Paul Yancich and Daniel Eisen are the co-founders of Arcadea Group, a Toronto-based investment firm that aims to buy control stakes in “ultra high quality, lower mid-market software businesses,” with between US$4-milliion and US$20-million in annualized revenue and growing by 10 per cent to 70 per cent a year, Mr. Eisen said in an interview.
Both worked as dealmakers at Constellation and reported directly to president Mark Leonard. Mr. Yancich left in late 2019 after 3½ years, while Mr. Eisen was at Constellation for seven years until December, 2020. They also worked at separate times for Toronto private equity firm TorQuest Partners.
“It’s hard to overcompliment [Constellation] and Mark in particular in terms of having a framework for investing rationally,” said Mr. Yancich, 36. “We were lucky to have a lot of exposure there [to] really great investors and operators.”
Mr. Eisen, 40, added Constellation “was fantastic for us. ... For Paul and I, thinking about what we wanted to do for the next 30 years of our career, it was really only possible to have that blank slate doing it on our own, which is basically why Mark started Constellation” in 1995 after leaving venture capital.
But aside from investing in small software companies, the pair stressed they are not trying to build a replica of Constellation, Canada’s second-most valuable software company behind Shopify Inc. Constellation has built its business by buying and holding hundreds of “mission-critical” software providers to a vast range of industry verticals from spas to public-housing providers to pharmaceutical manufacturers.
Constellation’s companies typically aren’t big or growing fast, if at all, but they are leaders in their markets with unthreatening competition. Constellation is renowned for applying strict financial discipline as buyers and operators to consistently expand cash flows, profits and returns.
“I think the most important similarities to Constellation are, [Arcadea is] focused on software, and these are not enormous businesses,” Mr. Yancich said. “From there, there are more differences than similarities,” including having “more flexibility” in their approach to dealmaking and generating returns.
Mr. Eisen added, “The continuation of Constellation is not the pitch we made to anyone,” nor do investors expect that.
For example, Arcadea’s strategy is to invest in companies for 10 plus years but not necessarily forever. Arcadea plans to buy about 15 companies with the capital it’s raised, aiming for founder-led businesses that haven’t taken venture capital.
The partners raised capital not in a fund structure with a set term, but as “evergreen capital” that investors are meant to keep parked with them for much longer, and which will be reinvested when Arcadea sells its investments.
Their handful of wealthy U.S. investors include Washington billionaire Mitch Rales, co-founder of Danaher Corp.; San Francisco Bay-area private capital investors Ed McGuire and Ian McDermott; and Sator Grove Holdings, led by former managers of the University of Notre Dame’s endowment fund.
With long-dated capital at hand, Arcadea’s founders are pitching themselves to companies as an alternative to “growth capital” funds that typically invest in fast-growing tech companies generating millions of dollars in sales with an eye toward exiting their positions within a finite period at significantly higher valuations, at a much faster pace than Arcadea intends.
They are also making the case that companies “don’t need nearly as much capital as venture capitalists would have you believe, and we know that” having talked to companies that took big investments then confessed they didn’t need so much money, Mr. Yancich said.
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