Launching Coverage of Constellation Software With Narrow Moat Rating and CAD 2,110 FVE

Constellation Software’s business model is akin to that of an investment company, with a specialization in asset-light, cash-generative vertical market software operators. The software niche presents attractive economics, including negative working capital as cash is often received in advance of services being rendered. The firm’s playbook is to identify, acquire, manage, and grow operators via a highly decentralized model with a small corporate office, and six operating groups. As Constellation has scaled over time, capital allocation decisions have become increasingly decentralized, with the exception that rare large deals require head office approval. Acquired businesses are run independently, held indefinitely, and Constellation compounds cash flow by redeploying excess cash to acquire additional businesses with incrementally higher rates of return.