64X MOIC target & American search fund royalty: what “permanent equity” REALLY looks like

Disclaimer: Views expressed here are the author's own and based on public sources. The article is intended for informational purposes only. This is not financial advice. Please consult a professional for investment decisions.

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TL;DR

Forget the tyranny of IRR and 5-year exit timelines. A new breed of US investors - "permanent equity" players like Compounding Labs - are changing how serial acquirers businesses can fund their acquisition strategies. Case in point: Rose Street Partners, a UK HoldCo that just raised £11M in a bespoke structure targeting 64X MOIC (yes, you read that right). Want to know how this deal was structured and who's backing it?

In the article below, we review this emerging alternative to incumbent rollup funding structures. 

Let's say you need money to buy a business…

Or multiple businesses. Over multiple years. And hold them forever, rather than flip after a few years. 

Funding-wise, what are your options?

Until recently, in Europe at least, the default answer was “family money”. And pity those that did not have it. The plethora of sponsors that exist all require an eventual exit. Private equity. Search fund investors. The odd VC that backs serial acquirers.   

The tyranny of IRR no more. In the last 1-2 years, an entirely new sponsor category has emerged. They call themselves permanent equity. Permanent equity are, for the most part, US based investors with pockets as deep as their conviction in “Long Term Hold”, a growing sub-strategy within search funds. Their preferred investment return yardstick is MOIC rather than IRR. We are talking about firms like Sator Grove and Compounding Labs. 

We have written extensively about the former, or rather, its investee aggregators Upliift, Arcadea and Chapters Group. Despite much shared history between Sator Grove and Compounding Labs, the latter is much less public.  

No wonder: as befits a HNWI syndicate, Compounding Labs has a no-frills setup. It writes checks of $10M to $20M per HoldCo. On what terms?         

The website is a threadbare one-pager. There is not much in the public domain. But don’t worry: we have enough to share with you, our readers. Today, we are bringing you the tear-down of Rose Street Partners (RSP), a fledgling British HoldCo and Compounding Labs’ first investment in Europe. So far RSP has acquired 3 seemingly unrelated businesses:

Read on to learn about:

1. RSP’s investment thesis and capital structure

2. The terms on which Compounding Labs is funding RSP 

3. What do RSP and Banyan Software have in common

4. Who is backing RSP

Before we dive in. I am still recruiting for the founder / CEO for a HoldCo of mission critical software businesses in the DACH region 🇩🇪🇨🇭🇦🇹

This new venture is backed by a very reputable institutional investor. You heard that right: a single LP writing a check into the platform that you are going to build from scratch. Think Visma. Or Valsoft. But yours.

Must haves: native fluency in German; prior M&A origination and execution experience; hustler mindset. And of course a passion for software.

Interested? Email [email protected] with your CV / Linkedin and some slots for a call.

What is Rose Street Partners (RSP)? How is it funded?

Founded one year ago by Dan Skyte, RSP aims to “buy enduring businesses, run by exceptional people, and hold them forever” (source). 

Dan has a decade of professional experience. According to LinkedIn, his first job was at Third Bridge, an expert network. This was followed by stints at the private equity firms ECI and Hanover Investors. Note that Dan does not have an MBA - that searcher’s hallmark - but he does have private market pedigree. 

Based on public filings, RSP has a war chest of £11M ($14M). The first million was spent on Fuelsoft - a UK VMS for the fuel distribution industry. Fuelsoft was founded in 1982 and has 29 employees. The acquisition was funded by a £1.2M equity line and a debt facility from ThinCats, an alternative lender to UK SMEs.   

RSP chose SPV level debt financing over a HoldCo acquisition facility. In doing so, it has seemingly gone against the tide. Almost all UK software rollups with some institutional backing have gone with the latter - because it is easier. ClearCourse, Everfield, Abingdon, Unaric, AscendX. 

However, once you zoom out to capture the broader UK SME acquirer landscape, the rationale becomes clear: avoid cross default. Among others, RDCP did it this way.    

How is RSP structured?

RSP has two share classes: A preferreds and B ordinaries. Investors own the A’s. Dan Skyte owns the B’s - which essentially vest in tranches: the higher the Multiple on Invested Capital, or MOIC, the higher the percentage that Dan owns in RSP:

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