Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Johan, can you provide short introduction to your background, before you joined Röko?

I've been working in finance-oriented companies since I graduated from Stockholm School of Economics. First, I did a bit of a stint in management consulting, predominantly focusing on private equity. After a couple of years, I moved into that side and spent four or five years in private equity, working for a few different firms, partly based in Stockholm and partly based in London. However, since July 2019, I've been working with Röko and I guess you could say, given that Fredrik and Tomas were not employees from day one, you could say that I am employee number one at Röko. This has been my longest employment, to date.

How did you meet Fredrik?

The dad of one of my friends asked me if I thought it would be a wise thing to invest in Röko. When Fredrik and Tomas had decided to launch, there was an article in a Swedish business press and some private individuals reached out and wanted to invest; he was one of those. Before he met them, he wanted to pick my brain as to whether I thought it was a good idea.

A couple of days after their meeting, Tomas Billing, who is the other co-founder, actually gave me a call and asked if I wanted to have lunch. I was working in private equity, at the time, and was not looking for another job but both Tomas and Fredrik are very interesting individuals, so I decided to meet. I think it was probably four or five days after that first lunch that I signed the employment agreement. It was a relatively fast process.

How is Tomas involved?

I would say that they work very closely together and have similar roles. Obviously, Tomas is the chairman, on paper, and Fredrik is the CEO. But I would say that both of them have similar roles and capacities, in the company. They spend a lot of their time thinking about investment opportunities that we assess and evaluate. They also spend a bit of time working with the companies that we own. They are on most of the boards of subsidiaries in Röko; not on all but on about 90% to 95%, together with myself or Anders Nordby, a Norwegian based colleague.

Do they both review every deal deck or presentation when it comes in?

I am the first filter. I filter things before they reach Fredrik and Tomas. Initially, we looked at everything and, as we have progressed as a firm, we are becoming more and more stringent about our criteria. It is helpful that we also have a bit of a better deal flow, today. I would say that I only send things to them where I think it's likely that we would want to have a physical meeting with that company. They review information, memoranda or financial information ahead of those meetings with management teams. In total, I look at something around 300 to 400 opportunities per year. Maybe 100 of those get through to Fredrik and Tomas for further review. I would say that we meet, maybe, 30 or 40 companies, per year, in a Teams or physical meeting.

What originally attracted you to work with Fredrik and Tomas?

I was very intrigued by the model. Obviously, since Lifco's IPO in 2014, that was a company that I was able to track a little bit, so that was a big thing. The fact that Fredrik, predominantly, has proven the attractiveness with serial acquisition and decentralized governance. As I got to know both of them, it was clear that both Fredrik and Tomas were actually very experienced in this. They also have a private business, on the side, called Hjertmans, which is a boat equipment retailer. It is a roll up serial acquirer, within boat equipment retailing, in the Nordics.

Selling actual boats?

No; only equipment. For example, life jackets and ropes, both physical and online retail. They were doing that together, before launching Röko, trying to work together, which was very helpful. It was clear to me that there was an attraction in the business model, an attraction in the way to acquire and govern companies, in a fully decentralized manner which, to be honest, is a little bit different from what I did when I was in private equity. I think it was intriguing to me then, and I still think it's a very attractive model for some companies to join into.

How was the governance different, relative to private equity?

The biggest difference is that we really strive for decentralization and simplicity in everything that we do. Obviously, this is something where it is difficult to always excel, especially when it comes to things such as reporting, for instance. But we always try to focus on key and core things and do things as simply and as fast as possible, to ensure that the small and medium-sized companies that we have acquired and invested in remain or retain their competitive advantage, which is normally nimbleness and swiftness in operations and decision making. That is a little bit of a different thing. Private equity is an active ownership type of governance, as well. We can be even faster because of our low requirements for internal governance at Röko. There are not a lot of committees that we need to go to, for decision making.

Do they just send you monthly numbers, simple balance sheet, income statement?

Exactly. We get a monthly report, full income statement balance sheet. Obviously, from that, we can back out cash flow. Depending on who is technically responsible for that company and, also, for what that company wants, we have more or less frequent discussions, either during the month or around the monthly reporting. Sometimes there are also companies in our group who don't feel that they are in need of frequent and scheduled interactions with the owner and we can, basically, let them run. Then it is fully decentralized, I would say.

What about HR? Do you make them use one Salesforce or HR system?

No; we don't engage in any of those things. The only thing that we ensure that they do in a similar way is that we require all of them to use an auditor that is approved by us and, technically, by our group auditor. We require them to do monthly reporting according to a template that we have. We require the companies to be enrolled into our cash pooling system so that we can handle liquidity in a more efficient way.

The cash they earn funnels to your bank?

Yes; it's almost as if we are a little bit like an internal bank. Every once in a while, there is a company that requires a bit of a revolver, for net working capital purposes. Maybe they need to place a large order for inventory, for instance. Most of the time, all of the companies are in a different bucket, so they have excess cash that they need to deploy somewhere, instead of having it sitting in their local bank account, with low interest. We facilitate the smooth and efficient transition between those companies, so the one that is in need of liquidity can access it, and the one who is over liquid can get something for it.

Let's say I am one of your portfolio companies. Obviously, I generate cash and that cash is somewhat funneled into your cash pool, but I need some excess capital, maybe for inventory or I want to build another site. How do you explore the return on that capital and allow the opco to spend the capital?

That's a good question. It depends a little bit on the scale, I would say. If it is significant capex investment, then we need to approve all of those, centrally. We look at them to ensure that the capital that is then deployed into those capex initiatives provide a good pay off or a good return. It is not so that we have a clear hurdle that everything needs to pass. I think here, it is important to remember that we own companies that are in very different industries, very different sectors and also in different markets. If we were to have one hurdle rate for all internal capex then I think, potentially, we would make it too difficult for certain companies to invest in their business. We look at it from a central level and we need to approve those plans. But otherwise, I would say, when it comes to managing cash in the companies and net working capital investments, in all our cases, the local management owns shares in their companies. The way for them to be able to take out dividends is to ensure that the local company generates profit, but also generates free cash flow. Otherwise, there is nothing to pay dividends with. We think that the alignment of incentives and interest between us and local management, ensures that we want – not always exactly the same thing – similar things.

I want to walk through a typical transaction in a moment, but can you just describe how you compare Röko's serial acquirer model is different, versus Lifco or Lagercrantz?

I should start by saying I only have explicit knowledge of our model; I haven't worked with any of the others. I think we are different in maybe a few ways, as I can see it reactively. We are a very small and nimble team. Currently, we are also, obviously, a private company which is different to those ones that you are comparing us to. That gives us some benefits in certain ways and some drawbacks in others. But we are a very small team. Everyone who is a decision maker is always involved from day one; for instance, when we meet a company. This means that we can be quite fast and efficient in our transaction processes, but we can also be quite fast and efficient when it comes to other decision-making processes internally.

Just to provide you with a little bit of context, in our head office here in Stockholm, we sit in a co-working space. We have a room that is 20 square meters or something like that, and that's where everyone sits. We are five people here at the head office, and then we have our satellite offices. Anders Nordby is based in Oslo, covering predominantly Oslo and the UK. Then we have Fabian Speiser, working from Switzerland, covering DACH and Continental Europe from a sourcing perspective. Small and nimble. We're basically about short decision-making routes. We are fully sector agnostic, which is a little bit different from others. Maybe then to paraphrase a little bit, given the use of agnostic, we are almost religious, you could say, in our view on financial characteristics and criteria of the businesses. We assess and subsequently, hopefully acquire, provided that they meet those criteria. The thing about sector agnosticity means that we can always have a relatively wide net and see quite a lot of opportunities, and then we can make a decision where we can invest our resources – both our time and our money – when it comes to trying to acquire what we think are attractive companies.

Just on that point though, because I think it's interesting, I've seen the presentation and what you say around clearly casting the net wider gives you more runway and more opportunity to allocate the capital, but you also have to know what you're buying. You own a beauty retailer; you own various different businesses. How do you think about understanding these end markets or businesses?

It's not the balance that we walk or try to manage every day, because we have taken the decision to be sector agnostic, but the balance between those models is exactly that. I think the way we look at it, we are very firm on our financial criteria. We only buy companies that have grown profits continuously, historically, and we look at that from a reported historical financials perspective, at least five years, but preferably longer.

Normally, we look at the company's EBIT; over the last five years, has it been growing? If it has been growing, has it been growing with a relatively steady pace, so no hockey stick, not a lot of volatility. You can have a very nice cadre over a five-year period of time, but it could embed volatility year over year. We don't like that; we like things that have almost a straight line when it comes to profit growth, historically. Then we like companies that have high operating profit margins, which we define as being above 10%. But if you read our report, you will see that, on a group level, we are closer to 20%. We're not really at 20%, but 18% EBITDA margin. We think it’s important that you can prove deliverability of those two for a long – or relatively long – period of time historically.

Five years is long, in your mind?

No, but it is at least an indication. I think 10 years is okay, but five years is at least an indication that we can work with. If you look at it over a longer period of time, then my sense is that, normally, something has happened every once in a while. A company may have made an investment in a product line that they didn't work out seven years ago, and you can see that in the numbers, but that's normally something you can live with. Or you can have a period when Covid happens, for instance, which could have a very positive effect on some companies and a very negative on others. But at least the five year gives you an indication. We see that you have been able to grow your profits at a good and steady pace, and if you have had a high operating profit margin over times as well – not just one year – it's at least an indication that this company is doing something right. They probably have an offering to customers which adds value, which customers are willing to pay for.

Depending on certain other characteristics, you can get the sense for whether they are capable of pushing on price increases to their customers when they see raw material prices increasing for instance. If we see those things, then we say okay, the next step is for us to sit down with the management team. If you have seen good development over the last five years, we would like it if the management team who is there today, is the same management team that delivered that, so that we can get a better understanding of what's really behind the numbers. Then to do that assessment, at least Fredrik, Tomas and myself, but normally also Anders, we attend those management presentations; we meet all the management teams in the companies that we invest in.

Why do you only acquire roughly 70%?

It's not by design, to be honest. We acquire majority stakes. We could acquire 100% of a company, but what we have seen up until today is we have focused a lot on buying founder family owner managed businesses, and quite often, the sellers who are then also the entrepreneurs, want to retain a stake as part of the transaction. In certain instances, it's because the only reason for them to do the transaction is that they want to take some money off the table, not selling the company, and then it's natural that they obviously retain a stake. In certain instances, they are starting to think about succession planning, then they want to make sure that they still have an engagement in the business. It has just happened that we have been fortunate to be able to buy 22 companies since we started, and all those 22 have been those kind of situations. We normally have a discussion with them in terms of how much they want to retain, how much we would want to buy. I would say that we have crept up a little bit over time. If you were to look at this from the start, we normally bought between 60% and 70% in the first one or two years, whereas now it's more common that we buy between 70% and 80%.

Why is that?

I think part of it is because we have acquired slightly larger companies, where we think that there is a bit more structural capital in the company. Part of it is also that we are not so sure that there is a big difference in the engagement if you own 35% as a management, or if you own 25% or maybe 15%. It depends a lot on the individual, and for us, it then actually makes life a little bit easier if we own a little bit more from day one.

Other serial acquirers, such Constellation Software and some of the other businesses that acquire 100% of the company, they have that problem of succession, and the problem of the founder checking out, cashing out and retiring. How have you seen succession planning when you buy 70% or 80%, given the founder has a stake relative to if you acquired the whole business?

Yes; we have that discussion with the founder immediately, as part of the due diligence and transaction process, to try to figure out what his or her time plan is that they have in their mind and it varies a lot between the different companies. We have companies in our group where the founders and entrepreneurs are just over 30, and we have companies in our group where the founder and entrepreneur was above 70 at the point of the transaction. Obviously, the discussion on succession is very different in those situations, but what we believe is simplicity is really key for us. Speed is really key; transparency is really key. We try to leap frog that situation by just discussing it up front with the management team or with the entrepreneur.

Sometimes they say, I am envisaging myself as leaving the CEO role in a couple of years or maybe in one year. Sometimes they just say, I don't know what I would do if I wasn't the CEO, so I would just like to continue. Depending on that discussion, we make a plan. We have done full, what I would call successions, in three companies since we acquired them, meaning that there was an entrepreneur who was the CEO when we acquired, and there is now a new CEO in place, and that has happened in three occasions.

How do you typically source the 300, 400 deals that you mentioned per year?

We focus a lot on sourcing through M&A advisors or corporate brokers around Europe. We build and nurture relationships with brokers in all markets where we are or could think of ourselves as being active, which is basically around Europe and in all countries. We obviously look for more bilateral situations as well, but it has not been a clear focus for us as of today, because we think that the absolute lion's share of the volume of opportunities come through brokers, and hence we have invested more in developing those relationships.

Maybe as we proceed, going forward, we become a little bit more well-known, potentially you could see a few more bilaterals for us, but we think that the majority of deals will always come through the broker network for us, so that's where we spend a lot of time. In practice, what we do is travel around quite a bit and we have a lot of Teams meetings, and we try to behave as we say that we will behave, when we do a transaction. In that way, when we buy something, we get a good reference, both from the entrepreneur that we partner with, but also from the advisors who are engaged in the transaction.

What percentage of deals are, typically, auction based versus exclusive?

I would say that 0% are full auctions, if I would compare them to what it was when I worked in private equity, where you have multiple bidders working side by side throughout the entire process. But a very high percentage are auctions in the start, and they are then auctions where the seller invites several potential buyers or bidders, who look at an IM for instance, maybe have a meeting with the management team, and the broker thereafter submits an indication of valuation or an indicative offer. Most commonly for us is that, after that, there is a phase where we are in a bilateral situation so we know that the seller is only speaking to us. That's normally what it's like. In certain occasions, we have had bilateral discussions from day one but they have, more often than not, included a broker even then, but it has been broker-led exclusivity if you will.

How do you think you can get an edge if they are run through brokers or, effectively, mini auctions?

I think we get an edge because we work a lot with deal flow, getting it and then managing it, so that we can always look at a lot of opportunities at the same time and decide to go for the ones that we think are the most attractive. That's one where I think our efficiency and stringent criteria can be relatively high, and we can make sure that we invest where we think that the attractions are currently the highest. Second, I think that even if it's an auction, my experience at least, is that it is very rare in our size bracket that you just win on price. You win on price or valuation, certainly to some extent – you need to be in the ball park – but a very important factor is personal fit and seller and buyer being able to meet each other on things that are not just valuation-driven. I think our edge can be that we have an offering that is a little bit different from others, and being a little bit different, a lot of it comes down to personality to be honest; personality and maybe governance structure.

How is that different? Take Lifco for example; Fredrik obviously built Lifco. How is it different to if Lifco or Lagercrantz or any of these businesses that have somewhat of a similar governance structure, somewhat of a similar philosophy? How would it be different if you are trying to buy a business that others are bidding on?

It's a very good question, but one is that the market for small and medium-sized companies across Europe is not so transparent. We are always up against companies that are objectively a little bit different – not that different – from us. If we look at what we understand is our competition in a transaction, it's normally us and maybe two or three local private equity firms and then, potentially, a more strategic or industrial acquirer, and then we differ a little bit on our model, the normal type of transaction. Every once in a while, of course, we are up against other Sweden-based serial acquirers, with small head offices and decentralized governance. As I said, I think in those situations it comes down to personality, because even if you would think that we are a little bit similar to a Lifco or a Lagercrantz, we are not the same individuals. It doesn't mean that we would win in all of those situations of course, but every once in a while, we do.

What percentage of acquisitions do you typically feel like you're coming up against another serial acquirer?

It depends a little bit in what market, I would say. In Sweden, maybe not it all of them but at least in most of them; it’s very high. It's also a relatively high percentage in Denmark, Norway and Finland. But if we go to the UK for instance, I would say that in most of our transactions, we are probably still the only serial acquirer, at least the only serial acquirer from the Nordics. That's also one aspect, where we are from, the culture that they feel that we bring and those kind of things, but of course, Lifco does acquisitions in the UK and there are others that do that as well. We certainly have competition, but for us, it's not so bad to have a bit of competition, because then we also know that when the sellers have decided to sell to us, they have made a considered decision where they have been able to assess and evaluate different buyers.

Let's walk through an acquisition example. Let's say I have a company doing €10 million revenue, for example. You have an M&A advisor puts the deck across your desk, you like it, you book a visit, you and the team go and visit the management team, the numbers obviously check out in terms of EBITA growth and high margins. What are you looking for when you meet that management team? What are you really analyzing there?

I think part of it is the situation. As we have spoken about, our model has really been to buy in partnership with management and entrepreneurs. I think we would really want to understand who in the management team – or who of the entrepreneurs if there are several – is a seller in this transaction and who is important to the business and has been important. Depending a little bit on the understanding of that, we try to make an assessment of if we think that the management team that remains are the right individuals to take this forward with us. That's an assessment that is based on the discussion that we have. It's not a form that we fill out or anything, but it comes down very much to our sense and our feel for these individuals. Apart from that, what we tend to do in those meetings and in those interactions is, obviously, to understand all of the things that you don't normally get a full picture of when you read an information memorandum. Those come down to the business logic, where it is positioned in its respective market, any relevant understanding that we can have of customer dynamics, supplier dynamics, those kinds of things.

How do you think about organic growth?

We buy companies very much based on their performance until today, and on their current state. Obviously, we like them to grow a bit from there, but we don't have a clear view that you should grow top line with X% and EBITDA with Y% or things like that.

Let's say I have a 10 million revenue business, how do you model out the returns?

Normally, we look at our baseline as a return on capital employed on the date of the acquisition – or in relatively short time after the acquisition – of 12.5%. That is our baseline hurdle.

That's year one EBITA over the capital you employed?

Exactly, and then in certain instances, we can live with that being a little bit lower for some reason, and in certain instances, we like it to be a little bit higher, depending on what we feel are the inherent risks of that business and how well we think it will grow going forward, depending on the historical data. It's not that we have – as I understand that some other serial acquirers have – a very clear three-year plan and a three-year model and after that period of time it should deliver a certain IRR or a certain return on invested capital; it's not really like that. We have a baseline which is this 12.5%, and then no matter which company it is in our group, we look at them based on a set of financial KPIs and financial criteria. We want them to grow profits year over year. We want them to increase margins year over year, and we want them to increase free cash flow year over year. No matter where they are, we want them to improve a little bit year over year. It doesn't matter if it is a company that has technically already grown a lot since we bought it, so that they are now well above that return on capital employed hurdle, we still assess and evaluate that business based on its performance the prior year.

Again, take an example of 10 million; let's say it has 15% EBITA margins post-acquisition?

Then unfortunately, it is a little bit too small for us to be honest, because we buy €2 million and above, but I am going to live with your example.

We can do 100 million and make it 15 to make the math easier; how do you think about using equity to structure the transaction?

We use a bit of bank debt, but we are quite conservative. On a group level, we have an interest-bearing net debt of approximately 1.4 times EBITDA. We would do something around that, maybe a little bit higher on day one, but not more than 2X, I would say.

I think we can talk about multiples in a second, but let's just make it easier. I think it's 9X to 10X you have been paying for stuff recently, but let's say it's just 10X to make it easier.

I think I will make a few clarifications to start with. Our average multiple has actually been below 8 since we started, on an EBITA level, and in 2022 it was 8.0.

Are you including everything in that, EBITA and the put option?

Exactly, everything is included, except that we take out acquired cash, or cash in the acquired companies, but that should then mirror the enterprise value that we pay. In our reporting, we report acquired EBIT, which is after amortization of goodwill, so technically it's not the right metric, but we are working with improving our reporting for comparability. Just to give you the actual numbers, we paid 8 times, on average, in 2022, but if we used the same analogy then, let's say we have bought a business with €100 million revenue, €15 million EBIT, and we pay 8 times, then we pay €120 million for it. And if you assume that EBITDA and EBITA is roughly the same at the point of acquisition – which is normally at least quite close to reality for us; we buy relatively asset light businesses – then we would maybe take, call it €30 million, so 25% of the €120 million as bank debt, or up to 30, or maybe a little bit below, and then we would own, call it 75% of the business. We would have a minority stake of, if my math is correct, and it depends a little bit on the structure of that €22.5 million, so that would also be a minority, or a put call debt.

This is if we acquire 100%, then we let management reinvest in a new structure. We do both alternatives to be honest.

If you acquire 100%, they invest in this newco and they basically buy shares?

Yes, exactly.

How does the put call option work, typically, if you only acquire 70%?

The put call option works in the following way. At day one after the acquisition, it is valued equal to what the management team invested for that put call, or retained as a share in the transaction. Going forward, the put call for each respective company, we have a model where we apply a multiple to the average earnings that that company has had – normally the three-year average for each company – and we apply a multiple to that, and then multiply that with whatever minority share that is retained by the entrepreneur or management team. To put things simply, if the companies we have invested in perform better and grow their profits, the put call option will increase in value, or our liability will increase going forward. If they perform worse, it will go down. So far, we revalue the put call once per year in our financial year end. In 2021, the put call option increased due to performance of the underlying companies, meaning that the underlying companies performed better financially, and in 2022 it was the same. The put call liability increased in 2022, as well.

What is the life of the option, typically?

It's never less than five years; normally somewhere between five and 10. It is tied to an individual shareholder, so it could be the case that, in one company, we have several put call options with several different dates, but it is always one date in advance for each individual, and normally between five and 10 years.

For example, if it's 10 years and I have sold 70% of my business to you, I have a 10-year option that I can put the business to you. Let's say after five years I don't want to work anymore and I want to put the business to you, how do you guys think about financing this option? Let's say, for example, all the companies put it to you at the same time, how do you think about that?

First, they can't put it to us at any point time, up until 10 years. They can only put it at the date which is stated in the agreement, which means that we know relatively well when we will have cash outflows to exercise these options. I don't have year-end report in front of me unfortunately, but if I'm not mistaken, we have approximately SEK 2.1 billion maybe.

It's SEK 2.16 billion.

Yes, SEK 2.1 billion in the put call now. I think approximately 560m of those are within the next three years. So that cash flow we know. The second thing on your question is, we treat the put call debt as financial debt in our reporting, in our leverage or debt ratios for instance, and our banks accept it like that. That means when we have the cash outflow to settle or exercise the option, we can basically just replace it with bank debt, because it has no impact on any ratio or debt like instrument in our reporting. That's really the idea.

Really, you have to manage that liquidity in understanding how many of these puts are coming up potentially per year and how much cash flow you need to finance that, as well as finance growth in acquisition outside of that?

Yes, but as I said, firstly, we have, obviously, a very good cash flow or liquidity forecast when it comes to those put calls having to be paid and settled. Secondly, our banks and credit providers treat the put call as financial debt, meaning at the time when we need to pay them, we can replace them with bank debt basically.

You can re-lever, yes. Why use put call options rather than traditional earn outs?

Earn outs tend to be shorter in nature. You could technically have an earn out which lasts five or 10 years. We have decided to use the put call option for two reasons, I would say. First and foremost, a put and call gives two opportunities; it's both a put and a call, so both parties can actually use to exercise it, or to not exercise it of course. Whereas an earn out is what it is. You can technically renegotiate it, of course, but normally it is what it is. Secondly, is what I said on timing. An earn out is more common to be one year or a couple of years, whereas our option agreements that we have with our portfolio companies or with their management teams of our portfolio companies, are longer term than that. I think those are the main reasons. We like the long-term alignment so we have actually not done a lot of earn outs, to be honest.

Or you could just let them keep the equity?

Yes, but then we wouldn't know what it would cost us to get to 100% in each business, but while having the put call option, we actually have an agreement and we can keep track of the outflow required to get to 100% in each subsidiary, and therefore, treat it as debt.

I guess it's the same as debt, it's the same as having bank debt, like you said. You mentioned how you target like return on invested capital or capital employed, 12.5%; it seems fairly low, at least much lower than other players, why is that?

I wouldn't say that we target 12.5%. 12.5% is really the hurdle. We have looked at serial acquirers in all our target markets, and it tends to be that, over time, the average multiple on EBITDA that serial acquirers pay, if they buy businesses of a certain size and with certain attractions, seems to be somewhere around 8 times. If you just take the implied return on capital employed, if you pay 8 times for a business, the implied return on capital employed immediately – if nothing happens to that business – is 12.5. Therefore, that is the hurdle that we come from, and we are a relatively new firm, as you are aware. We have been buying businesses for about three and a half years. The average company in our group has been a group company for less than two years. For us to have a very clear return on capital employed target, when we buy businesses that we think have done well historically and just want to let them continue to run their business without interference from us, in a fully decentralized model, it is a little challenging to have a return requirement that differs a lot from the average multiple you pay.

How do you think about return on equity and using leverage to boost that?

For return on equity, we should certainly be higher, and if you read our report you will see that it is technically lower now in the end of the last year. Return on equity is a little bit of a challenging metric in our business because the earnings component is not annualized. The second issue is that it is exposed to a lot of revaluations due to IFRS accounting, which has very little to do with the underlying performance of the business. For instance, this year in Q4, we had a hit to the profits of SEK 36 million due to the change in the future tax rate in the UK, which impacts our deferred tax liability. It has absolutely no cash flow impact as of now, but it impacted the return on equity quite a lot.

But if you use EBITA and net tax and interest out, you can get some rolling net profit and put that over equity, and you should be getting north of 15%, up to 20%, I would imagine, with the leverage?

I think normally, yes. If you would strip out the one-off things, it's not something we do in the reporting, but yes, you would probably get to those numbers.

It's interesting, so really because you're buying good businesses, you're paying decent multiples, and obviously the owners are staying on, so that reduces the risk. It doesn't make sense to be trying to get 25% hurdle rate off the bat in that scenario, unlike buying a $2 million that's legacy software or slow growing and the founder is leaving?

Yes, I think that's well-put. We don't step change companies when we have acquired them; we believe in a continuous evolution, similar to what they have done before. Then when we are a relatively new serial acquirer, the return rates are tricky to compare to others, I would just say that.

How have you deployed so much capital already though? I think you've done 2.4 billion last year, a similar amount to Lifco last year.

Since day one, we have worked a lot with building this network of corporate brokers, and we have ensured focus on being able to assess a lot of opportunities at any point in time. We have had an extra tank, you could say, given that we have had committed capital from our shareholders, so we have had money to invest; it's not that we have needed to be self-funded from day one. We have had that cash available, so we have actually been able to go after a large set of potential opportunities, and relatively large companies as well, from the start. But I think what has really been the case is we have invested a lot of time in building deal flow, building relationships to brokers, staying true to our word in the transaction processes, therefore being able to already see actually a bit of repeat business. We have bought more than one business for instance from the same corporate broker, which means that the actual individual who sold a business to us maybe two years ago, or helped sell a business two years ago, comes back with a new opportunity, can speak well about how we behave. I think that has been really key, and we have been very focused on ensuring that.

Don't the other players do that? Don't Lifco and Lagercrantz use brokers as well as you or as much?

I think they do, but I think Lifco invested approximately the same amount as we did last year. I think they bought slightly more companies, a few that are a little bit smaller maybe, but I would say that they do the same thing. Maybe where we differ a little bit was that we have really had a clear view of the importance of that from day one. We have also been very international from day one. The first year, we only bought companies in Sweden and Norway. The year after that, we bought companies in the UK and Denmark as well, and since then, we have just continued to add geographies. I think the benefit of that is we have been able to look at a lot of opportunities at any point in time and assess which ones we think are the most attractive, where it is possible to acquire them for what we think is an attractive valuation.

Why are you buying bigger companies?

It's a little bit by accident, I would say. Obviously, there is a benefit to buying a bigger company and normally there is a bit more structural capital in a larger company. It is easier if you are in a situation where you need to replace management, for instance, and there may be a bit more overall structure around it. But what happened I think during last year, was when you have increased volatility, predominantly in the credit markets, private equity buyers may struggle a little bit more, because their returns may be a little be more exposed or prone to attractive credit terms than what ours are, because we are more conservative with the use of leverage.

We saw an increased inflow of larger opportunities, which in our space is then companies that make, call it around €10 million of EBIT, and we certainly get those opportunities every once in a while, and did so even the years before. Normally, we either got an indication, even before sending indicative offers, that it would be probably a bit too competitive for us, or we understood that after having sent in the indicative offer. Whereas last year, we got through on more of those opportunities than before.

Before PE was squeezed in on their capital structure?

I think so. It's just my way of thinking around it.

Do you have a limit on the multiple you would pay then, given that you want that 12.5% return?

I told you about our average being around 8 times. It's not that we always bid 8 times and we are happy. We go a bit above and a bit below sometimes. But I would say that we bid what we think is attractive for any opportunity. The likelihood that you would see us buying a business and paying above 15 times EBITDA, I don't think it's going to happen. Every once in a while, we pay a bit more than 8, and every once in a while, we pay a bit less than 8.

How many deals do you think you could do a year, maximum, today?

I think we are certainly capable of continuing to do the same level as we have done up until today, and even a bit more. Just for reference, up until today, I think the most we did was in 2021 when we bought nine companies. Two of them were add-ons, but call it seven platforms, and last year we bought six companies. I think that's a level that we can continue to work with without any issue or running into problems with just managing the processes.

There always seems to be so many more companies that come in the pipeline. Every serial acquirer I speak to – I've done work on various different businesses, in software and Nordics, UK, US – they just say the pipeline gets bigger every single year. Is there any end to this?

I don't know, as long as it is that way, I don't see an issue. It is just great, because then we can be even more strict and stringent. We can make more and more comparisons between various investments at any point in time. As long as the pipeline grows, I don't have an issue. What keeps me awake at night is when I think the pipeline is too weak. That's an issue.

What could make it too weak?

Market volatility is certainly one thing. During the second half of last year, I feel that we got, maybe not fewer deals, but fewer deals that we thought were relevant to spend time on. So market volatility is one thing. I think every once in a while you see that competition increases quite a lot in the market where you are active, and then even if the pipeline is good, the likelihood of it converting to an actual acquisition is relatively low. I think that blend is important. Otherwise, I think we are carefully opportunistic, maybe not thinking that 2023 is going to be a wonderful year financially, but carefully optimistic and optimistic for the longer term.

What did you learn from working with Fredrik over the last few years?

I have obviously learned a lot from working with Fredrik, also working with Tomas. I think the importance of consistency is really something that is a key learning, I would say. I come from a background where maybe you were a little bit more flexible in what you did and exposure to different things. Obviously, you can look at what we do from the outset and you see you are sector agnostic, you own a beauty retailer, as you mentioned, and you own a single use medical device business, and everything in between. You can say that is not very focused, but I think we are very consistent and focused in what we look for, and we look for good companies. Sometimes a good company is the beauty retailer and sometimes a good company is the single use medical device, and we want to make sure that we find those, no matter which industry or country they are in.

Is there anything around deal making or getting transactions done that you have learned with Fredrik and Tomas relative to private equity?

I think the consistency goes across actually, because it is also very important staying true to what you have said, staying true to your word. Maybe not renegotiating everything that is not of massive importance, just to make a buck. But I would fit most things into this, call it value of consistency maybe. For us, it is very important that people feel that they can trust us; if we say something, that we can actually stand by it and adhere to it.