In this recent interview with Barron’s, John Neff and Chris Cerrone of the Akre Focus Fund discuss the durable competitive advantage of software businesses and what makes Constellation’s Mark Leonard one of the best capital allocators of our generation. Here’s an excerpt from the interview:
You own several software companies. What is the draw?
Chris Cerrone: A business like a software company has network effects—the more people who use it, the stronger it gets. That makes it much more difficult for [even] a better product to take those customers away. Switching costs are so enormous that it’s unthinkable somebody would rip out and put in something else, or there’s a complete lack of alternatives. Those are the businesses you can hang your hat on without being a technologist.
What is a software company that fits that profile?
Cerrone: Constellation Software. You take all of the attractive aspects of a software business—the essential nature of the product, a great business model, high margins, and a great runway for software to continue impacting new areas of our lives—and marry that to one of the best capital allocators of our generation in founder Mark Leonard, who started off as a venture capital investor.
Mark created Constellation in 1995, acquiring small, vertical-market software businesses, those focusing on just one niche market, like software for a bowling alley or a golf course. He’s a brilliant case study on capital allocation and governance of a large organization. There truly is a feeling of trusteeship, which to me means fiduciary duty to the shareholders. Mark also has skin in the game; he and his interests own just shy of 7% of the company, collectively over $2 billion. As part of the compensation structure, instead of receiving stock options, he gives employees [a cash bonus] but requires them to buy shares.
You can read the entire interview here:
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