Mark Leonard's system for holding small software businesses for decades, run from a deliberately tiny head office.
In one line
Constellation owns more than a thousand small software businesses for the long term and tests every use of their cash against a hurdle rate it rarely lowers.
Constellation owns small software companies that each serve a single trade, known as vertical market software. Most sellers are owner-managers, and in 2016 they accounted for 30 of its 40 acquisitions. Each usually stays a stand-alone unit under its existing managers. Leonard described the aim as being a great perpetual owner of these businesses.
The units sit inside operating groups, which coach managers and help them place capital. In 2013 there were about 125 units in five groups, with a head office of 14 people. Leonard found almost no link between a unit's size and its results, and some groups split large units into smaller ones.
Every acquisition and internal growth project must clear a hurdle rate, weighted for its odds of success. In 2015 Leonard found that each past cut to the hurdle had dragged expected returns on later deals down towards it. His summary was that "hurdle rates are magnetic". Cash that could not be placed at the rate went back to shareholders.
Bonuses rest on return on capital and revenue growth, after a 5% risk-free charge in most groups. High-return groups are asked to keep and reinvest their own capital. Two groups, Topicus.com and Lumine Group, were spun out to shareholders as separate companies in 2021 and 2023. Leonard stepped down as president in September 2025, and Mark Miller succeeded him.
Set the hurdle, then leave it. Constellation's record shows that one lowered threshold quietly lowers every decision after it.
A small centre and a named operator. Constellation pushes decisions down to the people who know the customers.
Ownership should take years to earn. Constellation's senior people hold their bonus shares for years, so their horizon matches the owners'.
Constellation's units are asset-light software firms with deep moats and long-standing customers. Consumer businesses here carry stock and face seasonal demand, so cash moves through them more slowly. A thin head office also assumes every unit already closes its books each month. In many businesses here, that has to be built first.
The machine also depends on a steady flow of founders ready to sell, and on listed shares that managers can value. Many businesses here are family-owned, and private shares are hard to price or sell.
Our own notes, from the company's letters, filings and public sources. Checked November 2026. Not investment advice.