Are holding companies Ponzi schemes?
Here's why you should invest in these magic compounding machines...
Why Invest in a HoldCo
The goal is long-term equity compounding in a tax-efficient manner.
A small upfront equity investment funds the first few acquisitions and then the flywheel kicks in.
Internal cash flow and debt fund future acquisitions and things compound.
HoldCo Benefits for Investors:
- Tax efficient
- Capital efficient
- Reduced reinvestment risk
- Reduced transaction frictions
How to Structure a HoldCo
Many are structured as traditional companies (C-Corps) with subsidiaries.
Some of the best-performing companies of all time have grown through acquisitions like Constellation and TCI.
Some HoldCos distribute profits as dividends monthly / quarterly / yearly instead of re-investing in future acquisitions.
This isn't tax efficient (it's better to reinvest), but psychologically some investors like to see money coming back to them.
An outside party will come in and set a fair value for the company's shares quarterly, yearly, or every few years.
Creates liquidity in absence of a sale.
The HoldCo and GPs generally have a right of first refusal. Then existing investors & outside investors.
The plan is generally to compound indefinitely. But some exit options are:
The entire HoldCo can go public so investors have liquidity. This is the route Constellation Software took.
Or they can sell as a whole to a larger HoldCo.
Or sell off companies individually.
TLDR Holding Companies for Investors:
- Long-term equity compounding
- Structure for success
- Liquidity windows
- Mailbox money
- Exit options