TIVP052: Chapters Group: 100-Bagger in the Making? w/ Daniel Mahncke & Shawn O’Malley

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26:17And for a limited time, you can use code STOCKS15 for a 15 % discount at checkout. I was actually planning to ask you about AI later in the episode and whether it's a threat to the business. And maybe we'll still get to that. But I just can't help thinking that public sector clients are probably a lot more forgiving when it comes to new innovations. And what I mean by that is if you take a company like Adobe, they're deeply embedded in customer workflows too. But their customers are private companies. And private companies are constantly trying to become more efficient, cut costs, and shorten processes.

26:52So the moment AI becomes a viable alternative, Adobe has to deliver something equally powerful inside of its ecosystem or customers will start looking elsewhere. And governments just don't operate that way. They aren't driven by the same incentives. And honestly, they don't face the same pressure to adopt new tools immediately or squeeze out every ounce of efficiency that they can. And so their main priorities are stability, compliance, and ensuring the system keeps running. And innovation usually takes a backseat to that. So is that actually an advantage for chapters in that they focus on the public sector as part of their business model?

27:30I think it's fair to make that argument. I actually listened to a conference recently where Jan Moore gave a presentation. It was actually hosted by Chris Mayer, the author of 100 Baggers, by the way. And he made a really good point, I think. He said most people completely underestimate the integration part of AI. So meaning AI won't just magically come in and then replace every piece of software overnight. It will mostly be about entering the workflow through the tools and companies that they already use. So talking about Adobe integrating an AI model in their own ecosystem and then delivering that to the customer.

28:04I mean, that's exactly what we've been preaching for months now when we talk about these companies, not only Adobe, but also Salesforce or even S &P Global recently. And the value isn't just in the AI model, it's just in embedding the technology in the day-to-day workflows where the customer already lives and actually has to transact with customers. And sure, there's going to be more true for some companies and maybe less true for other companies. But if you think about public organizations in Germany and in the EU in general, yeah, that's even more true there. I think there's a good argument to make that they are less likely to change than any other organizations.

28:39And they just rely on longstanding relationships and stability. So when AI is adopted, I think it will be through existing vendors, not by just ripping out everything that they already have and then starting over from scratch because there's a new AI startup that has a tool that's supposedly better than the legacy software. So if anything, AI should maybe become a tailwind for chapters and not a headwind, and perhaps even more so because they are in the early stages as an acquirer and can always adjust their strategy if AI should be even more disruptive than people assume today. And if there were a niche AI tool that truly solves a mission-critical problem better than what they already have, chapters could just buy it and fold it into the group.

29:23That's one of the advantages of being a serial acquirer. And so that might be more difficult for serial acquirers that already have hundreds of companies under their umbrella, thinking about maybe Constellation Software there, but it should certainly be possible for chapters. And so how does it look on the pricing side in the public sector? I mean, the barriers to entry are obviously high, and that's good, and the products are very sticky, but I could also imagine that there are all these regulatory hurdles to raising prices, right? The government doesn't want you to raise prices by 20 % on them.

29:55And so to what extent is that an issue for them? Yeah, that's actually a good point. We talked a lot about pricing in our Transim episode, but not every company is Transim, so you would think that governments are the last customers who would accept price increases, especially ones that go beyond inflation. But in practice, Chapter actually does have pricing power in this segment and itself talks about what they call, quote, high potential for price normalization. And the reasons I think are the ones that we already mentioned in this episode before. For example, your bus depot software or your emergency response platform goes down, everything stops.

30:31And it's a huge disaster for these major cities. So nobody in a public agency wants to take the risk of just switching vendors, retraining staff, then migrating really decades of data in most cases and dealing with political blowback if something actually happens and the system breaks down. So I would say the risk of changing products just outweighs the possibility of saving a bit of money here and there. And most of these contracts are long term linked to regulated budgets anyway. So cities usually bake in small annual price adjustments. So thinking about inflation, maybe two or 3 % a year. And just to keep up with higher requirements, maintenance and compliance that software is still costing.

31:10I mean, that's obviously not explosive growth, but I could very well imagine that there's more upside than that once AI really comes into play. And maybe you have some new modules or products and you can generally save time and money for your customers. And in that case, I think it gets a lot easier to argue or to justify higher prices or additional fees for some new features that you offer to the customer. okay well that's a pretty good look at the public sector what about the enterprise segment and what companies are they owning there what are the competitive advantages if any in this second segment of the company one thing you notice pretty quickly when you go through chapters portfolio is that a lot of these companies have been around for 20 30 and you know the company we just we talked about earlier sometimes even 40 years so for software companies i would say that's a pretty long time.

31:58You're not talking about manufacturers that have like decades on your, even sometimes hundreds of years of history. So I think most of these companies are pretty well established in the niches they play in. And that alone tells you a lot of things. I mean, first, these businesses clearly have real product market fit. So you don't survive in a niche for decades unless your customers rely on you and really think the product that you offer is a great one. And the second thing is actually even more interesting because many of these companies never even used their pricing power. Chapter's CEO mentioned an example of a company where the annual recurring revenue went from about 800 ,000 euros to 2 million euros just by updating prices.

32:36And according to him, churn basically didn't move. So that's a pretty common theme in these older and founder-led businesses where they know they have a great product, they're good at serving customers, but historically they're very conservative when it comes to raising prices. And that's now a big part of Chapter's playbook. And it's kind of the same thing Once again, we talked about the trend sign when Nick Howley publicly said that especially the good companies, the one with the new product and the pretty big mode, they massively underestimate how much pricing power they actually have just because of the quality of their product.

33:08And Jan Moore basically said the same thing. Founders often worry too much about losing customers, then don't fully appreciate the mode that they have built over decades and by just being the best player in the game. And so yeah, you've got customers still sitting on old contracts, old priceless, and sometimes literally the same terms they signed 10 years ago. And I couldn't repeat now what I said about the public segment, but again, it's about high switching costs and the price increases tend to work because the products are just so sticky. One of the companies you told me about that I found really fascinating is called Opus.

33:42And it's the market leader for, this is really niche, orchestra management software. They've been in business for more than 25 years and over 250 orchestras worldwide use it from the US to Australia and China. So how about that for an enterprise segment business? I love hearing about the company. Generally, if you go through their portfolio and you look at the, you often say niche businesses, but then you think about what does it actually mean? But this is one example where, this is the company we're talking about, an orchestra management software company. And that's one where they have customers in the entire world.

34:20I mean, 250 orchestras, if you think about it, it's a whole lot. There are not that many orchestras in the world, especially the big ones. And again, it's a good example for another comparison to Drenstheim. I mean, in my episode, I mentioned how the markets they enter by buying the market leader are very attractive for the first mover, but they usually are not that attractive for new entrants. Now, I'm not an expert on the orchestral market in this case, but I would assume this is just such a niche business where the software that you need to use for these orchestras. If there's one big player in there, I don't see how you get enough demand for one or two other big players in this segment.

34:55At least not if you want to actually run a profitable business with this. Maybe I'm off here since you definitely know the European market's better than me, but I could imagine that there's generally this bias toward local software where perhaps even more so in the public segment, but given the different languages and cultures across Europe, I mean, it's possible that you see the same thing in the enterprise segment. as well. So I mean, is that something that you've noticed this preference for using software built by local companies in a given country in the EU? Or how do you think about that?

35:29That's actually a very good point, because there are examples like Opus that operate at scale globally, but many companies in industry still have a local bias. I think that's a good thing also for chapters because it limits competition. I mean, of course, we would also like to see that, the upside potential just gets larger and larger because you expand into different countries and the scale is getting increasingly more. But it also makes the business very stable and predictable if you have your local market and you're the biggest player in that market. And in the enterprise sector, you always have the chance to expand beyond the local customer base.

36:03So perhaps you build the tool first for local customers. And then over time, when you're the market leader in that geography and you have by far the best tool, you then expand globally. I think that's what Opus did to a large extent. And I could imagine other companies could take a similar approach, especially with AI simplifying things like translation and customer support. But I wouldn't worry about growth in local markets either. I mean, there's a relationship between wages and software pricing that should be a tailwind for chapters too. I mean, when wages rise, software companies, usually they become relatively cheaper.

36:36So this naturally makes companies more willing to pay for tools that just automate work, reduce admin tasks, or just help them deal with labor shortages, which is another thing in Germany. It's not only that labor is expensive, you can also just not find enough skilled workers. And that obviously increases the demand for software companies. And you can actually see this in the macro data. In markets where wages rise faster, software spending tends to rise faster as well. So the fair price of software is ultimately anchored to labor costs. And in most European countries, labor costs have increased significantly faster than the rate of inflation.

37:13in the last couple of years. So instead of the usual pattern where annual prices increase about 2 % to 3 % in line with inflation, I think moving towards something like 5 % to 7 % adjustments is totally realistic in the next couple of years. And especially in categories where the alternative is hiring more people, which is more expensive. And as I said, increasingly also just more difficult to do. Talking about price increases and organic growth, What is the mix between organic growth and growth through acquisitions for chapters as a company? Yeah, over the last couple of years, most of chapters growth has still come from acquisitions, which makes sense because they're still broadening the portfolio and they're moving from buying all kinds of businesses to software companies only.

37:59But now that those pieces are somewhat in place, organic growth is becoming a slightly bigger part of the story. I mean, management is guiding for low teens organic EBITDA growth this year and double digits is also what they think is achievable on a steady state basis going forward. And that said, Chiptis is still so early in its development that I would personally expect more growth still coming from the M &A business. It's just over the last three years. I mean, if you look at it, the invested capital has gone from about 70 million euros to over half a billion euros. We've now talked about the public and enterprise segments.

38:37And so there's one left that we need to cover, and that's the financial one. What can you tell us about that part of the business? Right. I mean, this part of the business is kind of different from the other parts that Chapters operates. I mean, the financial technology segment is almost entirely about one specific niche, and that's international students and experts moving to Europe and especially Germany. And that might sound a bit too niche for basically being the entire financial arm of the company, but it's actually a pretty big and rapidly growing market with lots of long-term growth potential.

39:13Germany is the number one non-English speaking country for international students and experts. And I think it's over 15 % of all students in Germany's higher education system. So we're mostly talking about universities that are international students. And perhaps more importantly, the retention rate is pretty high too. So about 45 % of them are still in Germany about 10 years after they have finished their studies. That's a lot. So if you then own the entire ecosystem from supporting them coming to Germany, then studying here, then later settling down, I think that's just a huge opportunity if you own the entire flight world, basically.

39:48So yeah, that's what Chapter is going after. And they brought together three companies over the last few years. The first one is specialized in blocked accounts for visa applications. I think this is mostly a German thing. basically when you're a student, an international one, and you go into Germany to show the German government that you have enough money, you have to take 12 ,000 euros, put them into a bank account, then it gets frozen. And each single month you get 1 ,000 euros back. So that's what these blocked accounts are about. And you need them for visa applications. The second company they have is handling insurance and onboarding.

40:21And then the third is basically this digital arrival toolkit that helps people navigate German bureaucracy for the first time. And let me tell you this, this can be somewhat of a nightmare. And as you can imagine, if you want to study or work in Germany and you're a non-EU citizen, this entire process is just super structured, super bureaucratic, and honestly just pretty confusing. Sean and I sometimes talk about the cultural differences between an American and a German. And one thing that we both can agree on, Germans are pretty structured. But that can also make things a bit complex. So, you know, that's one thing that especially international students can struggle with.

40:59And about half of the students in my student home complex, they were international students and they told me stories that were just insane. You just can't navigate all the paperwork that you have to do if you move here. And a lot of it is even in German and you're probably not a German speaker. So it's a nightmare. And you need the right kind of bank account. You need financial proof. You need health insurance. You need to register with the authorities. It's just so much. And all of this usually happens before as an international student, you have even set foot into this country. So you just need companies that help you with the entire process.

41:34I can't say it's something I know a lot about because I just didn't have too many international student friends while I was in college. But that's mostly just because I went to a really small school. I remember there being separate dorm housing for the international students, actually. But I don't think I ever heard the same horror stories that it sounds like you did. But I wouldn't be surprised if they were there. I mean, I can imagine really no matter where you're coming from or what country you're going to, there's just no shortage of bureaucratic red tape. So you could definitely see how this would be a substantial value add for folks looking to travel internationally for their education.

42:09And that's why combining these companies operationally just suddenly gives chapters something close to, you could probably call it a full stack solution. So from the moment the student applies for a visa until they're fully settled, they can essentially manage their entire workflow. And nobody switches providers halfway through the visa process. I mean, the risk of messing something up is just way too big. And even universities or student organizations that help with onboarding prefer to just have one partner they can reach out to whenever anything is happening. and even financially, the model is just an attractive business for chapters because most revenue here is tied to regulatory requirements or just mandatory onboarding steps.

42:49So you don't need to convince anyone to open a blocked account or buy health insurance. You just have to. Law forces you to do that. So yes, it's an attractive business. And one common denominator for chapters is I would say that they mostly go for businesses that have these huge long-term tailwinds. And this is another one. This time I would say it comes mostly from demographics because Europe and Germany especially is dealing with a massive labor shortage and that isn't going away anytime soon. Birth rates are just low, the workforce is shrinking and governments, they know that immigration of skilled labor is desperately needed and that's something they talked about for many years but they need to make actions right now and at the same time you've got rising demand from abroad.

43:31So more people are studying in Europe each year especially from Asia, Africa and Latin America. So you get these two reinforcing curves. You have more people that want to come here to study and to work. And then at the same time, Europe is increasingly needing more of them to come. We've talked about international expansion in the other segments already. So I am curious how that would play out here. I mean, this part of the business is obviously very tied to regulation, which might make cross-border expansion tricky if every country has its own rules. But on the other hand, you've got huge student inflows coming from Asia and South America.

44:06into these European countries. And so I wonder whether part of this process fall under EU-wide regulations rather than specific country laws. Or is this something chapters can scale across Europe? Or I mean, does it have to be rebuilt locally each time? How do you think about that? Yeah, we're getting into the weeds now. I hope it's not too boring here on the bureaucracy side. But generally, I would say they can scale this across Europe. But it's not just a simple copy and paste type of thing. So parts of the workflow, they're governed by EU regulation, and then other parts are completely country specific.

44:40So it's kind of a mix of both. And things like identity verification standards, anti-money laundering rules, payment onboarding, insurance stuff, all of those that are frameworks that are harmonized across the EU. So if you've built the digital documentation systems for Germany, a lot of that underlying infrastructure can pretty smoothly be transferred to Spain, the Netherlands, Italy or Portugal, wherever you want to go in Europe, basically. And what gets a bit more tricky is the stuff that depends on national visa rules and financial proof requirements. I mean, I already talked about the blocked accounts that you need in Germany.

45:16Those are one example where it's a very specific thing, a very complex thing. But the good news is that Germany tends to be more complex than other countries. So if it works there, chances are it will work elsewhere too, where if you're in a different country, it's probably not the same thing if you then wanted to expand to Germany. And the customer Germany is almost identical anywhere. So a non-EU student who wants to study in France, in Spain, or the Netherlands faces the exact same core steps as someone who's coming to Germany. So since Chapters has built a full stack for onboarding and compliance and all of that stuff, I think the marginal cost of entering new countries is much lower than it would be if you had to build the infrastructure from scratch.

46:01Let's talk a bit more about how Chapters actually structures its acquisitions. We've already mentioned that Mitch Rails is a pretty large investor in the company. So the Donaher comparison kind of forces itself onto the table here. And is there anything in Chapter's approach that feels directly inspired by the Donahair playbook to you? I think they've copied quite a lot of things, not only from Donahair, but also from Constellation and Transem and basically the entire reach of these incredibly successful serial acquirer companies. So structurally, most of their deals follow a pretty simple pattern.

46:35Chapter usually buys about 80 % of the company. And then the founders or the key managers of those companies, they roughly own 20 % of that business. And the important thing is that this minority stake is meant to stay in place. So it's not like a typical private equity rollover where everyone knows the company will be sold again in three to five years. And then the remaining 20 % stake will just get cashed out. The default assumption here is that Chapter will own this business forever and it will never be sold. Maybe there's a bell ringing here. It sounds a lot like Buffett and Berkshire Hathaway.

47:08So yeah, that's very similar to most other companies that kind of go about the same playbook. But the core business, and I think that's important, it always stays independent and the people running it remain economically tied to the outcome of those businesses by their 20 % stake that they still have. And where Chapters adds a bit of a unique edge, you might say, or a twist is what happens to the 20 % stake because it doesn't have to stay locked up in the acquired company forever. in a lot of deals there's an option to convert that stake into chapter stock later on so let's say a founder runs the business under the chapters umbrella for a few years and at some point he wants to be more diversified or he wants to retire and the cash needs to be more liquid well then he has the option to just swap their illiquid 20 % stake in that private company and gets chapters group shares instead so it's more liquid and he has basically equity in that company and another thing Chapters does that comes straight out of the Constellation and Danaher playbook is the way they use shareholder loans.

48:11So when a company is bought or business is part of the Chapters group, part of the consideration comes from a shareholder loan given by Chapters to the new onboarded company. And usually there's an interest rate of 10 % on that loan. And you might wonder at first why the parent company would give or put such a big burden on a subsidiary, but it actually has some pretty solid advantages. First, it gives companies that are newly acquired flexible funding for acquisitions and investments. And second, it creates a predictable stream of interest income at the holding company level too. And it sends a very clear message that capital is not free, even if it's coming from the parent company.

48:51And if you as a manager want to deploy money, what you now have to think about is how can I make at least a 10 % return on that money? Because Otherwise, it's just not a profitable thing to do at all. And it also encourages the return of excess cash. So let's say a company doesn't see any opportunities to reinvest the money at returns above that threshold. Well, then it's just better to send the money back to chapters, to the parent company. So the system naturally funnels capital toward the best opportunity across the group. It sounds like strict parenting almost in a way, but I mean, I get it.

49:26It's less about the literal benefits of charging 10 % interest on financing to subsidiaries, but more about kind of the message it sends, as you said. And ideally, you'd have such great people in place who understand capital allocation well enough to recognize when to funnel profits toward the top of the holding company if their subsidiary can't find sufficiently attractive reinvestments. But I do think that this is a pretty pragmatic way of enforcing that discipline. And so one thing I do want to get into is the topic of dilution. If you look at the chart of total shares outstanding, I've got that pulled up right now, you'll see that chapters has been diluting shareholders at a pretty impressive pace in the worst way.

50:09And anyone who listens to the show knows that we are not exactly fans of companies that dilute a lot, right? If you buy a pie and and your stake in that pie is just being whittled away over time, that is objectively not a fun experience. So I'm curious, how do you think about that in this case? I'm actually glad this is not the first shot I saw about the company. Otherwise, I probably wouldn't have looked further. But at the same time, it's not unusual for a company at this stage to issue a lot of equity. But obviously, the overall question would be whether growth justifies the dilution in the long term.

50:45And, you know, then you got to ask yourself, okay, well, what are they doing with the cash and how exactly the dilution even happened? And yes, if you just look at the chart, it looks pretty brutal. In 2020, the company had about 3.3 million shares outstanding. And today it's roughly 23 and a half million. So the share count has increased pretty much sevenfold in just the last five years. And most of this has to do with the founding stage of chapters. In 2021, they were still evolving out of this MediCon era, and they needed to build the infrastructure of the holding platforms, the leadership teams, and just the initial acquisition engine.

51:21So that's where you saw the first big jump in the share count, from a little over those 3 million shares of the world standing at a time to about 11 million. And after that, it does slow down a bit. It's still a pretty unhealthy pace if you would look out of a 10-year horizon, but the next capital raises were significantly smaller and the main objective was to get more capital for fueling acquisitions. And they also issued shares directly to the owners of Fintiba, which is part of their financial arm. So because they have these deals in place and they thought, okay, well, Fintiba and this entire ecosystem that we talked about is strategically so important.

51:57I think it made sense to basically get the founders involved in Chapters Group. And as part of the compensation, they received shares for that. And by now, I would say Chapters has reached what management calls stage three. so they are more than just self-sustaining and they only raise capital if the deals are attractive enough to justify it and according to Janmoor the deal pipeline is still full and that's why chapters raised another 100 million throughout late 2024 and early 2025 so yes if you just summarize it dilution is pretty high there's no argument about that but I gotta admit I don't know why but this time I'm just not too worried about that first every major capital raise has had explicit support from all the long-term shareholders that we talked about, Mitch Rails, William Thorndike, Daniel Eck, and you name them.

52:45And when people of that caliber keep writing checks at higher share prices, they always pay the premium. It sends a very different signal than dilution that seems to be done out of desperation. And the second point about it is the way Jan Moore talks about dilution, which to me personally makes a big difference. I've listened to many of his interviews and I've read dozens of his filings and it's extremely clear to me that he's optimizing for value per share, not just the size of the company for the sake of size. So if he didn't think that raising capital was value accretive, I think he wouldn't do it.

53:20And I really like that he understands both sides of the equation. I mean, he's an operator now. He runs the business on a day-to-day basis, but he also spent eight years managing his own investment firm. So he knows how it feels to be on the shareholder side. And that combination, an operator who thinks like an investor is exactly what you want in a CEO deploying large amounts of capital during these early chapters, no pun intended, of a compounding machine. I do think that context actually helps a lot. When you first look at the share count, it's easy to panic. Triggered a little panic in me.

53:54I mean, seven times more shares in five years just sounds, there's no other word for it. It's just brutal. But when you map it onto the stages of the business. I mean, it makes more sense, I guess. And the fact that the long-term investors, this is really the key point to me, is the fact that these long-term investors kept funding every raise, I think is a pretty strong vote of confidence. So at the end of the day, dilution is solution. And the real question is whether the financials underlying the business justify that. And so maybe let's just shift gears here a little bit and take a closer look at the numbers, what kind of financial profile are we dealing with here?

54:31And how should investors think about the earnings power of chapters going forward? Well, there are definitely easier tasks than trying to dig into the financials of a young and decentralized holding company. I mean, the problem that you generally face is that things are just moving very fast. The reported numbers are quickly outdated. If you open the annual report and just look at the headline earnings, you would honestly think this is some money losing early stage roll-up experiment. So you really have to look at the operational business level and the actual portfolio companies. And this is once again, we talked about it with Trends Time, why we look at EBITDA.

55:09EBITDA stands for earnings before interest, taxes, depreciation, and amortization. The reason why EBITDA is so important for M &A heavy companies is that it strips out depreciation and especially amortizations from acquisitions. So when you buy companies, you create these big accounting amortization charges for things like customer relationships, software and goodwill. And those charges don't reflect the current operating performance of the acquired company. So EBITDA removes that noise and just makes it easier to compare subsidiaries and really track the real underlying profitability of the group.

55:44And if you take the business they owned in 2024 at year end and you pretend they had been part of the group for the entire year, they would have generated about 125 million euros in revenue and a little over 30 million euros in adjusted operating EBITDA. And that's a margin north of 24%. And if you listen to the company, they think this margin could over the long haul go to the mid 30s. And already in the first half of 2025, the same portfolio produced 85 million euros of revenue and almost 20 million euros of EBITDA, which annualizes to a business that's getting close to 170 million euros in revenue with high 30s in EBITDA.

56:24Annualizing these is always a bit difficult because deal flow could be slower in one year than in the other year. And also these smaller companies tend to be a bit more volatile. But still, these are the numbers you get and you have to work with them. And Chapters is definitely in the very early stages. I mean, at the end of 2024, Chapters had roughly 260 million euros invested in majority owned holdings. That was 140 million euros the year before. And in 2025, if you include the first half, the number is now north of 540 million euros. I know those are a lot of numbers, but this is just a huge increase.

56:58If you add in the structuring for financial technology clusters, so the business has scaled massively. So that loops back to our dilution discussion. Dilution is obviously uncomfortable, but at this stage of the company, when you're compounding at this pace and you're deploying hundreds of millions into what really are high margin, mission critical businesses, this is the window where it actually makes sense to do that. So EPS, obviously, if you look at this graph, gets pressured in the short term, sure. But if the fundamentals keep developing like this and the earnings power just catches up, raising equity today can still be the value-maximizing move, honestly.

57:35And according to the CFO, like I said, the business would have been self-sustaining roughly two years ago. So any new capital that is coming in, whether it's through equity or debt, is really just about accelerating the pace of growth rather than funding basic operations. It's tough for us to underwrite the earnings of this business. So it's just based on acquisitions and we don't know when they will happen. And so to some extent, for us to even really consider investing here, you just have to believe that this will work out. And inherently, it's a speculative bet that does require a degree of optimism.

58:10But then again, though, the thing that reassures me is that you're riding in the sidecar, right? Sidecar investing alongside these very successful and highly experienced investors who are well aligned with shareholders in chapter. So that is honestly, I think, the main angle here. And when you look at the fact that leadership, they literally paid premiums when new equity was issued. I just don't think we would be in bad company, literally, to be partnered alongside them. But before we move into the valuation, we should still talk about the risks. And I think there are probably plenty we could name for a company at this stage.

58:51Definitely. If I'm being honest, I find it very hard to pinpoint specific risks at this stage of the company. I could give you a whole list from growing too fast and onboarding companies that just do not have enough quality just for the sake of growing the company or the top line to overestimating pricing power and just organic growth. I mean, you could even argue this to some extent already happened. The full year guide for revenue this year was revised down from mid-teens to single digits. EBITDA is still supposed to reach mid-teens growth though. So I don't know, to me, this seems like no big deal, but it does show you how volatile these underlying businesses still are.

59:29and it's just very hard to judge what the actual earnings power is. The thing is, if a large and established company were to cut the revenue guide from mid-teens to mid to high single digits, I mean, it would be a massive drawdown in the stock. We've seen that with some of the stocks we've looked at before. But as you said, these smaller companies are just much more volatile. And so there's a reason Yann Moore emphasizes the long-term view so often and riding through the waves that are kind of inevitable in this type of young business. you kind of talked about it but ultimately i think this is a case of trusting management and the people who are involved in the company even though they're just shareholders for example i mean a while ago i read the paper by richard zackhauser who's a harvard professor and it was about winning the investment game considering how many things are unknown and in fact actually simply unknowable and one of the strategies he outlined was what you just mentioned sidecar investing.

1:00:26So those are investments where you are riding along in a sidecar pulled by a powerful motorcycle. I mean, Berkshire Hathaway, maybe one of the most prominent examples of that, was such an investment. And Buffett was basically the engine of that. And you could make the same argument for Mitch Rails. And I might sound crazy when I say this, but I wonder whether Chapters Group could be such a sidecar investment as well, bringing together the best of the best to help this company succeed. It's kind of funny that I come back to this because honestly, when I started my research, the thing that got me excited about this company the most was the shareholder structure.

1:01:02Then I started digging in and expected that I would see something else to come up and then become the number one reason to get excited about this opportunity. But to some extent, I looked for what all of these great investors see in Chapters Group. And while I liked everything I saw regarding the operating businesses, the acquisition strategy of the company and all of that, I did realize in the end, I would still make an investment decision based on the shareholder structure. Over the time that I've looked at this company, it just hasn't clicked to the extent where I could say, okay, well, now I understand what this serial acquirer should be so much better than all the others out there.

1:01:42If I've learned anything about serial acquirers, and I've looked at a lot of them over the years from studying Buffett to just my time at TIP, I mentioned Technion earlier. And so I just think it's really about what matters most is the people at the top and the culture from top to bottom, to be a little cliche. And since you're in Hamburg, maybe you can actually connect with some folks who work with the group to get a feel for that culture. But from the top down, it just it seems like an incredible cast of people running things or involved behind the scenes or at least participants in the equity of the business.

1:02:14And so clearly that is really the driving part of the thesis for better or worse. if people want to criticize us for ending up investing in it, they would say that we're just kind of willingly betting on this management team. And I think that's probably not a mischaracterization of things, right? It almost sounds bad, but I'm sort of indifferent to what types of acquisitions they're specifically doing and the niches that they're targeting in the sense that I trust these to be very smart people who know more than me with proven track records. So if these are opportunities that they are tackling with chapters and it makes sense to them, then I'm just happy to trust that as a true sidecar investor.

1:02:53That's really the whole premise behind it. So this is not a situation where I feel equipped specifically to analyze and comment on the areas that they're making these acquisitions in. I don't really know a lot about international students and the education process in Germany. And it is just very niche. And so the question is really whether these are people ultimately that you want to invest alongside for a company that is ultimately an acquirer with no core underlying business in itself, which can make it very dynamic and agile. But also at the same time, you're not really discounting the current earnings of the business in the way that you normally would.

1:03:31You're really discounting the value of the capital allocation decisions that will be made in the coming decades by the people at the top. So a lot of the same people are kind of doing a similar calculus when they think about Berkshire Hathaway at a much similar scale where they're thinking, you know, hey, I was happy to own shares while Buffett and Munger were the ones calling the shots and had this incredible track record of making very accretive capital allocation decisions. But now the question is, do I still feel good about owning the stock with others making the capital allocation decisions?

1:04:02And maybe I'm going to demand more of a discount to the current price or the current book value or earnings, multiple, whatever it is, to feel comfortable that you are are making an investment that has as attractive of a risk return profile as you would normally make and had been making for years with Buffett and Munger at the helm. I totally agree. And honestly, first of all, I'm trying to meet up with some of the people from the company. Unfortunately, I didn't yet have the time to, but I think that's a very important thing and also kind of where my edge lies. And I generally ask myself whether I underestimate the edge I have just by realizing how strong these tailwinds actually are, just by seeing how the German economy is doing and knowing how many companies there are that will actually be perfect fits for chapters and what that means for their pipeline.

1:04:52And to let me clarify this once again, I think there are very valid reasons why the company is likely to succeed. The first being that they focus on sectors with, like I said, these huge long-term tailwinds. Think of public transport in European cities. Think of skilled immigrants and all of that. And another is that they focus on mission critical, high margin companies and already have so many of them in their portfolios. When I looked through their portfolio, there were so many companies where I felt like, if this is a company not owned by a holding company, I would generally be interested in owning this one.

1:05:24So I'm everything but bearish on this company. My point was simply that if I would make the decision to invest, and you said the same thing now, it would first and foremost be because of the people involved and only then because of those other reasons and factors that come to play. Well, we're definitely in agreement on that point. How about we get into it then? I mean, how did you approach thinking about the valuation? As you said, it's not really a regular company where you could just dig into their different segments and look at the consolidated results as a reference point for trying to build a discounted cash flow model.

1:05:56Holding companies are messy because they are holdings of a bunch of different companies all in one. Yeah. So, I mean, when you have a company like Chapters, trying to forecast where the company will be in five years makes no sense at all, if you ask me. And I wouldn't even know where it will be in two years or even next year. So I decided to go for some of the parts valuation where we just look at the public, the enterprise and the financial segments, and then apply multiples to the EBITDA results. And calling this a model is definitely way too much. And honestly, if you have companies with a larger track record, you can do the same approach, but you at least have more data points on seeing how they actually go year by year, what's their growth rate, how do margins actually look like five years, 10 years out.

1:06:40That's all stuff that you don't have if you look at chapters groups. So it's more or less just a guessing game. For the public sector segment, I'm using a 15-time EBITDA multiple. It's high-quality vertical software businesses like Constellation or Topicus. They often trade in the high teens or the low 20s. But those are companies where you have that data, where you have decades of execution behind them, global diversification, and just extremely mature operating systems. Chapter's public sector portfolio is probably excellent, but it's way smaller, more concentrated in the DAG region. So again, Germany, Austria, and Switzerland, and still in the early phase of proving that its process is actually scale.

1:07:21So a modest size and liquidity discount get me to a multiple of 15. I feel that's more appropriate than say low 20s. And for the enterprise segment, a multiple of 16 makes sense to me. These are sticky workflow embedded industry software companies, but with slightly less regulatory lock-in than in the public sector. They deserve a strong vertical software multiple, just not quite to the premium end of the spectrum. And maybe you can already listen to this. This is mostly a guessing game. If you think you can go up one, two, or even three points on the multiple, please feel free to do that. It's not really an exact science here.

1:07:58For the financial technology cluster, for example, I'm using the highest multiple. I put an 18 times multiple on it. It is the fastest growing part of the portfolio. And it does just have these strong immigration tailwinds that I think will become more and more important. But it also comes with more regulatory exposure and you have sensitivity to policy changes. You also have sensitivity to interest rate changes. And one thing you never know how to focus in, I mean, if you look at Berkshire Hathaway, a huge thing for them has been float. That's something that potentially could come through this financial arm, but you just don't know that at this stage, if it will actually be important to the company or not.

1:08:32So it's a guessing game. Would you think it's appropriate for a company like Chapters to include some sort of holding company discount in the market. I mean, this is maybe an early hint for next week, but I'll actually be pitching a holding company that does trade at a very significant discount to its net asset value. So it's hard for me to not just mentally compare and contrast why one trades at a premium and one trades at a discount. Totally. I mean, honestly, I haven't asked myself the same question before, but then when I know about your pitch for next week, I'm also asking myself, how do you actually decide which company deserves a holding company discount and which one doesn't.

1:09:13I mean, companies in this segment usually don't trade at such discounts. I mean, look at Constellation, look at Topicus or Danaher. All of them trade without a discount. And actually, if anything, they traded huge or significant premiums. So then again, you could argue that they have more than earned the trust of investors. And if it makes you feel comfortable, you can definitely put a holding company discount on this because you said, well, this is a young company. They haven't yet proven to actually improve businesses over a long time period and actually add value to them instead of just acquiring a lot of businesses and then serving as a parent company.

1:09:47So I think it's fair to do that. I didn't do it because I already chose multiples for the segments that are probably a bit too conservative. So if you combine all the value of the segments and we subtract the net debt, which is about 140 million euros, and you add the value of the security portfolio, which is a small one. there are basically just a couple of bonds and then some shares in there, we get a fair value per share of 25 euros and 60 cents. And that would imply that Chapter's stock is currently trading at a premium of about 40 % to fair value. And it's not a huge surprise to me that we're on the more expensive side here, but it's also too expensive for me to advocate of making it a core position in our portfolio right now.

1:10:29Honestly, I mean, if we're talking about a potential 100 bagger, perhaps the next great compounder. Some very, very talented and well-respected people tied into it. I don't think I'd lose any sleep in making this a tracker position, as we like to say, that we almost buy to just maybe set aside and forget about it. If we did 1 % and it ends up being that we overpaid, it's just not going to materially hurt our portfolio's compounding. But if Chapters does become the type of compounder that we think it could, something like a Transdime or Constellation software or Donahair, that even with a very small allocation, actually, it could drive very significant returns for our portfolio overall over maybe the next decade.

1:11:12And that's just kind of the difference in the asymmetry of you can only lose so much. Whereas, you know, if you have order of magnitude gains on an investment, it can really move the needle a lot. And that's the kind of risk return profile we like to see. And so for me, it's up to how you want to approach it. honestly, Dan, you're not going to get any pushback from me on deciding to wait a bit, or if you want to nibble on it, I'm more than happy to do that with a very small portion of our portfolio. I think a tracker position makes a whole lot of sense. I mean, we did add a lot of companies from our watch list, actually, to our portfolio in the last couple of weeks.

1:11:47So I think we proved that we do not just forget about companies that we have once covered, but not yet added to the portfolio. But then again, still, and I know you agree with me, if you have it in your portfolio, the attention you pay to that company is still significantly more. So I think I think we could agree on making it a 1 % position just to keep track of it, see when earnings releases come up, what happens at the company. If anything in the shareholder structure changes, which would obviously be probably the main risk for this company if one actually starts out at any point. But yeah, this sounds good to me.

1:12:16So let's make it a 1 % position, keep track of it, hope that it will actually become maybe not even a 100-bagger. We are even fine with 50 times, right? We're not quickies. Absolutely not. So yeah, having made a decision on this, how about you give us the hints for next week's episode you already gave us a small one but perhaps you have one or two more so yeah i'll caveat this by saying i'm not sure many will have heard of this company so it could be hard to guess you have to put on your sherlock holmes hat a little bit it's a holding company that like i said earlier and it trades at more than a 50 discount to its net asset value which is just astounding i mean talk about buying intrinsic value if that really does prove to be true.

1:12:59And so anyways, the holding company itself is just really interesting. And I'll mention that it's also based in Europe. But what I like the most about it is that the company's largest asset, which is actually worth more than the entire market value of the holding company, is just one stake in one of our favorite businesses that we've covered previously on this show. But we decided not to add that company to our portfolio because we found it too expensive to invest in. And so really, the question is whether this holding company, because of the discount to its net asset value that it trades at, can give us meaningfully discounted exposure to a stock that we really liked previously.

1:13:39So there's the puzzle to go figure out. I think that's all I'll say for now. The value investor in me already gets excited about this pitch just by hearing about those hints, I must say. All right. With that, I would say I close it for today with a quote by Chris Mayer. He said, I don't like to follow the returns of my funds portfolio too closely. For example, I try not to actually log into the account unless I know I want to do something. I don't want the daily blow by blow on prices. It's bad for the investing psyche. It makes you impatient and lose perspective. Having said that, have a great Sunday and see you on our next episode.

1:14:28Thank you.