Michael Klein: Spac sponsor backs English compounder

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Can US dealmaker Michael Klein become the Warren Buffett of north-west England? On Tuesday, Klein invoked the Oracle of Omaha when describing his $1.6bn deal for Cheshire-based CorpAcq, via his latest blank cheque vehicle buyout.

CorpAcq has a portfolio of about 40 companies in England, which typically have an annual ebitda of $25mn and above. It allows the companies, mostly still founder or family led, to operate largely autonomously and collects cash flow to fund future deals and pay out a modest dividend. The idea, as Buffett perfected, is to own good companies and take advantage of the powerful twin effects of patience and compound growth.

According to figures shared by Klein and CorpAcq, the businesses it has bought generate 15 per cent ebitda margins and convert a majority of that into free cash flow.

But Buffett’s advantages are not easily replicated. They include cheap insurance funding, a sterling reputation with sellers and uniquely tolerant shareholders happy to eschew dividends, buybacks and other forms of instant gratification.

CorpAcq is to be listed in New York, where an equity holding company will be regarded as a novelty. However, the model exists in Europe, where several “compounders” have multibillion-dollar market capitalisations. CorpAcq’s $1.6bn enterprise value is about 10 times ebitda, a discount to its European listed peers.

Klein has also favourably compared CorpAcq to US “business development companies”, a publicly listed type of non-bank lender to portfolios of medium-sized companies. Here the comparison to Buffett falters. Buffett’s Berkshire Hathaway, returns aside, has been as shareholder-friendly as any company in the US. BDCs have a more chequered history, with high fees extracted by private equity sponsors often coupled with the pursuit of unprofitable growth. 

Spac deals have not covered themselves with glory either. In recent years, their sponsors have favoured their own interests over those of ordinary shareholders. In the CorpAcq deal, Klein is asking investors to trust his dealmaking instincts not just now but long into the future.

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