German conglomerate Chapters Group (Frankfurt: CHG) is one of the most compelling examples of the buy-and-build strategy, one of the oldest and most reliable playbooks in the investment world.
The logic is deceptively simple: acquire a fragmented collection of small, unloved businesses at low valuations, professionalise their operations, and roll them into a larger, more efficient whole that the stock market values at a much higher multiple.
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Chapters Group began to take shape in 2018, when Jan-Hendrik Mohr, a former fund manager and lifelong student of the Buffett school of investing, took over an obscure German micro-cap shell. His vision was clear: to consolidate the vastly fragmented European software sector.
Europe is currently facing a demographic cliff; there are an estimated 1.1 million small software businesses across the continent, many of which were founded in the 1980s, 1990s and 2000s. Their founders are now in their late 50s, 60s and 70s, often with no clear succession plan. These are not glamorous tech start-ups, but boring, mission-critical businesses with incredibly sticky revenue.
Since these founders value their legacy as much as the purchase price, Chapters is able to acquire them at sensible multiples of roughly six to seven times earnings; a massive discount compared with the double-digit multiples seen in larger tech acquisitions.
Why Chapters Group is successful
To manage complexity, Mohr has organised the group into three distinct vertical platforms, each serving a niche where software is a functional necessity rather than a luxury.
The first is the public-sector hub, which provides essential infrastructure software for organisations such as German police forces or the bus timetable systems for major European exchanges.
The second is the enterprise hub, focusing on specialised industrial tools, such as bespoke management systems for motorcycle retailers.
Finally, there is the financial technologies hub, led by the high-growth Fintiba, which digitises the regulatory requirements for international students and workers moving to Germany. By identifying areas where the cost of software failure is catastrophic for the client, Chapters ensures that its revenue streams are protected by high switching costs.
The secret to scaling this empire without falling into the trap of corporate bureaucracy is what Mohr calls the “manuscript method”. This allows local business units almost total autonomy over contract negotiations, hiring and daily operations as long as they observe rigid parameters regarding financial reporting, HR standards and integration into the central data functions. It is a freedom-within-limits model that allows Chapters to maintain an entrepreneurial mindset at the subsidiary level while benefiting from the efficiencies and data-sharing of a massive technology leader.
Chapters Group has attracted a who's who of the world's most successful permanent-capital investors. The shareholder list includes Mitch Rales, the co-founder of Danaher, who turned a small company into a $180 billion global science and technology giant using a similar playbook. It also features Daniel Ek, the founder of Spotify, and perhaps most tellingly, William Thorndike, the author of The Outsiders, a seminal book profiling eight extraordinary CEOs who achieved legendary returns. Thorndike's presence suggests he views Mohr as the next great outsider capable of compounding capital at more than 20% annually for decades.
What about the threat of AI? For Chapters, AI may prove to be a boon. The group operates at the unsexy end of the market, managing complex databases and security protocols that must navigate strict, local European regulations. These are small costs in very large budgets; a police force or a municipal bus service is unlikely to risk a mission-critical system to save a small amount of money on a speculative AI-coded replacement. In fact, Mohr views AI as a tool to improve his own products and accelerate the coding process, effectively lowering his development costs.
How to buy Chapters Group stock
For UK-based investors, there is presently a practical hurdle to owning Chapters. The stock currently sits on the German Scale exchange (a junior market similar to Aim in the UK), which makes it ineligible for most ISAs and SIPPs. However, management has signalled an intention to promote the company to the Prime Standard (Main Market) as it grows. This move, expected as early as later this year, would act as a significant catalyst, finally allowing institutional funds and UK retail accounts to buy the shares. With an executive team still in their 30s and 40s, Chapters is being run with a multi-decade horizon that aligns perfectly with the needs of the patient, long-term investor.
The beauty of the Chapters story is that it doesn't rely on luck or the next big tech fad. It is an industrialised system for buying quality, cash-generative businesses and making them better. Chapters is building something where the whole will be significantly greater than the sum of its parts. While the market often obsesses over the next quarter, Chapters is playing a 20-year game. For those willing to look past the current junior listing and embrace the slow, steady power of compounding, the journey with Jan-Hendrik Mohr and his backers could be very rewarding indeed.
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