Consistent allocation of capital to high-return opportunities is the engine that powers ‘compounding’ – the money-making magic that over time creates vast fortunes and was famously described by Albert Einstein as ‘the eighth wonder of the world’.

In the history of great investors, few have allocated capital as effectively as Mark Leonard, the founder of Constellation Software (CA:CSU).

Often described as "Canada's Warren Buffet", Mark Leonard has built one of the true great software powerhouses (and companies) of the modern age!

Software you say...

Constellation is a Canadian software conglomerate that acquires and holds vertical market software (VMS) companies. 

Unlike horizontal software, which is designed to be used across a wide range of industries and applications, vertical software is tailored to the unique requirements of a particular end-market, such as education, healthcare, finance, government, etc.

Constellations mission (having chosen to accept it) has been to acquire, manage and build market-leading VMS businesses that develop specialized, mission-critical software solutions to address the specific needs of these particular industries.

It's been an attractive space to for investors since Constellation pioneered it. A good recent example of a VMS software provider is OpenGov, a US based government software provider that has just announced its being acquired by Cox Enterprises.

Anyway, back to the program...

Over its lifetime, Constellation has grown through a combination of both acquisitions and organic growth, and established a 'house of brands' with a large, diverse customer base.

It now consists of six operating groups that service customers in over 100 different markets worldwide, with offices across Canada, North America, Europe, Australia, South America and Africa. Today, Constellation has over 50,000 employees, and generates consolidated revenues exceeding US$6 billion.

The acquisition led growth strategy has been one that has paid of significantly, having made >600 acquisitions! And as you can see, despite the spend being significantly higher now than it was 20 years ago (a product of how many investors having flocked to the space), their return on invested capital is still high!

Who is Mark Leonard?

A notoriously reclusive guy, in 1995, Mark got his start at Ventures West, a Canadian venture capital (VC) firm. Mark thought highly of his colleagues, but came to the realisation that they were playing the wrong game.

He was irritated by VC's focus on companies operating in large total addressable markets. Mark saw plenty of companies operating in niche spaces that were great businesses, but they just didn't have the upside potential to be huge VC outcomes.

By contrast, VMS businesses, whilst operating in markets often with limited TAM's, tend to have high market share within their niche (making them highly defensible). They often have high gross margins and sticky customers, and sell mission-critical software that is essential to a customer's operations. Tick, tick, tick.

Mark eventually left the venture capital industry and raised CAD$25 million from Ontario Municipal Employees Retirement System and his old venture colleagues, with the goal of becoming an aggregator of VMS businesses.

Show me the compounding!!

Constellation (CSU) went public on the Toronto Stock Exchange in 2006 at CAD$18.30 a share.

Since then, it's been an amazing wealth generator for long term investors, with total returns of almost 36% p.a.!

An investor who bought invested $10k into the IPO in 2006 and reinvested your dividends along the way, would now be sitting on nearly $2 million...

That's a return of 200x! An incredible outcome for investors and a great demonstration of the power of compounding.

If you think that's impressive... wait until you see the compounded return on our next pick.

for more compounding...