A Power Corporation of Canada POW-T unit has co-led a US$150-million equity investment into Valsoft Corp., a rapidly growing Montreal-based software rollup play that is aiming to emulate the success of acquisition machine Constellation Software Inc.
Portage Capital Solutions, a growth equity arm within Power’s Sagard alternative asset-management business, is co-leading the deal with past backer Viking Global Investors, a U.S. fund-management giant, and Toronto-based Propelr Growth. All of the money is going to Valsoft, unlike many recent large tech financings that have largely been used to buy out investors and employees. The deal values Valsoft at more than US$2-billion.
Valsoft is one of several companies, including Toronto-managed Banyan Software, that have sought to emulate Constellation’s strategy by buying up small, modestly growing software companies that focus on specific customer niches such as hotels, and face little to no competition or customer churn.
Valsoft has amassed 107 companies, which collectively employ more than 3,500 people, generate more than US$550-million in revenue and US$125-million-plus in operating earnings. Like Constellation, it has split itself into multiple divisions that each pursue their own acquisitions.
The company, which has 60 mergers and acquisitions dealmakers, typically buys small companies with less than US$10-million in revenue. It aims to pay one to two times revenues, although competition for deals has been heating up as flush private-equity firms look to deploy capital. Valsoft then works to expand its acquired companies’ revenues and profits by adding heft to their sales efforts. Like Toronto-based Constellation, Valsoft’s goal is to buy and hold, although it has divested two companies to date.
Valsoft sold a minority stake to Viking in 2022 for US$150-million and this year raised US$170-million in debt from Viking and Coatue Management LLC to fund deals. It also has a nine-figure line of credit with Toronto-Dominion Bank, Bank of Montreal and National Bank of Canada.
The company is “one of the top IPO candidates in the country” given its mix of size, revenue growth and profitability and the fact that it has “an established model that public market investors in Canada and globally have become extremely comfortable with,” said Propelr managing partner Sanjiv Samant.
Valsoft chief executive Sam Youssef said in an interview that he hopes to “eventually” take Valsoft public, but not until revenue reaches US$1-billion.
In the past two years, Valsoft has built up a payments-processing unit called Valpay used by 10 to 15 of its companies that now generates US$20-million-plus in annualized operating earnings, Mr. Youssef said. He credited Viking with the idea of building a financial-services offering for its companies. Valsoft is also building artificial-intelligence applications its companies can use to better serve customers and expand revenue. Both initiatives are of particular interest to Portage, which typically backs financial-technology companies.
“For nearly a decade, Valsoft has proven itself to be a best-in-class acquirer and operator of software companies globally,” Dan Ballen, co-head of Portage Capital Solutions, said in a statement. “We are excited to help Valsoft pursue growth opportunities in its core software market and, as fintech-focused investors, through the launch of new products and monetization channels, such as embedded financial services and AI-powered customer tools.”
Mr. Youssef and Valsoft co-founder Steph Manos graduated from Concordia University with computer engineering degrees in 2004 and built an affiliated online marketing business together. After discovering that pornography sold better than travel products and supplements, they became founding investors of Pornhub, now the world’s largest porn video site.
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 and long before the controversies that have dogged the business, now called Aylo Holdings SARL, in recent years.
Mr. Youssef, an entrepreneur since he cut grass and shovelled driveways in his teens, decided to get out of the adult-entertainment business in the late 2000s because he started a family and “my moral compass changed,” he once told The Globe and Mail. “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.”
Mr. Samant said that past foray “has nothing to do” with Valsoft, and that the founders “have had nothing to do with that other business for years.”
In the early 2010s, Mr. Youssef immersed himself in the world of investing, devouring books by Warren Buffett and Peter Lynch and attending the Berkshire Hathaway annual meeting. 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 that buying modest niche software companies with few or no competitors was better than playing the markets as it offered high returns for shrewd acquirers. Valsoft bought its first company in 2016, three the following year and eight the next. It now buys about 20 to 25 companies annually.
Mr. Youssef and Mr. Manos and a group of other investors oversee two other companies: Valnet Inc., a consolidator of digital-content sites that cater to movie buffs, celebrity watchers, gamers and others, and Valsoft spinoff Valstone Corp., which sells software to industrial companies.