Canadian investment fads come and go – think income trusts, cannabis and junior mining – but one trend never goes out of fashion: the rollup. There have been many successful sector consolidators (Alimentation Couche-Tard ADT-T, Constellation Software CSU-T, Open Text OTEX-T and Stella Jones SJ-T), but also several flameouts (Valeant Pharmaceuticals, Loewen Group and Philip Services).
The latest serial acquirer to rise to prominence is Valsoft Corp. The nine-year-old Montreal company, led by two entrepreneurs in their early 40s, Sam Youssef and Steph Manos, are trying to emulate Constellation’s successful playbook. Valsoft has bought up dozens of small, slow-growing but stable software vendors around the world that dominate a range of modest industry subsectors. Valsoft owns nearly 100 companies, generates upward of US$450-million in revenue and earns about 25 per cent to 30 per cent operating profits, the company says.
On Friday, Valsoft said it had raised US$170-million in debt to fuel further acquisitions in a deal led by U.S. investment giants Viking Global Investors – which bought a minority stake in the company for US$150-million in 2022 – and Coatue Management LLC. The company also has a line of credit of between $150-million and $200-million with a syndicate of Toronto-Dominion Bank, Bank of Montreal and National Bank of Canada.
In fact, Mr. Youssef and Mr. Manos, who graduated from Concordia University with computer-engineering degrees in 2004, are two of the original founding investors of Pornhub, now the world’s largest pornography video site. (They got into the adult business after starting out in the affiliated online marketing business and finding out that porn sold better than travel products and supplements.)
They sold out in 2010, a year after the U.S. Secret Service seized US$6.4-million from accounts controlled by their personal holding company, Mansef, and long before the controversies that have dogged the business in recent years. Pornhub’s owner, which recently changed its name to Aylo from Mindgeek, agreed to deferred prosecution with US. federal prosecutors last month and admitted to profiting from sex trafficking.
Mr. Youssef, a lifelong entrepreneur who cut grass and shovelled driveways in the Montreal area when he was a teen, said in a 2022 interview he had decided to get out of the adult entertainment business in the late 2000s because he started a family and “my moral compass changed. I’m very happy we got out of it, I’m very happy this is not my story and I’ve got a chance at writing another chapter.”
After selling the adult business he immersed himself in the world of investing, claiming to have read 150 books in a year by the likes of Warren Buffett and Peter Lynch, attending investment conferences and the annual meeting of Mr. Buffett’s Berkshire Hathaway. Mr. Youssef put his money to work in the stock market. One of the companies he bought into was Constellation.
He loved Constellation’s model and figured buying small, successful but modest software companies with few or no competitors “was like the stock market but 10 times better because there are 30,000 of them. It’s opaque, inefficient, and you could put together an investment organization that could deploy capital at high rates of return,” he told The Globe in 2022. “The economics are similar to where cable was in the 1980s or newspapers in the 1950s. I figured, this is where I should be focusing my efforts.”
Valsoft bought its first company, which sold software to small hotels, in 2016, three the following year and eight the next. Valsoft now buys about 20 to 25 companies a year with US$5-million to US$10-million in revenues apiece, paying one to two times sales for companies of little interest to venture capital or private equity firms.
The pair have other business interests: Mr. Manos is president of sister company Valstone Corp., which sells software tools to industrial companies in grain, agriculture, forestry, construction and waste management industries. Another sister company, Valnet Inc., is a consolidator of digital content sites that cater to movie buffs, celebrity watchers, gamers, technology gearheads, gardeners, sports and racing enthusiasts. Valnet says its online sites, including Screen Rant and Collider, receive more than 16 million daily visits.
And while the pair are proud of their entrepreneurial accomplishments, their pre-Valsoft life is something the company’s leaders are not comfortable spending much time talking about.
“They exited that business 14 years ago. They’ve had no dealings with it, it’s gone,” Valsoft president Mounir Hilal, a Montreal-area software veteran, said emphatically in an interview. “Nowadays it’s not something we concern ourselves with” as Valsoft, which has a $1-billion-plus valuation, prepares to go public within the next two years.
With files from Vanmala Subramaniam.
Editor’s note: A previous version of this article stated that the Business Development Bank of Canada was a part of a syndicate of lenders that have provided a line of credit to Valsoft. That is not the case. In addition, this article has also been corrected to reflect the appropriate size of the line of credit - between $150-million and $200-million, not $200-million. This story has also been updated to reflect Sam Youssef and Steph Manos's correct positions as founding investors of Pornhub.
Sean Silcoff