I really appreciate the thoughtful discussion and input from the Substack community 🙏 The different perspectives, challenges, and follow-up questions are exactly what make publishing here so valuable!
I do not want to imply any deliberate deception, but the complexity of the structure can easily create a misleading impression for retail investors without a strong accounting background, particularly when consolidated group metrics are emphasized without equally highlighting the portion attributable to NCI! The same applies to the balance sheet: when debt is assessed against the cash flow actually attributable to KPG shareholders rather than consolidated EBITDA, the business is economically much more leveraged than it may appear at first glance.
Thank you for writing this. It is the first comprehensive explanation of non-controlling interests I have seen in all my years of financial internet surfing.
Thank you very much — I really appreciate that. NCI can materially change the economics for ordinary shareholders, yet it is often overlooked or poorly explained.
Yep, I’m not to happy with their lack of transparency regarding NCI. To the point where in the Redeye conference this year Brett Kelly deliberately dedicates a slide to demonstrating that KPG shares are “materially undervalued”. But only displays the GROUP consolidated NPATA to show the undervaluation, ignoring NCI. This is particularly concerning considering Brett has had margin calls on his ownership around the time of this conference, suggesting he is not acting in the interest of other shareholders. As a shareholder who only discovered this after my initial purchase I’m not very happy.
Thank you, Benjamin. I share your concern. Highlighting consolidated group NPATA while discussing the valuation of KPG shares can be misleading when a meaningful portion of those earnings belongs to NCI. The distinction between group-level performance and the earnings ultimately attributable to KPG shareholders should be communicated much more clearly.
As for cashflow, timing of payment can make it look different as pure accounting. If you add up 2024+25, you'll see they don't give "more than half" to minority stakeholders.
Also note that debt is mostly held at subsidiary level and interests/repayment is taken from subsidiaries cashflow before it reaches top level.
I understand it may be too complicated for some and there is indeed a Brett Kelly risk involved.
But business wise, they grew +29% CAGR last few years, let's put +25% next 5 years.
That will put them at ~$500M revenues by 2031 for ~$150M EBITDA.
Cut that in half for KPG shareholders so $75M EBITDA.
Put a multiple on that for a business growing 25%...
That is a fair way to look at it, and I did not mean to suggest that KPG is necessarily a bad business or investment. My main point was simply that investors should distinguish between group-level profitability and the earnings and cash flows that ultimately accrue to KPG shareholders.
Your valuation framework may well prove correct. Personally, however, the structure does not appeal to me. The distributions to minority shareholders are economically meaningful and reduce the cash available for reinvestment and further acquisitions. On top of that, there is the Brett Kelly risk. I do not know him personally, but based on what I have seen, I do not have sufficient confidence in him as a steward of my capital.
For me, there are simply better businesses with cleaner structures and fewer governance concerns. But that is, of course, only my personal view.
Anyone can pass on any company and that's totally fair. There are many industries I personally just pass myself.
As of partnerships within KPG, it's not a bug: it's a very key feature. It allows KPG to retain the firms owners for several years after partnering with them.
And remaining cashflow to KPG shareholders are indeed low now as head-office overhead is weighting on it. But as they grow and scale, a much higher portion of cashflow will go to pure bottom line.
Good point! The key question for me is how much additional scale KPG really needs before head-office costs become immaterial and more cash flow actually remains with KPG shareholders.
For comparison, Teqnion is a decentralized, industry-agnostic serial acquirer with more than 40 subsidiaries across very different industries, yet its head-office costs are only around 1.3% of net sales. KPG also operates at a higher EBITDA/EBITA margin than Teqnion. That is why I am not fully convinced by an investment case that relies heavily on substantial future operating leverage at the head-office level.
More importantly, as long as KPG continues to acquire only 51% of its partner firms, the significant distributions to NCI are unlikely to change materially. They are a structural feature of the model and will continue to reduce the cash flow retained by KPG shareholders and, therefore, the group’s reinvestment rate.
Nice write up, you hit the nail on the head. Very telling when companies don't respond to certain questions, but are more than willing to be promotional............
Thank you — I appreciate it. I agree: companies are often very responsive when the discussion is promotional, so silence on specific and financially relevant questions can be quite revealing. Personally, I tend to prioritize companies that have little need for promotional activity because they simply compound quietly in the background...
Exactly. It is important not to follow the serial acquirer narrative blindly, but to look beneath the surface and understand the accounting, especially when companies do not acquire 100% of their subsidiaries. Teqnion, for example, typically buys 100%, so this issue does not arise. Röko often acquires only 80–90%, but recognizes the related put/call obligations as liabilities, allowing them to be reflected in enterprise value and net debt. So does HEICO. It really has to be assessed case by case.
I have no interest in this type of business, however this is a very good insight! You're right, I typically do ignore minority interest it in most scenarios.
Thank you, Kiran! By my standards, though, this was more of a shallow dive than a true Deep Dive. Have a look at some of my full company Deep Dives, and you’ll see what I mean (including the upcoming HEICO Deep Dive on July 19) 😄
My PhD supervisor once told me, "When you write, use the KISS principle and write for a reader with a basic understanding of the topic." In this article, you got straight to the point and explained the accounting aspects perfectly.
Not to be a stick in the mud... but I think your debt levels are incorrect. Pretty sure a big piece of the debt sits at the partnership level not the Parent. They have a slide on debt.
The 51/49 structure, while framed as a strategic advantage, may mask the true economic returns to shareholders. By contrasting consolidated financials with actual owners' earnings, the investment case becomes clearer, revealing potential risks in the math behind KPG's growth story.
For me, the partnership model is fine, but they really could communicate the accounting side better. What bothers me more is Brett's margin calls, which are partly why the stock price crashed — and given that, he should have clearly addressed it publicly. Instead, all we got was a shareholder letter with a Graham quote. Thanks for the article!
Well , this is interesting. And makes me regret not taking an accounting class or 2 in college. Given that Brett Kelly is the consummate Warren Buffett fan, why doesn't he publicly address why he does what he does with the accounting ? And why doesn't he explain why the stock price is down 70% while the markets are hitting all time highs? Brett Kelly is an accountant. He forgot more about accounting than most investors will ever know. I think the smart thing would have been to explain why they do what they do long before the stock falls 70% ! Because given the confusion, most investors are now not going to touch the stock. A CEO and founder should not let his reputation and business become shrouded with accounting question marks. This isn't about the AI taking over accounting. This is a different issue. I am hearing crickets.
It may all be technically correct, but the presentation stinks.
Buy 51%, consolidate 100% of the revenue and EBITDA, and barely mention that 49% belongs to someone else. Almost ingenious. Even better: retain the cash at subsidiary level and there are no visible distributions to NCI at all, although the economic claim of minority owners has not disappeared. That is why group-level figures alone can be highly misleading.
The more I think about it, the less comfortable I am taking the cash flow statement at face value—even though it is often described as the financial statement that is hardest to manipulate.
Always check for minority interests when analyzing cash flow. Otherwise, you may mistake consolidated cash generation for cash that actually belongs to shareholders.
I listened to the most recent conference call and someone asked a question about the stock price. Brett gave a very Buffett like answer saying they don't run a company based on the price of the stock. I do admire Brett Kelly, as I have read and listened to him before. He is very much a disciple of Warren. Not being an accountant savant myself , I am only wondering if this is a fair entry point or a warning of mayhem to come. Have you sent him any emails? He did say in the conference call that he responds to people's questions. Put it to him and see what he has to say about it.
Thank you. I would not generalize this to all serial acquirers that acquire less than 100% of their subsidiaries. The economic outcome depends heavily on the precise ownership structure, the contractual arrangements with minority shareholders, and the accounting treatment. An apples-to-apples comparison is therefore essential.
For example, some groups have put/call arrangements that effectively allow or require the remaining minority stake to be acquired later. Under IFRS, the expected settlement amount may be recognized as a financial liability. In that case, the economic cost of acquiring the minority interest is already visible on the balance sheet and can be reflected in enterprise value, net debt, and leverage calculations. Röko is a good example: these liabilities are included in its reported net debt, and therefore also in net debt/EBITDA.
Another approach is to focus on EBITDA or EBITA attributable to shareholders, which Idun Industrier explicitly discloses (most serial acquirers don't disclose this metric).
We like the story and leadership and TAM for the KPG opportunity. We view it as akin to an asset light perpetual family franchise model given the ownership metrics and fees.
Of course, we’re buying what’s underneath that, and we believe that must exist for the franchise fee asset light model to continue: to infinity and beyond, as Buzz says. As you have acknowledged, there exists incredible value and staying power in the firm/client relationship, KPG appears to have developed a successful system to perpetually exploit it (hopefully!). We’re betting on that secret sauce. P.S., Another enjoyable write up, thank you.
My reservation is less about the concept itself and more about the economics for listed KPG shareholders: the 51/49 ownership structure, recurring distributions to NCI, and governance risks mean that strong group-level growth does not translate one-for-one into cash flow attributable to shareholders.
I really appreciate the thoughtful discussion and input from the Substack community 🙏 The different perspectives, challenges, and follow-up questions are exactly what make publishing here so valuable!
I do not want to imply any deliberate deception, but the complexity of the structure can easily create a misleading impression for retail investors without a strong accounting background, particularly when consolidated group metrics are emphasized without equally highlighting the portion attributable to NCI! The same applies to the balance sheet: when debt is assessed against the cash flow actually attributable to KPG shareholders rather than consolidated EBITDA, the business is economically much more leveraged than it may appear at first glance.
Thank you for writing this. It is the first comprehensive explanation of non-controlling interests I have seen in all my years of financial internet surfing.
Thank you very much — I really appreciate that. NCI can materially change the economics for ordinary shareholders, yet it is often overlooked or poorly explained.
Yep, I’m not to happy with their lack of transparency regarding NCI. To the point where in the Redeye conference this year Brett Kelly deliberately dedicates a slide to demonstrating that KPG shares are “materially undervalued”. But only displays the GROUP consolidated NPATA to show the undervaluation, ignoring NCI. This is particularly concerning considering Brett has had margin calls on his ownership around the time of this conference, suggesting he is not acting in the interest of other shareholders. As a shareholder who only discovered this after my initial purchase I’m not very happy.
Thank you, Benjamin. I share your concern. Highlighting consolidated group NPATA while discussing the valuation of KPG shares can be misleading when a meaningful portion of those earnings belongs to NCI. The distinction between group-level performance and the earnings ultimately attributable to KPG shareholders should be communicated much more clearly.
I'm in the same situation and I'm really pissed off about this.
Yes there is a 51/49 split on financials for KPG.
As for cashflow, timing of payment can make it look different as pure accounting. If you add up 2024+25, you'll see they don't give "more than half" to minority stakeholders.
Also note that debt is mostly held at subsidiary level and interests/repayment is taken from subsidiaries cashflow before it reaches top level.
I understand it may be too complicated for some and there is indeed a Brett Kelly risk involved.
But business wise, they grew +29% CAGR last few years, let's put +25% next 5 years.
That will put them at ~$500M revenues by 2031 for ~$150M EBITDA.
Cut that in half for KPG shareholders so $75M EBITDA.
Put a multiple on that for a business growing 25%...
Even at a modest 13x, you get a $1B market cap...
That is a fair way to look at it, and I did not mean to suggest that KPG is necessarily a bad business or investment. My main point was simply that investors should distinguish between group-level profitability and the earnings and cash flows that ultimately accrue to KPG shareholders.
Your valuation framework may well prove correct. Personally, however, the structure does not appeal to me. The distributions to minority shareholders are economically meaningful and reduce the cash available for reinvestment and further acquisitions. On top of that, there is the Brett Kelly risk. I do not know him personally, but based on what I have seen, I do not have sufficient confidence in him as a steward of my capital.
For me, there are simply better businesses with cleaner structures and fewer governance concerns. But that is, of course, only my personal view.
Anyone can pass on any company and that's totally fair. There are many industries I personally just pass myself.
As of partnerships within KPG, it's not a bug: it's a very key feature. It allows KPG to retain the firms owners for several years after partnering with them.
And remaining cashflow to KPG shareholders are indeed low now as head-office overhead is weighting on it. But as they grow and scale, a much higher portion of cashflow will go to pure bottom line.
I invite you to model it a few years out to see.
Good point! The key question for me is how much additional scale KPG really needs before head-office costs become immaterial and more cash flow actually remains with KPG shareholders.
For comparison, Teqnion is a decentralized, industry-agnostic serial acquirer with more than 40 subsidiaries across very different industries, yet its head-office costs are only around 1.3% of net sales. KPG also operates at a higher EBITDA/EBITA margin than Teqnion. That is why I am not fully convinced by an investment case that relies heavily on substantial future operating leverage at the head-office level.
More importantly, as long as KPG continues to acquire only 51% of its partner firms, the significant distributions to NCI are unlikely to change materially. They are a structural feature of the model and will continue to reduce the cash flow retained by KPG shareholders and, therefore, the group’s reinvestment rate.
It's not that it relies heavily on future leverage, it's just that the size orof KPG is much smaller now than a CSU or a Teqnion.
They still need to pay a CEO, a CFO, legal, HR, exchange fees, auditors...
This is obviously a higher toll on $20M EBITDA than on $100M+ EBITDA
Also note that the 51% also comes with only paying for 51% of the business, it's all fair.
Each side of the 51/49 grow +25% when they grow +25%
Nice write up, you hit the nail on the head. Very telling when companies don't respond to certain questions, but are more than willing to be promotional............
Thank you — I appreciate it. I agree: companies are often very responsive when the discussion is promotional, so silence on specific and financially relevant questions can be quite revealing. Personally, I tend to prioritize companies that have little need for promotional activity because they simply compound quietly in the background...
I appreciate the attention to detail here! All the more reason to stay vigilant when assessing the quality of roll-ups and serial acquirers.
Exactly. It is important not to follow the serial acquirer narrative blindly, but to look beneath the surface and understand the accounting, especially when companies do not acquire 100% of their subsidiaries. Teqnion, for example, typically buys 100%, so this issue does not arise. Röko often acquires only 80–90%, but recognizes the related put/call obligations as liabilities, allowing them to be reflected in enterprise value and net debt. So does HEICO. It really has to be assessed case by case.
I have no interest in this type of business, however this is a very good insight! You're right, I typically do ignore minority interest it in most scenarios.
This is what we call, "a Deep Dive". Great write-up and thank you for your time
Thank you, Kiran! By my standards, though, this was more of a shallow dive than a true Deep Dive. Have a look at some of my full company Deep Dives, and you’ll see what I mean (including the upcoming HEICO Deep Dive on July 19) 😄
Haha.. HEICO, a new article. Good.
My PhD supervisor once told me, "When you write, use the KISS principle and write for a reader with a basic understanding of the topic." In this article, you got straight to the point and explained the accounting aspects perfectly.
Appreciate your feedback!
Not to be a stick in the mud... but I think your debt levels are incorrect. Pretty sure a big piece of the debt sits at the partnership level not the Parent. They have a slide on debt.
Otherwise great work :)
You nailed it! I was looking at $KPG.AX and I was not sure about the math around non-controlling interests. Thanks for sharing!
Thanks, Alexandru! That is exactly why I wrote it.
The 51/49 structure, while framed as a strategic advantage, may mask the true economic returns to shareholders. By contrasting consolidated financials with actual owners' earnings, the investment case becomes clearer, revealing potential risks in the math behind KPG's growth story.
Agree!
For me, the partnership model is fine, but they really could communicate the accounting side better. What bothers me more is Brett's margin calls, which are partly why the stock price crashed — and given that, he should have clearly addressed it publicly. Instead, all we got was a shareholder letter with a Graham quote. Thanks for the article!
You are welcome!
Well , this is interesting. And makes me regret not taking an accounting class or 2 in college. Given that Brett Kelly is the consummate Warren Buffett fan, why doesn't he publicly address why he does what he does with the accounting ? And why doesn't he explain why the stock price is down 70% while the markets are hitting all time highs? Brett Kelly is an accountant. He forgot more about accounting than most investors will ever know. I think the smart thing would have been to explain why they do what they do long before the stock falls 70% ! Because given the confusion, most investors are now not going to touch the stock. A CEO and founder should not let his reputation and business become shrouded with accounting question marks. This isn't about the AI taking over accounting. This is a different issue. I am hearing crickets.
It may all be technically correct, but the presentation stinks.
Buy 51%, consolidate 100% of the revenue and EBITDA, and barely mention that 49% belongs to someone else. Almost ingenious. Even better: retain the cash at subsidiary level and there are no visible distributions to NCI at all, although the economic claim of minority owners has not disappeared. That is why group-level figures alone can be highly misleading.
The more I think about it, the less comfortable I am taking the cash flow statement at face value—even though it is often described as the financial statement that is hardest to manipulate.
Always check for minority interests when analyzing cash flow. Otherwise, you may mistake consolidated cash generation for cash that actually belongs to shareholders.
I listened to the most recent conference call and someone asked a question about the stock price. Brett gave a very Buffett like answer saying they don't run a company based on the price of the stock. I do admire Brett Kelly, as I have read and listened to him before. He is very much a disciple of Warren. Not being an accountant savant myself , I am only wondering if this is a fair entry point or a warning of mayhem to come. Have you sent him any emails? He did say in the conference call that he responds to people's questions. Put it to him and see what he has to say about it.
Yes, I have sent him a few emails about the topic and never received a reply. Might try again!
Yes, please to that, and let us know whether he does or does not respond here. Thanks,
I’ve just sent him an email. I’ll update you guys if he responds.
Excellent article. Makes one think twice about serial acquirers who don't buy whole businesses.
Thank you. I would not generalize this to all serial acquirers that acquire less than 100% of their subsidiaries. The economic outcome depends heavily on the precise ownership structure, the contractual arrangements with minority shareholders, and the accounting treatment. An apples-to-apples comparison is therefore essential.
For example, some groups have put/call arrangements that effectively allow or require the remaining minority stake to be acquired later. Under IFRS, the expected settlement amount may be recognized as a financial liability. In that case, the economic cost of acquiring the minority interest is already visible on the balance sheet and can be reflected in enterprise value, net debt, and leverage calculations. Röko is a good example: these liabilities are included in its reported net debt, and therefore also in net debt/EBITDA.
Another approach is to focus on EBITDA or EBITA attributable to shareholders, which Idun Industrier explicitly discloses (most serial acquirers don't disclose this metric).
We like the story and leadership and TAM for the KPG opportunity. We view it as akin to an asset light perpetual family franchise model given the ownership metrics and fees.
Of course, we’re buying what’s underneath that, and we believe that must exist for the franchise fee asset light model to continue: to infinity and beyond, as Buzz says. As you have acknowledged, there exists incredible value and staying power in the firm/client relationship, KPG appears to have developed a successful system to perpetually exploit it (hopefully!). We’re betting on that secret sauce. P.S., Another enjoyable write up, thank you.
I hope the bet pays off for everyone invested in KPG over time!
My reservation is less about the concept itself and more about the economics for listed KPG shareholders: the 51/49 ownership structure, recurring distributions to NCI, and governance risks mean that strong group-level growth does not translate one-for-one into cash flow attributable to shareholders.