A new Toronto private equity fund aims to follow in Constellation’s footsteps.
Through Toronto-based Define Capital, OMERS Ventures and RIV Capital alum Narbe Alexandrian plan to buy profitable vertical software-as-a-service (SaaS) and business-to-business (B2B) companies and grow them long-term.
Define recently raised CAD 20 million ($15 million) for it. With Define—not to be confused with Vancouver’s defined capital city—Alexandrian sees room to follow in the footsteps of Toronto-based Constellation Software and consolidate the fragmented software market at a time when many Baby Boomers are preparing to sell.
“The supply is big and the supply is getting bigger, and there’s the M&A boom that’s also taking shape with the Baby Boomers [retiring].”
Narbe Alexandrian, Define capital city
“The idea is to create long-term value by acquiring these sticky SaaS and [B2B] software companies, optimizing them and then just holding them forever, similar to a Constellation-type model,” Alexandrian told BetaKit in an exclusive interview.
Launched in early 2023, Define is an open-end private equity (PE) fund with a “multi-decade horizon” and a limited liability general partner (LP) structure. “What we’re building is a perpetual capital corporation,” said Alexandrian, founder, chief executive officer and sole employee of Define.
He declined to reveal the identities of Define’s LPs, noting only that they consist of a mix of mostly local high-net-worth individuals, family offices and strategic investors with backgrounds in technology, entrepreneurship and finance.
Alexandrian started at Deloitte working in consulting and mergers and acquisitions (M&A). After working at Firmex as manager of corporate strategy and business development, MaRS Innovation as an advisor to the University of Toronto’s early-stage technology program, and Telus as senior strategy manager, he joined the venture arm of the Ontario Municipal Employees Retirement System (OMERS Ventures). , where he spent almost four years.
At OMERS Ventures, Alexandrian started as an associate and worked his way up to principal before leaving to lead the PE and venture capital (VC) arm of Ontario-based Canopy Growth, which later spun off as RIV Capital. He served there as president and then president and CEO for nearly three and a half years until his departure in 2022.
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He said that during his days at OMERS and MaRS, he ran into a lot of niche software companies that didn’t quite fit the traditional VC profile. “They’re profitable, their customers are sticky, they’re answering a really clear problem within a niche industry, the market size isn’t that big, but it’s been a great business,” he said.
Alexandrian expects a significant number of companies that fit this description — both established and new — to change hands over the coming years as Baby Boomers age and artificial intelligence and low- or no-code advancements have made creating new software easier than ever.
“The supply is big and the supply is getting bigger, and there’s the M&A boom that’s also taking shape with the Baby Boomers [retiring]” added Alexandrian, who sees room to acquire some of these companies and optimize them for long-term growth amid what has become an investor- and acquirer-friendly market environment.
To begin with, Define plans to buy one to two companies based in Canada or the United States per year. As it grows in scale, Alexandrian said it may close more deals. Define prefers full control, but is open to acquiring majority stakes in various niches. Some verticals Alexandrian has explored so far include software for churches, funeral homes, construction, bakeries and pharmacies.
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Alexandrian described Constellation as an inspiration, noting that it grew into a $77 billion giant using a similar strategy to the one Define now plans to implement, as it joins a list of Canadian software consolidators that includes established players like Kitchener. Waterloo’s OpenText and younger newcomers like Valsoft from Montréal.
He sees an opportunity for Define to grab a slice of the North American software market with a more human approach, noting that many of the older founders he’s met want to sell to someone who will take care of their business like they did.
“My difference is… when you talk to me, in the beginning, when you want to sell your company, I’m the guy, I’m going to do my best, I’m going to build the model, I’m going to negotiate, I’m going to close it and I’m going to launch it, and you’re not going to be passed on to someone else,” Alexandrian added, noting that he’s found this to be a selling point, especially for people who have built and run their own businesses for decades.
“This is not a very cash, capital intensive business. You can take $20 million very, very far.”
Define targets profitable, growing, niche SaaS and B2B software companies with $1-30M in recurring revenue, limited churn, a “critical use case”, more than three years of business history and a strong team. His “sweet spot” is companies with earnings of $400,000 to $5 million before income, taxes, depreciation and amortization.
The fund has already made its first two acquisitions, buying two undisclosed municipal government software companies. Alexandrian declined to share their names for now, citing strategic reasons, as Define looks set to manage the transition in the coming months before announcing the news publicly.
Among other things, Define intends to help portfolio companies improve their operational efficiency, optimize their pricing and go-to-market strategies, and continue to invest in their software infrastructure. In some cases, if Define acquires direct competitors, there may be an opportunity to combine these companies. In others, the fund intends to leave them to work separately.
According to Define’s CEO, many of the companies he was considering buying have loyal customers, modest growth and “untapped potential” that could be unlocked by moving their solutions to the cloud. The real challenge, he said, will be in execution.
Alexandrian believes that $20 million will be more than enough to achieve a good strategy. “This is all the capital we need,” he said, noting that Define can “strengthen” its deals because there is cash flow in the companies it is targeting, securing debt to support acquisitions. “This is not a very cash, capital intensive business. You can take $20 million very, very far.”
Feature image courtesy of Define Capital.