of primary cash equity to > $55B of current market capitalization over the course of three decades¹. The primary equity value creation levers are summarized below; interestingly, these foundational levers bear striking similarities to those employed with great success in the early, magical years of LBO private equity (the 1980s / 1990s). Our rollup investing practice at Asymmetric today largely searches for creative, novel applications where these dynamics can be successfully translated and employed in service of efficiently building equity value over time.

Constellation’s story is primarily one of small cap acquisition economics in a large, fragmented and growing category (vertical market software). Healthy, profitable small cap assets tend to trade at modest relative multiples of EBITDA or unlevered free cash flow compared to their larger cap peers. This broadly-observed size premium across categories implies an opportunity to create a large asset through the acquisition of many small assets, at a weighted average entry multiple that represents a significant discount to the fair market value multiple of the scaled platform. In addition, given their profitable nature, acquisitions can support financial leverage. A meaningful minority of total acquisition consideration can usually be deferred in the form of performance-sensitive earnouts that can typically be funded with organic free cash flow. Given industry scale and fragmentation, over time this growing free cash flow stream can be continuously reinvested in further acquisitions, creating a geometric growth arc. Taken together, these factors can result in a stunningly capital-efficient path to scale (enterprise value and equity value). In addition to Constellation, we would point to extraordinary companies such as Copart, TransDigm, and Authentic Brands Group as illustrative of this playbook employed successfully.

The platforms in which we invest seek to employ these value creation levers to categories outside of vertical market software. Despite broad similarities, however, these platforms also tend to display important distinctions relative to Constellation’s approach. We would highlight two in particular:

• Playing To The Rise Of Scaled Private Equity: One of the great structural transformations of the past few decades has been the extraordinary growth of scaled private equity strategies (particularly LBOs). At Asymmetric, we generally believe that the excess returns historically generated by these strategies are primed to compress as competitive intensity (as measured by AUM growth and firm proliferation) has risen dramatically. While our most successful rollup platforms will in theory possess all of the attributes required to be successful public companies in the vein of those listed above, we are also aware that many are likely to be eventual private equity acquisitions. The small businesses our platforms acquire are not individually addressable to private equity given scale; however the broader platforms we invest in are capable of justifying enormous valuation multiples on the basis of efficient, future inorganic growth. More simply, our platforms by design acquire assets in the least competitive M&A market and then position themselves for sale into the most competitive M&A market. This awareness in part informs the categories and applications in which we invest, and how we work with our platforms to raise attractive subsequent capital.
  ‍
• A Privileged Parent: Vertical Software As A Structural Edge: Selling software into small and midsize businesses (SMBs) is widely acknowledged as a significant challenge. The technical sophistication of owners / managers in that segment, the scale of realistic annual contract value / lifetime value, and resulting costly go-to-market economics of selling a product to reluctant customers all work against would-be software vendors. Given this dynamic, our acquisition platforms - with the benefit of scale and tech sophistication - typically build proprietary vertical software in service of growing revenue and expanding margins. When executed well, this approach not only improves the pro forma acquisition economics (earnings have grown) but also positions the relevant platform as an advantaged buyer given potential acquisitions are more valuable in our hands than in those of less tech-forward competitors. While not yet a mainstream view, we believe the modernization of some SMB segments will need to be premised on infusing technology into acquired businesses rather than attempting to sell software as a vendor to those same disinterested businesses.

As we at Asymmetric have increasingly invested in this style of acquisition platform over the past three years, we’ve both confirmed some elements of our original thesis on the category and generated enormous learnings through experience working closely with our portfolio companies². While we will spare you the laundry list, perhaps our strongest belief generated through those learnings is that building these platforms in practice is enormously difficult. From sourcing acquisitions, to diligence, to managing acquired companies, to capital structure, to hiring, challenges abound. Even for the best-run platforms, the degree of motion and movement can feel overwhelming to some. One corollary in our minds is that we must partner with extraordinary founders and teams in building these platforms; anything short of that is unlikely to amount to much. We feel enormously privileged to have done exactly that with Jeremy at Splash, Henry at Emergence, Max, Felix and Anibal at Elevva, and Karetha at Appex.

Hopefully this piece has conveyed our excitement for a niche style of investment that we believe is both fascinating and underappreciated relative to its potential. We’re confident that the last great platform in the mold of Constellation, Copart, or TransDigm has not yet been founded, and we are constantly searching for talented founders looking to build enormous businesses from small component parts. We take a first principles approach to underwriting these platforms, and as such are open minded around particular applications; we have evaluated acquisition platforms focused on everything from intellectual property to farms in the midwest. Within the bounds of what is legal, ethical, and addressable to our investment mandate, almost nothing is too far out of bounds for us to take a first look. If you or somebody you know is working to build the next great acquisition platform, we’d love to hear from you.

‍

________________________________

(1) Constellation’s original equity raise at formation was $25M CAD, or equivalently $37M USD in inflation-adjusted 2024 dollars; the company has never subsequently raised primary equity, including a secondary-only IPO largely intended to create liquidity for a very happy group of early Constellation investors.

(2) For those interested in greater detail, we’ve memorialized many of our beliefs and learnings around this style of investing in a 40+ page memo; available by request to sam@acp.vc.