For two decades, Constellation Software (TSX: CSU) has been the closest thing public markets had to a perpetual compounding machine.

Under the stewardship of Mark Leonard — a reclusive former venture capitalist turned operator — the company executed one of the most disciplined and successful vertical market software (VMS) serial acquisition engines in modern history.

From a modest Canadian software consolidator, CSU evolved into a sprawling network of over 1,500 downstream companies, each operating in niche verticals with high switching costs and mission-critical workflows.

The formula was like clockwork:

• Acquire small VMS companies at low multiples
• Decentralize operations and preserve entrepreneurial autonomy
• Harvest predictable free cash flow
• Deploy capital into the next acquisition
• Continually repeat…

This wasn’t just M&A — it was a well oiled capital allocation engine in hyper drive.

But in 2025 – 2026, something started to change…

The tone from long-time investors wasn’t what it used to be. Quietly at first, then more openly; the market was beginning to question whether the flywheel at Constellation Software could still spin as effortlessly as it once did for the past 20 years.

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The Bear Case: Why Conviction Is Cracking

1. End of the Mark Leonard Era

Leonard’s transition away from day-to-day leadership — and more importantly, from the board — represents a structural break.

This is not a typical CEO succession story.

Leonard wasn’t just setting strategy; he defined the culture, underwriting discipline, and capital allocation philosophy. His letters became required reading across the investment community, often compared to those of Warren Buffett.

Now, the wizard is gone.

As highlighted in the latest ROE Newsletter by Jason Donville, President DKAM – a long time investor in CSU who recently exited his position entirely in 2025 between $3,250 – $3,760 – the concern isn’t just about Leonard’s abrupt exit but compounded by the fact that Constellation Software is becoming increasingly more challenging to model. And the very real threat of AI disruption is not helping the outlook.

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2. The Flywheel Is Losing Torque

Donville goes on to write in his newsletter that historically, CSU thrived on a powerful structural advantage:

• Acquire VMS businesses at ~0.8x revenue
• CSU trades at 4–6x revenue (a handsome multiple)
• Reinvest internally generated cash at similar spreads

This created embedded multiple arbitrage, supercharging returns.

But that engine is evolving.

The Shift: Minority Investments

CSU has increasingly allocated capital into minority stakes in public and private companies.

The Problem:

• No operational control
• No guaranteed access to cash flows
• No ability to redeploy capital internally

In other words, less flywheel, more portfolio-investing.

This is a fundamental shift from operator to allocator.

And markets are rational to question whether the same premium multiple applies.

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3. The AI Conundrum: A Portfolio Too Big to Valuate

Finally, Donville laments that boasting over 1,500 businesses across dozens of industries; CSU has become too vast and complex to model at the edge.

That was once a strength.

Now it’s a risk.

AI introduces asymmetric disruption:

• Some VMS businesses may become significantly more valuable (data + workflow ownership)
• Others may be quietly obsoleted by AI-native challengers

The issue isn’t direction — it’s uncertainty.

If even 10–20% of the portfolio faces structural erosion, the compounding math changes materially.

And unlike a focused SaaS company, CSU cannot easily communicate this exposure.

It’s a black box at scale.

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The Bull Case: Why the Compounding Machine May Still Work

1. Decentralization Was the Point All Along

Bulls argue the market is over-indexing on Leonard.

Constellation is not a centralized empire — it’s a federation of capital allocators.

Its six major operating groups (including Topicus, Lumine, Harris, Jonas, etc.) already function semi-independently.

Over decades, CSU has effectively trained hundreds of operators to think like disciplined investors

The argument:
Leonard didn’t just build a company — he built a system.

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2. The New CEO – Mark Miller – is an Insider

With Mark Miller stepping into the CEO role, the market is now recalibrating around a different kind of leader.

Miller is not an outsider parachuted in to “professionalize” the business. He is a Constellation insider, having spent years inside the organization, most notably as a senior executive within operating groups like Volaris.

In many ways, he represents the purest continuation of the CSU playbook — a capital allocator trained inside the system rather than a strategist imposing a new one.

What Bulls Like

• Cultural continuity: Miller is steeped in CSU’s disciplined capital allocation and decentralized philosophy
• Operator DNA: Unlike traditional CEOs, he has direct experience overseeing acquisitions at the ground level
• No reinvention risk: There’s no indication he intends to “fix” what isn’t broken

What Bears Question

• Is he Leonard — or just Leonard-adjacent?
• Will underwriting discipline hold at scale without the founder’s final say?
• Does he have the authority to say “no” as often as Leonard did?

The real issue isn’t competence — it’s comparative mythology.

Leonard became larger than the company itself.

Miller inherits not just the role, but the expectation of near-perfect capital allocation.

That’s an almost impossible benchmark.

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3. Vertical Market Software Still Wins

The core thesis behind VMS remains intact:

• High switching costs
• Deep workflow integration
• Low relative cost to customers
• Often mission-critical

Examples include software for:

• Municipal governments
• Healthcare providers
• Utilities
• Education systems
• Dealerships

These are not easily replaced.

Even in an AI-driven world, incumbents often win because:

• They own the data
• They control the workflow
• They have distribution

Firms like Morningstar have long argued that VMS companies may benefit from AI via upselling and automation.

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4. Downturn = Opportunity

Constellation has historically thrived in fragmented, inefficient markets.

If AI or macro tightening creates distress among smaller software vendors, CSU could:

• Acquire at lower multiples than historical norms
• Re-accelerate organic and inorganic growth
• Reassert its dominance

In this framing, today’s uncertainty is tomorrow’s hunting ground.

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The New Reality: A Valuation Reset

The real shift isn’t operational — it’s psychological.

For years, CSU enjoyed:

• Premium multiples
• Near-unquestioned trust
• “Buy at any price” status among quality investors

That era may be ending.

The market is now asking:

• What is the sustainable reinvestment rate?
• How repeatable is the acquisition model at scale?
• What is the true AI exposure?
• Who replaces Leonard as the philosophical anchor?

This is not a collapse.

It’s a repricing of certainty.

For another long-time investor in Constellation Software, though, the current climate of uncertainty isn’t changing his course: “I have been personally adding to CSU and TOI (for clients we are holding)”, says Jason Del Vicario, Portfolio Manager at Hillside Wealth, a division of iA Private Wealth.

In a conversation over email, Jason Del Vicario elaborated:

”The true moat at Constellation Software lies in their deep customer relationships and a culture of governance and incentives that is globally second to none. While some may view recent moves into public equities like SABR as a departure, CSU (through Topicus) has a proven track record of finding value where others don’t. They are built to excel at deploying capital effectively, potentially even beyond the VMS space in the long term. We remain long-term believers. Rather than taking a ‘victory lap’ on short-term price movements, the real test of a thesis is where the price sits in five to ten years. For those of us focused on high-quality businesses and perfect incentive alignment, we’re happy to step in when others decide to exit.”

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For investors reassessing Constellation Software, which companies are you looking to deploy capital into going forward? For investors buying more or holding, what’s the rationale?

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Regards,
Robin Speziale

Disclosure: own CSU