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We Study Billionaires - The Investor’s Podcast Network

TIP772: How Great Compounders Turn Time Into a Superpower w/ Kyle Grieve

Published November 28, 2025
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About This Episode

Host Kyle Grieve analyzes the book "The Compounders" and explores why a small group of exceptional businesses can compound capital at high rates for decades. He explains the central importance of maintaining returns on invested capital above the cost of capital, sustaining high reinvestment rates, and leveraging time, while highlighting the roles of decentralization, culture, incentives, and working capital discipline. The episode walks through multiple case studies, including Nvidia, Lifco, Indutrade, Bergman & Beving, AdTech, Constellation Software, Heico, Ametek, and Judges Scientific, to illustrate how great compounders turn time into a superpower.

Topics Covered

Investing Return on invested capital (ROIC) Serial acquirers Working capital management Decentralization Capital allocation Business growth and scaling Leadership and management Niche markets Personal Development

Disclaimer: We provide independent summaries of podcasts and are not affiliated with or endorsed in any way by any podcast or creator. All podcast names and content are the property of their respective owners. The views and opinions expressed within the podcasts belong solely to the original hosts and guests and do not reflect the views or positions of Summapod.

Quick Takeaways

  • Shareholder value is created when a company consistently earns returns on invested capital above its cost of capital and can reinvest a large portion of cash flows at those high rates.
  • Exceptional compounders deserve premium valuations because their ability to reinvest at high ROIC over long periods makes time their greatest ally.
  • Decentralized cultures with aligned incentives and empowered local leaders are a common hallmark of great serial acquirers and long-term compounders.
  • Working capital discipline, especially metrics like profit-to-working-capital, can be a powerful lever for self-financed growth and resilience.
  • Niche-dominant businesses in small, overlooked markets often enjoy strong pricing power, customer lock-in, and durable competitive advantages.
  • Effective incentive systems that tie management rewards to capital efficiency (not just growth) are critical in high-performing acquisition-driven companies.
  • Swedish and Nordic serial acquirers showcase how trust, transparency, frugality, and decentralization can support long-run compounding cultures.
  • Organic growth remains vital even for serial acquirers; acquisitions amplify but rarely substitute for strong underlying business performance.
  • Investors frequently undervalue long-term compounders because traditional exponential discounting underweights distant but powerful future cash flows.
  • Resilience-via diversification, downside protection, and avoiding catastrophic loss-is essential to surviving long enough to reach the powerful later stages of compounding.

Podcast Notes

Introduction and framing of great compounders

What great long-term compounders have in common

Host frames the episode around rare businesses that can deliver 20%+ returns for decades and turn early investments into life-changing wealth[0:06]
Key focus is not just how these businesses generate such returns, but how they sustain them over long periods[0:27]

Core elements to be explored

Episode will break the puzzle into capital efficiency, reinvestment rates, and the underappreciated role of time[0:22]
Will explain why many iconic winners are serial acquirers of tiny niche businesses and how that supports compounding[0:27]
Discussion includes dominant market share, durable competitive advantages, and smart capital allocation enabling premium valuations and market-beating returns[0:32]

Preview of case studies and target audience

Nine case studies will span from manufacturers with elite working capital discipline to a vertical market software giant with exceptional management incentives[0:46]
Some companies have cultures strong enough to compound through multiple CEO transitions[0:57]
Episode is aimed at long-term investors seeking durable, low-maintenance winners and business owners wanting to build compounding cultures[1:03]

Host introduction and the core investing question

Host background and the book "The Compounders"

Kyle Grieve introduces himself as host of The Investor's Podcast and says he has been studying a book he really enjoys because it aligns with his love of compounder businesses[1:31]
The book is titled "The Compounders, From Small Acquisitions to Giant Shareholder Returns" by Oddbjorn Dibvad, Ketil Nyland, and Adnyan Hadzifendik[2:45]
• Kyle apologizes in advance in case he mispronounces the authors' names

Why some expensive stocks still generate huge returns

Kyle raises the question of why some companies produce exceptional returns even when purchased at sky-high valuation multiples[2:03]
Nvidia is used as a key example of a business often cited in this context[2:07]
• In January 2017, Nvidia traded at 43 times earnings, which Kyle calls a sky-high multiple
• Despite the high multiple, buying then would have produced about a 63% annual return
This challenges the traditional value investing approach of buying cheap, waiting for price and value to converge, and then selling[2:26]
• Kyle says a business like Nvidia illustrates that excellent businesses that can reinvest at high rates of return are worth paying up for

ROIC, cost of capital, and why some businesses deserve premium multiples

Core concept: value creation when ROIC exceeds cost of capital

Kyle states that shareholder value is created when a company earns a return on capital that exceeds its cost of capital[3:22]
He emphasizes that this is the essential concept investors must understand to buy value-creating businesses[3:16]
Most businesses struggle to consistently earn returns above their cost of capital because competition erodes returns[3:30]
• He notes that over multi-year periods, returns on capital tend to gravitate toward the cost of capital, likening it to a moth drawn to a flame
Only businesses with competitive advantages can stave off competition long enough to create value[3:48]

Why high-ROIC businesses should trade at higher multiples

Kyle argues that if most businesses can't earn returns above their cost of capital, then those that can should not trade at the same multiples as the majority[3:43]
He references a default cost of capital around 9.5%, similar to the long-term S&P 500 return[4:04]
• If a business can earn returns on invested capital above 9.5%, it can create substantial shareholder value by reinvesting in itself
• For serial acquirers, reinvestment means buying more businesses; for Nvidia, it means investing in better hardware

Nvidia vs IBM: contrasting capital allocation and valuation

Kyle contrasts Nvidia with IBM, describing IBM as a mature blue-chip company whose returns on capital are lower than its cost of capital[4:37]
Because IBM's growth destroys shareholder value, it sensibly returns profits via dividends and buybacks instead of reinvesting heavily[4:48]
• He argues IBM deserves to trade at about nine times earnings so investors earn a return equal to its cost of capital
Nvidia, by contrast, can reinvest profits at very high levels, with Fiscal.ai data showing an average ROIC of ~90% since 2017[5:04]
• Assuming an 8% growth rate, Kyle says you could pay about 60 times earnings for Nvidia and still only earn its cost of capital, which is nearly seven times IBM's multiple
Two critical assumptions must hold: Nvidia must maintain its ROIC and its growth rate into the future[5:33]

Time, durability of ROIC, and discounting future cash flows

Durability of high ROIC versus common valuation models

Most investors assume ROIC will erode over time, so DCF models typically show slowing growth leading to a perpetual growth rate near inflation (2-3%)[5:47]
Outstanding businesses like Nvidia can buck this trend; Kyle notes Nvidia's ROIC grew from ~38% a decade ago to around 100% today[6:07]
He quotes "The Compounders" asserting that what matters is investing in companies strong today that will be even stronger in 10-15 years, making traditional valuation models seem almost irrelevant[6:16]
• The book urges focusing on durable competitive advantages, sustainable reinvestment potential, and capacity to strengthen market position over time

Hyperbolic vs exponential discounting

Traditional finance uses exponential discounting with a constant discount factor, which strongly devalues distant cash flows[6:47]
Kyle introduces hyperbolic discounting, where valuations drop sharply for near-term periods but decline more slowly further out, aligning more with human tendencies toward instant gratification[7:07]
Under hyperbolic discounting, the present value of far-future cash flows is significantly higher than under exponential discounting[7:22]
• The book suggests markets may implicitly value long-term compounders using hyperbolic-like discounting, which helps explain why they trade at premiums
• The authors argue relying solely on exponential discounting can lead to significant undervaluation of true long-term compounders

Core drivers of the nine compounder case studies

Performance of the nine profiled companies

Kyle notes the nine businesses in the book outperformed indexes and turned $10,000 into $6.6 million over 35 years, a ~20% CAGR[8:11]

Two overarching keys: culture and reinvestment engine

First key is a high-performing decentralized culture that does not tolerate mediocrity and filters it out[8:26]
Second key is a durable reinvestment engine: high ROIC plus a place to deploy excess capital[8:35]
Kyle says these two attributes are what he seeks in about 90% of companies he invests in, though they are difficult to identify in practice[8:46]
• He notes that assessing authentic culture is hard because CEOs may present well personally while behaving poorly internally
• Durability of high ROIC is uncertain; he spends much of his ongoing due diligence checking if growth runways remain intact or competitors are eroding them

Turning time into a superpower

All companies in the book drove growth by turning time into a superpower: generating large cash flows and reinvesting them at high rates over long periods[10:06]
This creates a virtuous cycle where cash generation and reinvestment feed each other, producing exceptional shareholder returns[10:16]

Reinvestment rate, ROIC, and the mathematics of compounding

Definition and importance of reinvestment rate

Reinvestment rate is defined as (organic capex + acquisitions) divided by operating cash flow[10:31]
• Example: if a company has $100m operating cash flow, invests $10m in organic capex and $90m in acquisitions, its reinvestment rate is 100%
Kyle says he gets very excited when he sees a 100% reinvestment rate in a business[10:26]
A high reinvestment rate is necessary but insufficient; it must be paired with high ROIC to drive compounding[10:51]

Explaining ROIC with a vending machine analogy

ROIC is net operating profit after tax (NOPAT) divided by invested capital[11:01]
Kyle uses an analogy of two soda machines: one returns two cans per dollar, the other one can per dollar; investors prefer the higher output per dollar, just as with capital allocation[11:25]
Investors want companies that can deploy capital at high, sustainable rates of return[11:29]

Role of time in compounding and a two-company example

Kyle sets up two hypothetical companies, both with 100% reinvestment rates but different ROICs, to show impact over five and twenty years[11:45]
• Company A: 100% reinvestment rate and 20% ROIC; starting with $100m NOPAT, it reaches ~120m in year 1, ~144m in year 2, and about $250m by year 5
• Company B: 100% reinvestment rate and 10% ROIC; starting with $100m NOPAT, it reaches about $160m by year 5
• Extended over 20 years, Company A reaches about 3,800 of NOPAT versus 670 for Company B, illustrating how time magnifies differences in ROIC
Kyle concludes that time is the friend of the compounder and the enemy of lower-efficiency businesses[12:38]
He notes investors struggle to value such businesses because forecasting capital efficiency 5-20 years out is very challenging[12:47]

Common traits of the nine compounders: reinvestment modes, resilience, niches, decentralization, and culture

Two primary reinvestment channels: organic growth and acquisitions

Many profiled companies reinvest both organically (into existing businesses) and through programmatic acquisitions of cash-generating businesses[13:25]
Public serial acquirers benefit from valuation arbitrage: buying at low EV/EBITDA multiples and being valued at higher multiples themselves[14:01]
• Example: Constellation Software has averaged ~28x EV/EBITDA in the market over nine years but typically acquires at ~5x EV/EBITDA
• Once acquired, targets are effectively revalued at the parent's higher multiple, creating instant value uplift
Private markets are more inefficient, with less transparency and liquidity than public markets, leading to attractive deal opportunities[14:15]
• Additional factors supporting attractive deals include availability of capable managers, limited customer/supplier counts, and low sales thresholds that reduce competition for smaller deals

Resilience and the power of scale over time

Kyle illustrates that doubling money from $10m to $20m is good, but doubling from $1b to $2b, over the same time, has far greater absolute impact[14:34]
To reach those large numbers, businesses need resilience to survive and thrive early on[14:50]
Two resilience levers: downside protection via diversified revenue streams and sustainability via business model and capital allocation[15:24]
• Diversification across customers, suppliers, and industries helps buffer subsidiaries when some segments face downturns
• Sustainability includes some organic growth (even low single digits), value-added acquisitions, and post-acquisition optimization like centralizing select back-office functions or pruning weaker segments
He quotes the book likening strong foundations to sprawling tree roots, emphasizing avoiding catastrophic single-exposure risks to reach the "second half of the chessboard" of exponential growth[16:20]

Focus on small niche industries and products

Many compounders focus on small niche markets that are less attractive to large private equity firms, which prefer bigger, faster-growing markets[16:35]
Example: Lifco subsidiary Brock dominates autonomous demolition robots, a ~$300m market where it holds about 70% share[16:54]
Niche dominance leads to strong pricing power and fewer alternatives for customers, reinforcing competitive advantage[17:14]
He mentions Heiko's aviation customers as an example of high customer lock-in and pricing power in mission-critical products[17:38]
• Many profiled companies have predictable B2B revenue, smaller basket-size products, and quick payment cycles, reducing working capital strain

Decentralization and culture as compounding enablers

Constellation Software is cited as an example that cannot rely on one person to execute ~1,200 deals, so it uses decentralization as it scales[18:05]
Too much bureaucracy is described as a death sentence for aging companies because it leads to excessive talking and insufficient action[18:19]
Decentralized firms set the right incentives and systems, then allow local leaders to execute, which they are financially motivated to do[18:30]
Cultures that foster leadership and entrepreneurship are portrayed as critical; they enable smooth CEO transitions when internal talent understands the culture[18:35]
• The book shows CEOs of the nine companies have, on average, 21-year tenures within their companies and 13 years as CEO, supporting long-term strategic thinking

Why Sweden and the Nordics produce so many serial acquirers

Kyle's prior conversation with Chris Mayer and Swedish context

Kyle recalls asking Chris Mayer why Sweden has so many successful serial acquirers on a previous Millennial Investing episode[23:48]
Chris Mayer likened Sweden's ecosystem to Silicon Valley cloning successes like Bergman & Beving[23:48]

Authors' explanation for Nordic success

The book's authors, who have invested heavily in the Nordics, attribute success partly to Sweden's embrace of innovation and globalization without strong constraints[24:12]
Sweden has a long history of global expansion through acquisitions dating back to the mid-20th century[24:27]
The book notes Sweden scores highly on ease of doing business, global innovation, perception of corruption, and human development indices[24:36]
• High trust and transparency in Sweden mean large amounts of public information are readily accessible, supporting business and investing

Two pioneers of Swedish decentralization philosophy

Hans Werthén of Electrolux and Jan Wallander of Handelsbanken are highlighted as pioneers of decentralization[25:05]
Werthén built a culture that avoided bureaucracy and centralization and empowered lower-level employees closest to customers[25:18]
• He was notably frugal, moving Electrolux HQ from a luxurious Stockholm location to a cheaper site and cutting staff, budgets, forecasts, and internal meetings
• Under Werthén, Electrolux sales and earnings grew 80-fold, compounding at ~20% over 25 years
Wallander pushed decentralization within a bank, despite initial pushback, believing it aligned with human nature and unlocked people's potential[26:13]
• He removed annual plans, budgets, and fixed performance contracts, and gave branch employees decision-making power
• Headquarters became a service center for frontline staff rather than the central decision-maker
• HQ staff was reduced by 33%, and marketing staff shrank from 40 to 1, as strong service reduced marketing needs
• He organized incentives around profitability and capital efficiency, fostering healthy competition among branches

TIP's own decentralized culture example

Kyle compares TIP's culture to these examples, noting Stig gives hosts a long leash for creativity while expecting ownership of mistakes[27:32]
He finds TIP's incentivization structure rewarding for good ideas and execution and says it suits him very well, though it may not fit everyone[27:47]
He shares an anecdote from his insurance representative about an employee whose productivity plummeted when working remotely, illustrating that decentralization requires the right people[28:06]

Case study: Lifco

Overview and leadership

Lifco has about 257 companies operating in 37 countries, across dental, demolition and tools, and system solutions segments[29:01]
Key leaders include CEOs Fredrik Karlsson and Per Waldemarson, under whom earnings have compounded at 14% and per-share free cash flow at 21% annually since 2006[29:17]
Major shareholder Carl Bennett owns about 50.2% of shares and 69% of voting rights, and handpicked Karlsson as Lifco's first CEO[29:29]
• Bennett learned business at Electrolux and became CEO of one of its divisions before buying the struggling Getinge medical division and turning it around partly by raising prices
Lifco was spun out from Getinge and later taken private so long-term decisions unpopular with public investors could be made[30:09]

Margin improvement and acquisition discipline

Karlsson sold non-performing assets while Lifco was private, shrinking the business by about 40%[30:13]
• Despite the shrinkage, operating margins rose from 2% to 8%, and are about 16.5% today per Kyle
Lifco is very disciplined on acquisition prices, paying no more than eight times EBITDA[30:46]
Value creation continues after acquisition via management-led organic profit improvements, often through increased specialization and pricing power[30:56]

Incentives, seller alignment, and decentralization

The manager who leads an acquisition is also incentivized to improve that company's profitability, directly linking post-deal performance to their bonus[31:07]
Lifco aligns sellers by letting them retain an ownership stake; performance has been better post-acquisition when sellers keep skin in the game[31:32]
The company runs very lean at the center; the CEO does not even have an assistant, and corporate functions like business development, HR, and finance are pushed to the company level[32:09]
• CEO Per Waldemarson quips that hiring an HR person looks good for two years but risks leading to five employees after five years, illustrating their aversion to corporate bloat
Group managers are promoted internally and have previously run operating companies, so they understand operational nuances[32:35]
Karlsson showed his confidence in Lifco's culture by buying shares on the day it was announced he would step down as CEO[33:00]

Case study: Indutrade

Business overview and history

Indutrade operates in five segments: industrial engineering, infrastructure and construction, life sciences, process, energy and water technology, and system solutions[33:16]
Since its 2005 IPO, cash flow has compounded at 14% annually and total shareholder return at 22%[33:27]
It originated from a merger of three firms into AB Nils Dacke, led by CEO Gunnar tidnburg, who favored growth by acquiring entrepreneur-led businesses[33:46]

Focus on relationships and shift toward proprietary manufacturing

Indutrade emphasized strong relationships with customers and suppliers, which brought insights and opportunities[33:57]
• In one example, an Atlas Copco purchasing agent named Kali Group as their best supplier, a company that Indutrade now owns
After Tidnburg retired, Johnny Alvarson became CEO and shifted the portfolio from technical trading to more manufacturing with proprietary technology[34:33]
• Alvarson increased the share of such businesses from mid-single-digit percent to 50% while growing acquisitions from 60 to 200
He also expanded beyond the competitive Nordics into the UK, Germany, Austria, and Switzerland where acquisition competition was lower[35:01]
Alvarson led for about 13 years, compounding EBITDA at 14% and driving strong shareholder returns[35:11]

Anvik era and product characteristics

Successor CEO Bo Annvik blended the strengths of Tidnburg and Alvarson in technical trade, manufacturing, and international growth[35:28]
Annvik furthered international expansion, governance, and internal empowerment[35:32]
Indutrade's products often represent a small share of the total machine or system cost and include consumables, valves, transmissions, fasteners, pipes, pumps, and filters[35:56]
Indutrade uses incentives so subsidiaries must grow profitably and at attractive ROIC, preventing growth via margin cuts, poor working capital, or heavy discounting[36:25]

Why sellers choose serial acquirers and Indutrade's three-year review

Kyle addresses the question of why owners would sell to serial acquirers rather than private equity, which often bids higher[36:39]
He notes non-price factors: some owners want to keep improving their business and value partners who provide capital and know-how without drastic layoffs or cultural shifts[37:01]
Indutrade conducts a three-year post-acquisition performance review, encouraging management to focus beyond the next year and optimize over multi-year periods[37:29]

Case study: Bergman & Beving (B&B) and working capital discipline

Overview and defining characteristics

Bergman & Beving (B&B) owns and develops niche products for the construction and industrial industries[38:03]
Two defining traits: dedication to decentralization and commitment to self-financed growth via profit goals[38:15]
Kyle notes B&B's working-capital focus resonated with his own recent emphasis on owner's earnings and working capital in 2025[38:25]

Owner's earnings and working capital example

He defines owner's earnings as operating cash flow minus maintenance capex and says tracking it highlighted working capital's importance[38:56]
Kyle explains working capital using a hypothetical B&B subsidiary, Joe Safety, which sells workplace safety signage and needs inventory[39:14]
• Inventory and accounts receivable tie up cash while awaiting customer payments, which might take 30-90 days or more
• Accounts payable, by contrast, let Joe Safety delay paying suppliers, effectively financing its business for free if payment terms are long (e.g., 120 days)

Profit-to-working-capital KPI and the centralization experiment

B&B uses a metric called profit-to-working-capital and aims to keep it over 45%[40:27]
• Example: with profits of 10m SEK, working capital must be below 22.22m SEK; equivalently, each unit of working capital must generate at least 45 cents of profit
In 2001 B&B spun off two segments (AdTech and another group) and briefly experimented with centralization under the name B&B Tools[41:05]
• They tried integrating product companies with wholesalers to realize synergies; profits grew fivefold over six years but then halved in 2009
• Aggressive acquisitions and rising debt compounded the pain when profits dropped
New leader Al Lilius refocused on decentralization, re-emphasized the profit-to-working-capital KPI, and improved performance[40:27]
Reseller operations were later spun out as Momentum Group, and B&B reverted to its decentralized roots[41:05]

Mechanics of the 45% self-financing target and the focus model

The book states that with profit-to-working-capital above 45%, a business can self-finance taxes, interest, dividends, internal investments, and acquisitions without equity raises or heavy debt[42:26]
• The 45% is split into three 15% blocks: taxes, dividends to the parent, and reinvestment for growth and maintenance
Six levers can improve the ratio: three profit levers (increase volume, raise prices, reduce costs) and three working-capital levers (reduce inventory, speed up customer payments, extend supplier terms)[42:36]
B&B uses the "focus model" to apply the KPI across all operating companies, ranking groups and companies by their ratio[42:36]
• Level 1: ratio below 25%; focus is on improving margins and working capital, not revenue growth
• Level 2: ratio 25-45%; similar focus, but at the higher end they can start making growth investments
• Level 3: ratio above 45%; businesses prioritize profitable growth via acquisitions and organic expansion
The KPI becomes a tool for product and market analysis, acquisition assessment, and supplier negotiations, supported by incentive structures encouraging movement up the levels[43:03]

Case studies: Logercrons and AdTech (B&B spinoffs)

Logercrons: turnaround and niche products

Logercrons, spun from B&B in 2008, has been a 100-bagger since, with free cash flow compounding at 16% and ROIC at 19%[47:29]
It operates five divisions: Electrify, Control, TechSec, Niche Products, and International, each with leading positions in niche markets[48:33]
As a generalist acquirer, Logercrons can flexibly adapt its acquisition criteria[48:18]
A key move was adding the Niche Products division in 2012, enabling consolidation of higher-margin businesses like ASEP International, a ketchup dispenser maker[48:14]
• These businesses did not fit prior divisions, so the new division allowed them to raise the overall company margin profile
Logercrons adopted B&B's 45% profit-to-working-capital KPI and set additional goals: 15% annual earnings growth over a full cycle, ~8-12 acquisitions a year, and 25% return on equity[49:49]

AdTech: technology focus and cyclicality lessons

AdTech, spun out in 2001, has compounded free cash flow per share at 19% and total shareholder returns at 26%[49:47]
Its divisions are automation, electrification, energy, industry solutions, and process technology, with a focus on technology-related businesses[50:21]
AdTech's history underscores that serial acquirers must manage performance across economic cycles to thrive long term[51:17]
• The company IPO'd a week before 9/11, with high exposure to telecommunications and automotive (34% of revenue), and suffered in the post-dot-com and 9/11 downturn
• They improved margins from 3.6% to 6.7% within three years and diversified income by investing in a medical business later spun off as AdLife
During the 2008 financial crisis some segments saw order drops of ~30%, and profits fell 42% in 2009, but cash from operations fell only 5% thanks to working capital improvements[51:18]
AdTech removed its centralized M&A function, split into four more independent units, and kept adjusting its structure for resilience[52:12]
Technology focus brings upside (high organic growth and pricing power when in favor) but also downside risk of obsolescence[52:23]
AdTech has had three CEOs since 2001, each with strong performance: Roger Bergkvist, Johan Sjö, and current CEO Niklas Stenberg, with rising revenue and shareholder value growth under each[53:40]
• Stenberg's tenure shows 15% revenue CAGR and 32% shareholder value CAGR per Kyle's summary
Kyle emphasizes that as long as culture remains strong and each CEO embraces and improves it, shareholders remain well-positioned[56:00]

Case study: Constellation Software

Business model and VMS industry

Constellation Software was engineered by founder Mark Leonard, who recently stepped down as CEO[56:19]
Leonard viewed vertical market software (VMS) businesses as cash generators lacking reinvestment outlets, so he decided to reinvest their cash in acquiring more VMS businesses[56:34]
This created a flywheel: cash generation leading to more acquisitions, leading to more cash generators, which is the same basic strategy shared by many companies in the book[56:48]
Since its 2006 IPO, Constellation's operating profit has compounded at 33% annually while returns on capital employed stayed above 30%[56:53]
• The stock has been a ~200-bagger, even after a more than 30% drawdown mentioned by Kyle

Characteristics of target VMS businesses and decentralized structure

Constellation favors VMS businesses that are #1 or #2 in narrow markets, small relative to customers' revenue, deeply integrated into workflows, and mission-critical to customer operations[57:45]
Strong switching costs and deep integrations mean customers rarely leave, even when prices rise[57:59]
• Kyle notes that changing core software after a decade is time-consuming, energy-draining, and can alienate employees, raising turnover risk
As Constellation scaled, it adopted a decentralized group structure: corporate level, operating groups like Jonas, then verticals and business units[59:05]

Incentive structure and Mark Leonard's role

Kyle says Constellation has the best alignment incentive program he has seen[59:15]
Key feature: 75% of variable compensation must be used to buy CSU shares in the open market, held in escrow for 3-5 years[59:29]
Incentives are tied to achieving ROIC above 5%, keeping capital allocators focused on capital efficiency rather than mere growth[59:37]
• Example: if a vertical within Jonas has capital to deploy, it will favor whichever option offers higher ROIC, whether organic investment or an acquisition
Kyle notes that most of CSU's value has come from acquiring new companies, while long-term organic growth has averaged only ~2%[1:00:18]
He highlights a story where Leonard cut his salary to zero, waived bonuses, and stopped expensing any costs, making him purely a shareholder[1:00:27]
• In his 2015 letter Leonard wrote he would take no salary, no incentive compensation, and charge no expense to the company, signaling focus on shareholder value rather than personal perks

Additional case studies: Heico, Ametek, and Judges Scientific

Heico: family-run aerospace supplier

Heico supplies critical parts to the aerospace industry and demonstrates that multi-generational family businesses can succeed at high levels[1:01:22]
Kyle notes this only works if the next generation wants to be involved, which he suggests is not typical for most North American families[1:01:28]
Heico's success includes courage to challenge large OEMs that historically controlled spare parts, despite heavy regulation and scrutiny[1:01:48]
As an acquirer, Heico retains talent by letting sellers keep ownership stakes, motivating them to improve the business over time[1:02:10]

Ametek: excellence, continuous improvement, and black belts

Ametek is diversified across aerospace, healthcare, energy, and advanced technology and exemplifies a culture of excellence[1:02:29]
Though decentralized, Ametek uses internal specialists called black belts to reduce waste and variability and drive process improvements[1:02:58]
• Black belts lead week-long Kaizen events at subsidiaries to identify inefficiencies and design solutions
Kyle argues this counters the misconception that good serial acquirers only buy perfect companies; they also coach and improve subsidiaries[1:03:23]
He quotes a former Constellation performance manager who said portfolio CEOs mostly coach business unit leaders to high performance in addition to sourcing deals[1:03:39]

Judges Scientific: slow acquisitions, strong organic growth, and ROTIC

Judges Scientific acquires niche, highly profitable instrumentation companies and has completed about 25 acquisitions since its 2003 IPO yet is already a 100-bagger[1:04:03]
CEO David Cicurel emphasizes value creation over acquisition speed, stating they care about speed of value creation, not speed of acquisition[1:04:27]
Organic growth has averaged about 7-9% annually, which is crucial to achieving a ~24% CAGR when making only about one acquisition per year[1:04:33]
Judges uses Return on Total Invested Capital (ROTIC) as its key KPI instead of return on capital employed (ROCE), which Cicurel calls an accounting fiction[1:05:05]
• He argues ROCE's denominator can shrink as assets are amortized or goodwill adjusted, inflating apparent returns, whereas ROTIC uses actual capital invested
• Kyle gives an example where Judges' ROTIC is 18%; adding 40m GBP of amortization could push ROCE to 38%, showing why Cicurel prefers ROTIC

Final synthesis: key lessons for investors about compounders

ROIC, cost of capital, and valuation of compounders

Kyle reiterates that shareholder value arises when companies maintain ROIC above their cost of capital over long periods[1:06:07]
Exceptional businesses that can sustain this deserve premium valuations, but traditional frameworks often undervalue them because they heavily discount distant cash flows[1:06:22]
He notes investors relying solely on exponential discounting risk underestimating companies with strong long-term growth and reinvestment capability[1:05:59]

Culture, decentralization, and reinvestment engines

Great compounders combine decentralization, performance-driven culture, and durable reinvestment engines[1:06:38]
They empower those closest to customers, keep corporate lean, and use clear incentives aligning management with shareholders[1:06:44]
Downside protection via diversification and disciplined capital allocation helps them avoid catastrophic losses and reach the powerful later stages of compounding[1:06:30]

Investor mindset: recognizing and holding compounders

Kyle urges investors to seek businesses that can leverage time as a competitive advantage through long runways, consistent reinvestment, and cultures that reward excellence[1:07:20]
He emphasizes that compounding is not just mathematical but organizational, and investors must be willing to hold such businesses even when they appear expensive in the short run[1:07:42]
He concludes that the magic of compounding reveals itself only over time and closes by inviting listeners to connect with him on Twitter and LinkedIn and share feedback[1:07:46]

Lessons Learned

Actionable insights and wisdom you can apply to your business, career, and personal life.

1

Investing behind businesses that consistently earn returns on invested capital above their cost of capital-and can reinvest a large share of cash at those rates-is far more powerful than simply buying statistically cheap stocks.

Reflection Questions:

  • • Which companies in your portfolio or watchlist demonstrably earn ROIC above their cost of capital over multiple years, and which do not?
  • • How might your investment process change if you prioritized capital efficiency and reinvestment capacity over low valuation multiples?
  • • What specific metric or screen could you add this week to better identify high-ROIC, high-reinvestment businesses?
2

Time is a force multiplier for high-quality businesses: the longer a company can sustain high ROIC and high reinvestment rates, the more dramatic the divergence in outcomes versus average businesses.

Reflection Questions:

  • • Where in your investing or business decisions are you underestimating how powerful small advantages become when compounded over a decade or more?
  • • How could you extend the runway of your best ideas-whether investments or projects-so they can benefit from more years of compounding?
  • • What is one position or initiative you should be more patient with because its edge strengthens over time rather than showing immediate results?
3

Decentralized structures with clear, long-term incentives often outperform centralized bureaucracies because they empower people closest to customers to act quickly and think like owners.

Reflection Questions:

  • • In your current organization or projects, where are decisions bottlenecked at the top that could be pushed closer to the front line?
  • • How might you redesign incentives so that key contributors share directly in the long-term value they create rather than only short-term targets?
  • • What is one decision or responsibility you could delegate this month to increase speed and ownership without sacrificing control of key risks?
4

Disciplined working capital management and self-financing growth (like targeting a high profit-to-working-capital ratio) can make a business more resilient and less dependent on external capital.

Reflection Questions:

  • • How much attention do you currently pay to working capital efficiency when analyzing a company or managing your own business cash flows?
  • • Where could you shorten cash conversion cycles-by reducing inventories, speeding receivables, or extending payables-without harming relationships or quality?
  • • What concrete step could you take this quarter to track and improve a single working-capital-related KPI in your business or investment analysis?
5

Choosing to dominate small, unglamorous niche markets can be a superior strategy to chasing large, crowded markets, because niche dominance often brings pricing power, stickiness, and less competitive pressure.

Reflection Questions:

  • • Are there small or overlooked segments in your industry or investment universe where a player quietly holds strong, defensible market share?
  • • How could you reframe your own goals to focus more on dominating a well-chosen niche rather than scaling prematurely into broad, competitive spaces?
  • • What is one niche market or subsegment you could study deeply over the next month to identify potential compounders or strategic opportunities?
6

Aligning incentives with true economic value creation-using measures like ROIC or ROTIC rather than accounting-driven metrics-encourages better capital allocation and discourages superficial growth.

Reflection Questions:

  • • Which performance metrics are you or your organization using that might encourage growth at the expense of genuine returns on capital?
  • • How might adopting a capital-efficiency metric (like ROIC or ROTIC) as a primary success measure change the decisions you make about projects or investments?
  • • What is one bonus plan, KPI, or personal goal you could adjust this year to better reward long-term value creation rather than short-term optics?

Episode Summary - Notes by Sawyer

TIP772: How Great Compounders Turn Time Into a Superpower w/ Kyle Grieve
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