How lean is your HoldCo? Vol.2: Why we ❤️ ROIC

In Vol.1 we discussed how industry characteristics influence HoldCo design. 

In Vol.2 we will address the following questions:

• From an investor’s point of view, what is the macro case for allocating capital to software rollups?

• How does one measure the shareholder value generated by a rollup? 

• Why should investors allocate capital to rollups?

• When does a HoldCo allocate capital more efficiently than the companies themselves? 

Why should investors allocate to rollups?

The global asset management industry oversees nearly $100 trillion in AuM. Alternative asset classes, such as private equity and infrastructure, now account for 50% of the industry revenue pool, more than double their share of the AuM (21%). Of this figure, private equity AuM (including venture) represents half. And it is growing. 

And yet one alternative strategy has been difficult to scale up / institutionalise. We’re talking about high quality, small-cap (sub $10M revenue) digital businesses. These are remarkably profitable and yet attractively valued. The vast majority are bootstrapped; very few are private equity owned. Even fewer are publicly listed. VCs’ portfolios come closest in terms of size, but not in terms of maturity or profitability. 

We would argue that such businesses should represent a meaningful portion of the managed private equity and private debt AuM, which currently stands at $9T. Software rollups can facilitate ownership transfer and close the asset allocation gap. 

With one condition: they must demonstrably add value, with low transaction costs. 

My “one metric to rule them all”…

…would be ROIC, short for Return On Invested Capital. Check out the two-part series on SaaS metrics that I wrote together with Don Wharton from SureSwift Capital.

Subscribe to Premium to read the rest.