Constellation Software's (CNSWF) on Q4 2015 Results - Earnings Call Transcript

Constellation Software, Inc. (OTCPK:CNSWF) Q4 2015 Earnings Conference Call February 19, 2016 8:00 AM ET

Executives

Mark Leonard - President and Chairman of the Board

Jamal Baksh - CFO

Analysts

Blair Abernethy - Industrial Alliance

Paul Steep - Scotia Capital

Paul Treiber - RBC Capital Markets

Andre Eknada - Euro-Pacific

Thanos Moschopoulos - BMO Capital Markets

Operator

Good morning ladies and gentlemen, welcome to Constellation Software, Inc.'s Q4 Results Conference Call. I would now like to turn the meeting over to Mr. Mark Leonard. Please go ahead, Mr. Leonard.

Mark Leonard

Good morning. Thank you for joining us on the call. As you know, our general practice is to go directly to questions. Eric is going to instruct you on how to queue up if you have a question. So please go ahead Eric.

Question-and-Answer Session

Operator

Thank you Sir. We will not take the questions from your telephone lines. [Operator Instructions]. The first question is from Blair Abernethy from Industrial Alliance. Please go ahead your line is open.

Blair Abernethy - Industrial Alliance

Mark I just wondered if you can talk a little bit to operating leverage in the business. Margins have been trending nicely in the last couple of years’ right through the end of this fiscal ’15, and I just want to understand how you’re thinking about it now and where you see sort of your best operating leverage points over the next couple of years?

Mark Leonard

We don’t really think about operating leverage per say, we are not big believers in economies of scale. Our primary philosophy and model is to have local managers running local businesses, and our business is constituted of many small business units and we believe that the business unit managers understand and can address their markets, can manage their people, can manage their products, can understand their competitors far better than anyone at its head office, strategy group or R&D group or anything of that nature.

So you don’t see a lot of economies of scale, you might get a wee bit in some functions, the most obviously the G&A, and so from time-to-time here we talk about some leverage that’s available in G&A. What do you have working against you there is the natural desire for managers higher up inside an organization to know more and that pursuit of knowledge leads you towards building infrastructure, so that you can know what’s going on and how to provide valuable input?

The challenge is that that tends to bloat your G&A, so that’s the offset sort of desire to perhaps minimize G&A and it’s a challenge. We have operating groups that have virtually no and operating group for G&A and obviously it has quite significant and the rules are also varied. Some of them get real value out of having specialists for the operating group level and obviously others do not.

I think where you were probably driving at is the EBITDA margins, and we look at those as a percentage of net revenues. The reason we use net revenues is that hardware like in this quarter can bounce up and down quite a bit, and tends to have very different margin than some of the other components of our revenue streams.

And so we tend to pull out third party costs from growth revenues and then look at the net revenue number. And so EBITDA over net revenues is one of the primary numbers that we monitor on an ongoing basis on a business unit-by-business unit basis. There were trade-offs between EBITDA margin and organic growth when you are expensing all of your R&D in sales and marketing and you do.

And those trade-offs tend to be long term, and so you can often chose short term EBITDA margins at the expense of long term growth, that’s something we hope we’re going to do, but obviously that we might be doing. And so it’s something we’re very conscious of.

So we don’t aggressively tell people here’s an EBITDA target, you got to get there. We say if you got to grow this business, you’re going to be in it forever, what you need to invest and what can you intelligently invest in the future and in the home [buying] sales and marketing to make sure that we are in this business here.

Blair Abernethy - Industrial Alliance

One other quick one for you just from an external perspective, given the macroeconomic volatility and concerns about growth in various geographies around the world, are you seeing any change in your pipeline or in the competition for potential deals at all on the M&A side.

Mark Leonard

Firstly we don’t think about those deals, we try and call them acquisitions because we don’t want to tend to deal junkies. And when you start talking about most of them as acquisition completely involve in these things that you hold forever, and what’s happening in the very short term in the macro world hopefully doesn’t have a profound impact on your thinking.

Obviously if there are public companies or subsidiaries of public companies that are suffering and are subject to quarterly pressures and have them under performing software subsidiary or want to sell their businesses in private [sense], those will be more obviously probably more available in a tough macro environment.

People with private businesses have longer term confidence to build those businesses of extended tools. They can time their exit; usually these businesses are pretty hard to get in to a spot where you have to do an emergency sale. Obviously there are some issues that you can’t control, age and sickness and things of that nature which will precipitate some sales even in tough times. But I’d say for the most part we don’t look for the small private businesses to be preferential if they were born in difficult times. We may see some of the public ones.

Operator

The next question is from Paul Steep at Scotia Capital. Please go ahead, your line is open.

Paul Steep - Scotia Capital

Mark on the professional services side within public it’s declined over the past year. You can maybe talk about what some of the drivers of that are? Has it been a purposeful run-off of some projects or was it specifically some things that TSS or Trapeze that have wound down that were large deals over the last year.

Mark Leonard

I would say it’s a generic issue Paul, specifically when you buy a business and they may perceive or they may track profitability differently than we do. We tend to look at a sort of departmental profitability where professional services should be making money on what they do. This is kind of the opposite of the SaaS business where they provide installation, training, hand-holding for free as part and parcel of what they provide.

We don’t, we say you can have as much professional services right where we can make some money on it. And when we acquire business it may or may not have that philosophy before we buy it, if it didn’t. What in all likelihood happens is that as we start pricing it so that we make some money on it, there’s a run-off, there’s a decrease in the amount of professional services business that we get.

On the other hand, we may also go back to clients and find that there is inherent demand for professional services that hasn’t been tapped. So it varies from place to place, let’s say for the most part in large ticket software businesses and there are professional services that are pretty much knowing and generally end up shrinking the sum component of the business.

Paul Steep - Scotia Capital

Is it fair to think that shrink is largely complete on the major deals you’ve done in that area? I’d assume it’s the larger deals that drove the decline for the share.

Mark Leonard

Yeah I think the larger deals tend to be the larger ticket, big project oriented ones. There’s a rule if you’re doing small ticket, you don’t tend to run in to those. I was looking at some of the contract accounting this year and literally we have contracts that is still running off from seven and eight years ago when we purchased some of the big businesses during the downturn.

And so some of these contracts they literally take forever to finish. There’s a process whereby they get sort of 80% done, and that last 20% both you and the client sometimes decide just isn’t worth the effort and so it’s really hard to say, but I’d say in general if you add most of the shrinkage in the first year, but then you get a tail [from them] for many years to come.

Paul Steep - Scotia Capital

The second one I guess its likely something you might give us some thought on. In your letter which is the trend in R&D and sales and marketing, that spend has sort of fallen throughout 2015. Has it been a conscious decision on the part of the team to down that back a little bit, based on your view of where the investments have been falling?

Mark Leonard

No I haven’t spotted that, so I’ll go back and check it. We don’t think of R&D and sales and marketing as a tool that we allocate from head office. We think about it as 170 managers of business units making individual decisions about what they are spending on R&D and sales and marketing. And I think what you’re seeing is the sum of those individual decisions. And so if you’re seeing a decline it’s because of I guess the guys feel that the incremental return that they can generate on that incremental spend isn’t sufficiently attracted to keep on incrementing.

Jamal Baksh

I mean we think just, this is Jamal. R&D as a percentage of revenue may have declined slightly, but then you’ve got professional services and hardware which is not related to the R&D. The metric that we look internally throughout CSI which is, and we don’t disclose the metric but its’ a percentage of maintenance and license sales that are as a percentage of R&D does not really fall off. It’s a little bit better than it was in ’14, but its right in line with what it was in ’12, ’11, ’13. So I wouldn’t say that there is an overall decline in the way we look at R&D.

Paul Steep - Scotia Capital

Good that’s helpful. The last one actually likely is a Jamal question as well. The TSS minority interest, maybe you could talk a little bit about how that pair has worked and if that’s going to be an ongoing annual feature, and it effectively looks like all of that minority net income got paid out, is that correct?

Jamal Baksh

It’s correct. I don’t know Mark if you want to speak, but my thought is, look TSS the same way CSI would rather deploy their free cash flow on acquisitions, and that’s we believe we can get may be a better return that way. But they’ve looked at their pool of acquisition targets, looked at the free cash flow they’re going to generate in ’16 and made a decision that if there was excess cash that they would give it then back to shareholders, and shareholders being CSI and the minority shareholders it happens equate to pretty much what their adjusted net income was for the year. Going forward, again it will depend on their opportunities available to from acquisitions standpoint.

Mark Leonard

They’re certainly investing heavily and looking for acquisitions. They got a very talented group of M&A people, and are comparable to any of that we have in our other operating groups and they’re methodically going through the suspects in the geographies where they are strong and starting to reach out in to adjoining geographies.

Paul Steep - Scotia Capital

So it’s not driven at all by the minority agreement?

Mark Leonard

No. I mean it is and that it’s even handed in fair to all the parties, but it doesn’t require that we flush out cash.

Operator

The next question is from Paul Treiber with RBC Capital Markets. Please go ahead. Your line is open.

Paul Treiber - RBC Capital Markets

I was just hoping that you could elaborate on some of the plan changes in the compensation plan specifically if you could quantify the potential impact on margins or your staff expense from the potential changes in compensation.

Mark Leonard

As I mentioned, I think it was in the [President’s] letter, we talked to everyone all of the constituents about increasing amount of bonus compensation available to folks that we felt could be very important to the future of the corporation. We put in place a kick-up program that sits above our existing bonus program. It’s a much longer oriented program with golden handcuffs on it. Whereas our existing bonus program isn’t golden handcuff oriented, it just encourages long term share ownership.

And we’ve had some take up when looking at roughly 1 million of incremental expense based on forecasts for the performance of the underlying businesses this year. There was relatively small tick up among the operating groups, it wasn’t universal, some of the groups used it, others didn’t. And they will be very closely watched amongst the general managers to see if its effective and if delivers value.

I hope it will be and I hope that it will grow significantly later in the course of the next few years, like most of the things we do. Let’s try it, see what works and adjust and then if it starts working well, apply fuel to fire.

Paul Treiber - RBC Capital Markets

And just want to shift gears to acquisitions and the pace of acquisitions. If you look at over the last few years our capital deployment acquisitions has lagged free cash flow. What in your view is the reason for that? And then when you look out in to the future, the challenge of deploying capital at high rates of returns will increase. Now how do you think about Constellation’s ability to keep deploying capital at high rates of return going forward?

Mark Leonard

That’s the challenge to the high rates of return, but deploying capital is not all. It’s non-trivial and you can keep doing it as if we’re doing something very, very special, because most of the groups that we study struggle with it. It is a challenge. It doesn’t have to be a challenge if everyone universally fails that. We know of some software companies that have done a tremendous job of not buying things that are too expensive.

But on the other hand, if we keep the cash out to shareholders, they have the investment problem and we are amongst those shareholders, those managers and employees, and if we can think at opportunities to reinvest some of our capital through the business, we are obviously going to do that.

So it’s not going to be easy, Paul I understand your concern and those of the shareholders and it’s something we think about and talk about a lot at the Board level, at the operating group level and even down to the business unit level they are trying to create a cohort of the couple of hundred capital allocators who have the skills to do that.

Paul Treiber - RBC Capital Markets

And then earlier or I guess last year Constellation lowered the hurdle rate in acquisitions. Give us a sense of what proportion of capital deployed last year is directly attributable to the lower hurdle rate being in place.

Mark Leonard

I think the time that we lowered it we also told you that we were cynical about hurdle rates and their impact upon portfolio returns. And we felt the portfolio returns track very closely hurdle rates. Because we have that underlying concern from the analysis that we’ve done of our own moves in hurdle rates over the decades, we did it in a fashion that wasn’t universal.

We lowered the hurdle rate instead for larger transactions and leverage transactions, we didn’t lower the hurdle of very small transactions, and guess the next tier up - lets call them tiny, we didn’t lower their hurdle rates, while we raised them in fact. Small, we left them where they were, and it was only on the larger ones that we dropped the hurdle rate.

And in terms of proportion just look at the size of transactions that have been done overtime, and if they are above $10 million transactions the likelihood is they’ve got a slightly lower hurdle rate on.

Paul Treiber - RBC Capital Markets

Just lastly, I just wanted to touch on topic that I don’t think we touched on in the past. Just on the internal controls, just for the increased scrutiny on inquisitive companies recently, can you provide some color on Constellation’s in terms of controls and then the internal processes that you as managers used to ensure compliance with your internal policies.

Mark Leonard

Back in the day we used do the internal controls from head office. Increasingly over time that has pushed down. What we advise the managers of the operating groups is this, the area where you’d get the worst faults in terms of accounting and understanding what’s going on the business of these revenue recognition, that doesn’t necessarily show up on the income statement initially. It tends to show up on the balance sheet where you get increasing amounts of work and AR, and to get really visibility in to what’s going on, you have to get down to the project level and the operating groups have CFOs and finance staff and they review an [arm width] at the business unit level and look for increasingly aged arm width and then drill down to the project level if they have concerns, and we do a certain amount of cross checking from head office Jamal will have calls with the guys. Jamal do you want to talk about that a little bit.

Jamal Baksh

Yes, I have quarterly meeting with the CFOs and do a detailed various analysis as well. We have an internal audit group that goes through and sort of reviews each of the financial statements of each of the operating groups. The same certifications that Mark and I have to sign off on we require the CEOs and CFOs of each of the operating group to sign off on. So there is accountability there, and I don’t if I just mentioned, they spent days now put in place internal audit people within their groups to help them get comfort that what they are signing off on is accurate.

Mark Leonard

So it’s a legitimate concern Paul because we run highly distributed decentralized session and so the consistency that you’d see in a centralized organization isn’t as great. But at the same time, we got these firewalls around individual situations you are much less likely to get a big surprise inside our organization you’re likely to get a small surprise and then hopefully people learn from that and make sure [eventually] get better.

Operator

The next question is from [Edward Macauley with Macauley Investment Consulting]. Your line is open.

Unidentified Analyst

Our analyst friends have been sort of damming you with (inaudible) for some time and now you’ve broken everything to print regarding acquisitions specifically Datamine, Market leader and Springer-Miller systems. Are you able to comment on any of these unkind references?

Mark Leonard

I don’t consider them unkind. I understand their concern because we are a collection of many small businesses and they can’t drill down in to the drivers of individual businesses, there just isn’t the time and the information for them to do so.

They are hypersensitive and when they see us buying larger troubled businesses that aren’t generating the kind of margins we’re generating and in some instances are undergoing fairly significant revenue shrinkage, their concern obviously is that the historical financial results that they can see through the internet, through various sources will continue under our ownership.

And I recognize that’s a concern. Every now and then we try to create case studies so that they can get some comfort around what we do with the businesses. It isn’t magic, we just try and share best practices with the businesses that are required and work with the management teams, existing teams to implement some of the things that will work better elsewhere inside the organization.

And it seems to have worked over the years, and there were instances where we’ve done so called BARs, Business Acquisition Reports that give you a more detailed view of a particular acquisition. We’ve also on a voluntary basis broken out a couple of major acquisitions and provided information that isn’t required under normal financial accounting. We can’t do it for all of the business units, we have a 170 of them presented and we’d be giving away a lot of competitive information.

So I understand why they are concerned, I understand their natural cynicism they’ve been burned before by acquisitive companies and the best I can suggest is look at the track records and continue to monitor the working capital account to see if they are ballooning and just do sort of weighted out and you’ll see how it goes.

Unidentified Analyst

Second question in organic growth the effect of foreign exchange implies that the organic growth is taking place in Europe being offset by negative foreign exchange. Am I reaching too far here?

Mark Leonard

So we do work out the impact to foreign exchange on the individual operating groups and business units, so that we can look at how they’re doing. Most of the business units themselves tend to be in one or two geographies and so it’s not that (inaudible). But the business unit level, when you get up to the aggregate level of course we’ve got Swiss Franc, we’ve got Euro, we’ve got Australian, we’ve got Canadian and US revenue, British pounds and so there are movements all over the place and it’s tough to get a strong handle on what’s happened and I think that’s why it all tends to be constant currency discussion in the MD&A. But certainly we think the organic growth of the underlying businesses particularly some of the Europeans ones is better than it would appear when you look at their statements in US dollars.

Jamal do you have anything to further comment.

Jamal Baksh

I think that’s right on. I mean TSS for example, the impact or the organic growth as a result of FX is like negative 15% because of the decline of the Euro, but it was actually fairly positive in local currency right. So there is a huge impact as a result of the euro.

Operator

The next question from Andre Eknada at Euro-Pacific. Please go ahead. Your line is open.

Andre Eknada - Euro-Pacific

Mark can you talk a little bit about the ongoing development initiatives that you are currently undertaking and should be impactful to your performance in 2016, love to know your perspective on that.

Mark Leonard

I can’t really think of a single one that would have in and of itself an impact that’s measurable at the aggregate level in ’16. Even larger our rewrites tend to be a few million dollar expenditure per annum type level and those would be the larger of our initiatives. And so it’s really the sum of a host of those things, and throughout the organization they would be at one time many rewrites and significant add-on products being created. It’s not an easy one to answer I’m afraid.

Andre Eknada - Euro-Pacific

Maybe we can shift the gears to one of your businesses here and we’ve seen one of your competitors in the wellness services industry report for example, 27% user growth last year and guiding to 30% growth in 2016. It seems like a fairly robust space to be in. Can you just give us update on how you’re positioned there against the likes of company like MINDBODY?

Mark Leonard

Sure. MINDBODY has a broader positioning than we do. We tend to be more in the health club and physical fitness professionals market. We have multiple offerings with different price points aimed at that particular segment. These multiple business units are the separate heads in that market, and MINDBODY is a company I’d follow with great interest. We try and study all of the SaaS models to figure out which ones’ are working.

And I think the incremental revenue and the incremental investment that MINDBODY makes to get that revenue looked to me to be approaching levels that would make sense, even if you didn’t think that dollars’ worth of revenue is worth $5 or $7.

So I love it when there are rational competitors in the market place, because you can behave rationally with them. On the other hand when you get irrational competitors who value dollars’ worth of revenue at extremely high multiples and are willing to invest 5 bucks to get a 1 bucks worth of revenue that has very high attrition characteristics which is quite common in the health and fitness space, than you worry about the economics of the whole sector.

I think it’s coming around. We track the SaaS sector, generally we have a group of companies that we serve our index on, and what it seems that in multiples of revenue that the market is according to these businesses have come down literally two times in the course of the last quarter, and that’s widely [encouraging]. It means that rationality is (inaudible) perhaps it’s no wonder available at very high prices for these companies and hence they are starting to invest the capital that remains more intelligently, more rationally.

That didn’t answer your question exactly, but I hope that I gave you a sense of sort of what I worry about and what I see happening in the market place.

Andre Eknada - Euro-Pacific

Yeah, it sounds like you are not quite ready to ramp your SaaS presence as they are just to chase that performance, is that fair to say?

Mark Leonard

Well I don’t think we have non-SaaS offering in that space, it is one of the first verticals to go SaaS, it did say years ago and it was because it was actually payments driven and payments accounted for the bulk of the revenues of the underlying systems providers even when they weren’t essentially hosted and were on-premise system. They had a SaaS tied economic model and so over the course of perhaps the last 10 years nearly all of the vendors in that space have moved to an essentially hosted model for the bulk of their revenues I’d suggest.

Andre Eknada - Euro-Pacific

Got it, and may be a final one from me. One for you Jamal, if there was a healthy jump in the maintenance revenue on the private side of the business, can you add some color in sort of what was driving that and the upside there.

Jamal Baksh

I didn’t notice anything specific in the private side. We’ll do the maintenance analysis and then show that reward in March presence whether in a month or so. But there’s nothing that pops out to me that occurred especially in the private side other than we acquired maintenance. The organic growth I don’t think is anything - I am not expecting it to be anything different than sort of what we’ve had in the past.

Operator

The next question is from Thanos Moschopoulos at BMO Capital Markets. Please go ahead your line is open.

Thanos Moschopoulos - BMO Capital Markets

Mark over the past year you’ve talked about being more active on bidding on some of the awesome sized deals. Now that you’ve been out doing that for a while, have there been any lessons learnt from that experience and is elephant hunting proving to be any materially different from what you initially expected.

Mark Leonard

Well its more frustrating that I’d hope, and there were little less than 80 elephants as we could find in the vertical market software space. During the course 2015, we got to participate in roughly a quarter of them, and we landed none of them.

We would like to drive up our participation rate, so that we are seeing a higher percentage. Don’t know if that’s possible, it will largely be a function of just telling the brokers where we think we fit in these processes and how they can use us best, because nearly all of them are brokered.

If we do succeed in driving up the participation rate and we would at least know the markets with our own hand be positioned for when particularly good ones from our perspective come along, and we would hope to get one of those every year or two.

Thanos Moschopoulos - BMO Capital Markets

Okay, and on the organic side; organic growth’s been slower than typical over the past couple of quarters. Would you say that’s primarily reflective of some of the revenue run-off dynamic that you alluded to earlier or generally speaking are your operating managers seeing any broader issues weighing on the overall demand environments?

Mark Leonard

I think I told last quarter about the forecast for ’16 and that it was more or less in the range that we would hope for, but at the same time we tend to see that forecast drop during the course of any current year, and it was has come down from last quarter.

It’s still a number that I would be very comfortable with if we deliver it. But I suspect we’ll continue to see some slippage. It isn’t that feeling distressed about the future, I’d say they are feeling reasonably optimistic, but you don’t know what it’s going to be till it happens.

Thanos Moschopoulos - BMO Capital Markets

Fair enough. Looking at the components of revenue is it safe to assume that the organic growth for maintenance revenue would be substantially higher than the organic growth for the overall business?

Mark Leonard

That’s nearly what was the case with us because we emphasized recurring revenue at the expense of one-time revenues. That’s the stuff that we like, it’s the stuff that we can plan it on and make ourselves to hire and keep employees even look to our economic downturns and so it’s - we’ll always focus on procuring at the expense of other kinds of revenue.

Thanos Moschopoulos - BMO Capital Markets

And then finally my understanding is that your organic calculation includes assets that you’ve owned for less than a year. If we were to strip those out, would that have a material impact on what the overall organic growth rate would look like?

Mark Leonard

Yeah, I saw that in the Veritas report that came out a month or so ago. And it’s a legitimate concern or complaint; we went and had a look at it, and I’m going to present the data to you in the presence later, and I think what you’ll find is it’s a temptress in a teacup. That could spread a little difference, whether you use the calculation, there are many people who use what you don’t include the revenues for the first year post acquisition, as compared to where we do use them right away. There’s not a whole lot of difference.

I think our method is more sensitive and gets you an answer quicker on whether the acquired business has organic growth or not. I think a method that Veritas prefers. It is less likely to get played with because the run rate that you pick for the business when you acquire it, you can’t play games with it if you just don’t include it for the first year. It’s a much more audible kind of number and they take great comfort in quality of earnings, quality of numbers that kind of stuff.

Operator

[Operator Instructions] the next question is from Drew Tony, a shareholder. Please go ahead, your line is open.

Unidentified Analyst

You mentioned in the past that the dividend being attached is part of the investments a few years ago. Going forward it seems retaining the cash would maybe more tax efficient and beneficial for the long term shareholders, and I do realize that that’s a bit physiologically unpleasant, but at what point does it make sense to kind of rip off that bandage.

Mark Leonard

It’s a great way to put it. One of the ways you can of course avoid ripping of bandage is by finding a way to make them permanent and comfortable. And so we’re actually working on that. We’ve come up with a concept they call the dividend equivalent share and we’re running it by the tax authorities to get a ruling on whether we can do it or not and (inaudible) with a round of these Canadian shareholders to hold a separate class of shares that begin to allow them to not receive dividends but get the economic benefit as if they were receiving dividend.

We’re going to bring that before the AGM and present it to shareholders and subject to getting approval from the Canadian tax authorities who’ll probably put that in place. So that would allow us to continue to pay dividend or not and including people who attack who don’t particularly want to receive dividend yet allow them to participate economically in the increasing value of their efforts.

That aside and it’s a bit of a (inaudible), if a very large acquisition came along, if we had the opportunity to go in to our acquisition that we thought could generate very high rates of return, I would not hesitate to recommend to the Board that we sacrifice the dividend to help finance that acquisition. But I’m not suggesting that we have such an acquisitions, I would love it if we did, but we don’t.

But that’s how it would be. If there are great places to put the dough, we will hang on to it even if that these shares aren’t in place.

Unidentified Analyst

And how do you feel about potentially just growing the capital so that you would have more dry powder if you will or that large acquisition, just to say hey we put this money away, it’s going to be there. I guess that time [someone] will have a bigger bat if you will to take that flank.

Mark Leonard

Yeah it serves a game so the spreadsheet up on the wall in the Board room and we’ve got little decision [sprees] that taking look at all of that stuff and what we think the probabilities are of being able to find large and attractive acquisitions. And what happens is, we find (inaudible) with any luck and nice small businesses each year, but we succeed in acquiring and have a good track record if you will.

Occasionally we find a large under-performing business and occasionally we’ll find a large business that’s doing well that we can leverage and sort of play the private equity gain, and also bring some value to it.

The probabilities as you move up that scale from these small to the large leverage can become lower and lower and lower, and so the opportunity cost of having money sitting on the sidelines becomes higher and higher and higher to the extent that you can convince a bank syndicate group to give you a revolver that’s by far your least expensive and standby capital, and so we’re in the process of putting in place a renewed revolver as we speak.

The problem with revolvers and even bridge loans when you go to make large acquisitions is that they are inherently short term capital and what you’re buying are kind of assets, you’re growing businesses to keep further. And so the problem is the one of mismatch. If I want to be mismatched, if you’re going to avoid it and so the alternative would be to go out and raise permanent capital and then go find a permanent investment.

The cost of that permanent capital as you know in the form of our debentures is in the 8% region, and if we were to go out and get bonds, it would be no longer permanent capital because the bonds tend to be 5, 7, 10 years. And (inaudible) sure it’s unclear exactly what our cost on that particular capital would be, but it would be a hell of a lot more than revolver.

So I think the way we’re going to come out is we’re going to put in place a revolver, we’re going to try to be in a position to do a baseline group of acquisitions, and then if we stumble across or find some kind that’s significantly larger, we’ll have to hustle.

Operator

Thank you. There are no further questions at this time. I’d like to turn the meeting back over to Mr. Leonard.

Mark Leonard

Thank you Eric, appreciate it. And all for attending and look forward to chatting with you at the AGM or on the next quarterly conference call. Bye, bye now.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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