Is Chapters Group the Berkshire Hathaway of the future?

The goal of the German conglomerate Chapters Group is to achieve the same level of success as Warren Buffett

According to Terry Tanaka, investors ought to enter the market early.

One of the best illustrations of the buy-and-build strategyone of the most traditional and trustworthy investment strategiesis the German conglomerate Chapters Group (Frankfurt: CHG).

The reasoning is surprisingly straightforward: buy a disorganized group of small, unloved companies at cheap prices, professionalize their operations, and combine them into a bigger, more productive whole that the stock market values at a significantly higher multiple.

From the early days of Warren Buffett's Berkshire Hathaway to more recent examples like the UK's Diploma or Canada's Constellation Software, history demonstrates the model's success. Finding a top-notch serial acquirer early on can change the life of a patient investor.

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Start your trial When Jan-Hendrik Mohr, a former fund manager and lifelong student of the Buffett school of investing, took over a little-known German micro-cap shell in 2018, Chapters Group started to take shape. His goal was to unite the highly dispersed European software industry.

With an estimated 1.1 million small software companies operating throughout the continent, many of which were established in the 1980s, 1990s, and 2000s, Europe is currently facing a demographic cliff. Now in their late 50s, 60s, and 70s, their founders frequently lack a clear succession plan. These are dull, mission-driven companies with extremely sticky revenue rather than glamorous tech start-ups.

Chapters is able to buy these founders at reasonable multiples of about six to seven times earnings because they value their legacy more than the purchase price. This is a significant discount when compared to the double-digit multiples observed in larger tech acquisitions.

What makes Chapters Group successful?

Mohr has divided the company into three different vertical platforms to handle complexity, each catering to a market where software is a functional requirement rather than an extravagance.

The first is the public-sector hub, which supplies vital infrastructure software for institutions like the bus scheduling systems for significant European exchanges or the German police force.

The enterprise hub, which focuses on specialized industrial tools like custom management systems for motorcycle retailers, comes in second.

Lastly, there is the hub for financial technologies, headed by the rapidly expanding Fintiba, which digitizes the legal requirements for foreign workers and students relocating to Germany. Chapters makes sure that its revenue streams are safeguarded by high switching costs by identifying areas where the cost of software failure is catastrophic for the client.

Mohr refers to the "manuscript method" as the key to growing this empire without succumbing to corporate bureaucracy. As long as they adhere to strict guidelines regarding financial reporting, HR standards, and integration into the central data functions, this gives local business units nearly complete autonomy over hiring, contract negotiations, and day-to-day operations. Chapters can retain an entrepreneurial mindset at the subsidiary level while taking advantage of the efficiencies and data-sharing of a major technology leader thanks to this freedom-within-limits model.

The most prosperous permanent-capital investors in the world have been drawn to Chapters Group. Mitch Rales, a co-founder of Danaher who used a similar strategy to grow a small business into a £180 billion global science and technology behemoth, is listed among the shareholders. Daniel Ek, the founder of Spotify, and William Thorndike, the author of The Outsiders, a groundbreaking book that profiles eight remarkable CEOs who achieved legendary returns, are also featured, perhaps most tellingly. The fact that Thorndike is there suggests that he sees Mohr as the next big outsider who can compound capital at a rate of more than 20 percent per year for decades.

What about the threat posed by AI? Chapters might benefit greatly from AI. Managing intricate databases and security procedures that must adhere to stringent local European regulations, the group works at the unsexy end of the market. A police department or a municipal bus service is unlikely to jeopardize a vital system in order to save a tiny sum of money on a speculative AI-coded replacement because these are minor expenses in very large budgets. Actually, Mohr sees AI as a tool to enhance his own products and speed up the coding process, thereby reducing his development expenses.

How to purchase stock from Chapters Group.

Group of Chapters.

Currently, owning Chapters presents a practical challenge for investors based in the United Kingdom. Since the stock is currently listed on the German Scale exchange, a junior market comparable to Aim in the UK, it is not eligible for the majority of ISAs and SIPPs. But as the business expands, management has indicated that it plans to elevate it to the Prime Standard (Main Market). Anticipated as early as later this year, this action would serve as a major catalyst, enabling institutional funds and UK retail accounts to purchase the shares at last. Chapters' executive team, which is still in their 30s and 40s, operates with a multi-decade horizon that is ideal for long-term, patient investors.

The Chapters story's beauty is that it doesn't depend on chance or the next big thing in technology. It is an industrialized system for purchasing and improving profitable, high-quality businesses. The goal of chapters is to create something that will be much more than the sum of its parts. Chapters is playing a 20-year game, whereas the market is frequently fixated on the upcoming quarter. The journey with Jan-Hendrik Mohr and his backers could be extremely rewarding for those who are prepared to look past the current junior listing and embrace the slow, steady power of compounding.