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Can Michael Klein, the American dealmaker, replicate Warren Buffett’s success in north-west England? In his recent takeover of Cheshire-based CorpAcq worth $1.6 billion, Klein drew a parallel to the renowned Oracle of Omaha.
CorpAcq currently owns around 40 companies in England, mostly led by their founders or families, with an annual EBITDA of $25 million or higher. These companies operate with a certain level of autonomy, using their cash flow to fund future deals and distribute a modest dividend. Just like Buffett, the strategy is centered around investing in strong companies and capitalizing on the power of patience and compound growth.
According to Klein and CorpAcq, the acquired businesses generate 15% EBITDA margins and convert a majority of it into free cash flow.
However, replicating Buffett’s advantages isn’t easy. These advantages include access to low-cost insurance funding, an esteemed reputation with sellers, and shareholders who prioritize long-term growth over immediate gratification such as dividends or share buybacks.
While CorpAcq plans to list in New York, where an equity holding company is somewhat of a novelty, a similar model already exists in Europe with several “compounders” enjoying market capitalizations in the billions. CorpAcq’s $1.6 billion enterprise value is at a discount of around 10 times its EBITDA compared to its European counterparts.
Klein has also compared CorpAcq favorably to US “business development companies” (BDCs), which are publicly listed non-bank lenders to medium-sized company portfolios. However, the comparison to Buffett falls short here. Berkshire Hathaway, Buffett’s company, is known for its shareholder-friendly practices, while BDCs have a more mixed history with high fees and a pursuit of unprofitable growth often driven by private equity sponsors.
Unfortunately, SPAC (Special Purpose Acquisition Companies) deals have also been tarnished in recent years, with sponsors prioritizing their own interests over those of ordinary shareholders. In the CorpAcq deal, Klein is asking investors to trust not only in his current dealmaking skills but also his long-term vision.
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