Horizon Capital clinched a 5-bagger with TotalMobile. Here's how

PE investment into VMS tends to get a bad rap from “permanent equity” aggregators - who paint it as a risky game of “hot potato”, with a short-term focus. 

Is it justified? Maybe. Maybe not.  

For a moment, let’s ignore the noise and the posturing and recognize the PE firms’ remarkable ability to generate value in lower mid market software buy-and-builds.

What exactly does this strategy entail?

It begins with a platform acquisition: typically an established player in a fragmented but lucrative market. More often than not, the target is a mature business ripe for transition from perpetual licence towards subscription-based revenue. A manoeuvre that lifts underlying growth by several percentage points.

Next, bolt-ons. 

PE firms approach buy-and-build in a highly systematic manner, having screened the market for bolt-ons before the platform deal is closed. That way, they can execute on a “rapid fire” M&A agenda before competition wakes up. 

Finally, when the buildout is complete and metrics have stabilised, the rollup is sold - ideally at a significant premium to the invested capital.

This exact playbook was deployed by Horizon Capital (formerly known as Lyceum), a British buy-and-build specialist, with TotalMobile, a field service management software vendor. Upon exit (to another PE firm), Horizon achieved a 4.6X MOIC & 38% IRR.

Of course, returns like these don’t happen by chance. Horizon is highly skilled in the field of buy-and-build, with a proven track record of identifying, acquiring, and nurturing managed services businesses. Notable acquisitions include:

In this article we break down:

• Horizon’s investment thesis for the mobile workforce market and TotalMobile specifically

• TotalMobile’s financial metrics before, during - and after Sponsor investment

• Horizon’s value creation playbook - in 6 steps

If you are interested in how TotalMobile’s successive sponsors structured incentives and address leadership change, check out Part 2 of the story: Always Be Rolling? 30 million reasons sellers should roll over equity in PE buy & builds. 

Step 1: Identify a lucrative market

Following an alleged three-year courtship, Horizon acquired the Belfast-based TotalMobile in September 2015. The sellers were the firm’s management and MMC, a venture capital firm. Notably, this transaction locked in a staggering 11x MOIC for MMC, which had first invested in TotalMobile back in 2001.

What was Horizon’s buy-in thesis?

TotalMobile offers a comprehensive suite of software solutions (both from cloud-based and on-premise) that empower better mobile working, data capture, and workflow management.

In plain English, this includes solutions that help schedule shifts and care visits; dynamically optimise staffing in response to changes in demand and employee absences; and so on. 

TotalMobile’s 2018 annual report assessed the global mobile workforce market at $2.8B, growing at 16% CAGR.

At a time, in the UK alone, >3.5M workers were field-based. Subsequent data from TotalMobile’s 2022 annual report indicated that the forecast was exceeded.

Step 2: Acquire a solid platform

Horizon valued TotalMobile’s deep relationships with local government, healthcare, utility, engineering, and facilities management clients. 

Unlike many mature VMS businesses that have high market shares but low/no topline growth, TotalMobile’s underlying market has swelled thanks to the proliferation of both mobile devices and mobile/remote working. 

In the four years to 2015, TotalMobile had grown revenue by 13% CAGR, while improving profitability.

Companies House filing suggests that Horizon’s in-price was £33.5M (excluding acquisition costs). In the year leading up to the acquisition, TotalMobile reported £12.6M in sales against an adjusted EBITDA of £3M (this figure includes capitalized R&D. This translated to revenue and EBITDA multiples of 2.7x and 11x respectively. 

Wait, there’s more! 

Subsequent filings reveal TotalMobile’s recurring revenue was only £5M in 2017 - and likely (much) less in 2015. This would suggest that Horizon in fact paid at least 7x ARR. Which, by all standards, is pretty rich for an aggregator. 

How did it justify the price? 

Step 3: Refresh the business model

Horizon investment thesis was threefold: 

• Broaden and modularize product offering

• Transition from the one-off / perpetual licence model to a recurring SaaS model

• Enter new verticals, such as public utilities and construction

This plan was not without its risks. Filings reveal that in the 2 fiscal years following the acquisition, TotalMobile’s revenue had contracted by one-quarter, from £12.6M to £9.2M. Similarly, adjusted EBITDA had tanked from +£3M to -£1.4M. 

What happened? 

Probably two things. One, a switch from perpetual licence tends to result in lower revenues in the first couple of years. Two, the associated investment weighed on profitability. 

As our analysis shows, weaning the firm off the perpetual license “addiction” was the right decision. Starting from 2018, revenue growth turned positive and profits rebounded accordingly, driven by the rising proportion of recurring revenue as a percentage of total.

By 2020, TotalMobile's revenue per FTE was already 42% higher than before the acquisition. And then COVID-19 hit. TotalMobile responded to a surge in demand by launching 6 micro-products tailored to the customers' evolving needs.

Step 4: Boost the bench

As part of the value creation plan, Horizon brought in two key senior hires - a Chairman (Mark Rogerson) and a CEO (Jim Darragh). Both had rich experience as executives in PE-backed companies including Literacy Capital and CMO Compliance. Additionally, the leadership team was reinforced with senior hires in engineering, sales, marketing and finance. 

The fresh blood helped drive significant improvements in customer satisfaction, product capability, revenue growth and profitability.

Step 5: Execute add-ons

Horizon had refrained from M&A until Year 4, opting to complete the transition to SaaS first. And then, it executed 4 acquisitions over a 2-year time span, deploying £28M in capital (including earnouts). All deals were small, with the average ARR of £2.4M. Mean buy-in price was 2.9x revenue. By 2020, these new acquisitions represented 34% of TotalMobile's total revenue. 

Step 6: Pass it on!

By the end of 2020, Horizon had successfully transformed TotalMobile into a platform nearly twice the original size - notwithstanding the early revenue attrition triggered by the transition to a SaaS model. The share of recurring revenue had now surpassed 70%.

At £7M, TotalMobile’s EBITDA was still small, however, it would now attract a premium multiple. The next owner Bowmark Capital paid £138M in cash (excluding the £10M earn-out) - equivalent to almost 20x EBITDA. Doubtless, Horizon timed the exit well, with the COVID-19 “halo” 

A combination of these factors helped Horizon generate a 4.6x MOIC and a IRR of 38%.