"My hero's Warren Buffett. I wanted to build a holdco and intend to do it for a very long time... I have a long-term value mentality, and I intend to a, hold the shares; and b, keep control of the group forever." - Brett Kelly, Kelly Partners Group CEO, H1 21 earnings call
If you’ve ever listened to Brett talk, it’s clear he’s rigorously studied Buffett. A focus on intrinsic value, owner earnings, and an aversion to issuing shares are all principles Brett is applying to his own attempt at creating long-term value: Kelly Partners Group (KPG).
KPG is a listed holding company that owns a controlling stake in accounting firms across Australia. KPG acquires practices that provide accounting and taxation services to small and medium-sized enterprises. Over the last 20 years, there has been many failed attempts to roll up accountancy services, especially in Australia. Stockford Ltd was a major Australian bankruptcy in the early 2000’s which, on the surface, followed the same strategy as KPG. However, there are important differences. We interviewed a Former Director at Stockford to understand exactly how and why KPG is different to previous accountancy roll ups.
Our executive explains how roll ups are all about incentives:
I think that goes to the heart of the questions I always have around why do you roll up and why professional services? Rolling up is all about incentives. Are the incentives aligned? What are the benefits to the practices, to roll up? If it is purely succession planning and allowing people who have built a professional services practice to cash out and to keep running their business for a while, then I think it’s fraught.
Aligning incentives between the buyer and seller is crucial to any durable roll up strategy. Kelly’s M&A transaction structure is different to other successful roll ups such as Constellation Software or TransDigm. KPG buys 51% of the equity of the practice and the partners keep 49%. This structure incentivises partners to grow organically and improve the free cash flow of their practice. KPG also doesn’t keep any working capital debt at the holdco level. Acquisition and working capital debt sit at the opco level, secured against the operating assets with personal guarantees from the partners. This is a huge incentive for partners to keep the opco lean and profitable.
Kelly’s structure provides owners with a liquidity event whilst maintaining enough skin in the game for owners to benefit from growth in their practice. This aligns incentives on the upside, as partners benefit from future opco FCF growth, and on the downside as partners have 49% of the opco equity with personal guarantees on working capital debt. Stockford, on the other hand, had misaligned incentives on both sides:
Stockford and Kelly are quite different; Kelly is probably much better aligned. Stockford bought 100% of the businesses, with some buy back entitlements for some of the people, for equity in Stockford. They were paying a little bit of cash out, but it was mostly in stock and they acquired 100% of the organization. The incentives were great while Stockford’s share price was going up. As soon as it turned around, the incentives were appalling, because everyone wanted to own their own business again.
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