Borrowed credibility is one of the oldest tricks in the investment world: attach yourself to the names everyone already trusts, and some of that trust rubs off on you. Kelly Partners (“KPG”) does this about as hard as any microcap I’ve come across.
Open the “Owner’s Manual”, a title lifted from Warren Buffett, and you eventually land on a slide called Big Learnings, displaying “The Essays of Warren Buffett”, “The Outsiders”, and the logo of Constellation Software, which attempts to encapsulate what Kelly Partners is all about: a programmatic flywheel! KPG cites Mark Leonard on numerous occasions and uses Charlie Munger to explain its partnership structure. It runs its shareholder meetup in Omaha in May every year so shareholders in town for Buffett can walk over and hear from Brett Kelly too. By Brett’s own account he’s queued outside the Berkshire venue before dawn for five years running, thermos in hand, with an entourage now >80 people he calls “the Kelly gang.”
Brett posted a long piece on his own Substack a few days ago for the firm’s 20th anniversary, and it’s the best illustration of my point. It’s written in third person, under his own name, about himself. The subtitle reads “the softly-spoken accountant who wanted to be Warren Buffett.” Mark Leonard is quoted telling him, on stage in Toronto, that he’d never seen an entrepreneur stretch a dollar as well as Brett does. The post places Kelly Partners inside a formal academic category of “programmatic acquirers,” citing a REQ Capital study of 13 global serial acquirers (which doesn’t include KPG itself) compounding at 17.5%/year against Berkshire’s 5.9% over the same period, and name-drops Thorndike, Jim Collins, and Rackspace co-founder Graham Weston as shareholders. Brett’s own line is that “the compounder” is the thing, and everything else is marketing. Ironically, his post making that claim is itself exactly that: marketing, at a time when shareholders could use some.
Despite all the virtue signaling, the thing is that Brett Kelly has actually delivered.
Since its inception, KPG has compounded group revenue at ~30% annually, doubling the business six times over with no share issuance. Adjusted book value per share has compounded at 35% per year over that period. It’s close to two decades of a founder buying small accounting practices at sensible prices, funding the growth mostly with retained cash and operating-business-level debt rather than dilution, and doing it year after year. So when KPG went public on the Australian Securities Exchange in 2017, the groundwork was already laid for the hype, and the share price followed suit, with a total shareholder return that ran past 1,000% (or 38% CAGR) at the time when the share price topped in February of last year. The P/E hit 150x (which, due to amortization, is not an accurate measurement of KPG’s cash-generating ability).
This brings us to why I write up KPG now: the stock has fallen off a cliff. From an ATH of AUD13.60/share, it now sits at AUD3.80/share, down 72%, with the ugliest of it in a single week in February, when the price fell almost 30% in a matter of days and the ASX sent KPG a please-explain letter under Listing Rule 18.7. (Any question the exchange had about undisclosed information was met by a flat “no”, signed by Brett.) The reason for the crash is simply that the stock was priced for perfection, and AI fears hit the whole sector this year, compressing multiples across every accounting and services rollup at the time KPG’s own numbers started softening.
Let’s see what we have…