Steve Scotchmer - Mark Leonard's muse and the best private investor you have never heard of

One way of finding potential good managers is to look at the biggest winners in the stock market and finding out who invested early in those names. Steve Scotchmer was there at the very beginning of Constellation Software and made a killing. Surely you know of Constellation? They are a serial acquirer of very specialized software companies in vertical markets like scheduling for municipal toilets. Constellation Software went from $25m to $40b in market cap in about 25 years. Steve has been a director since 2000 and holds more than a $125m stake (including spinoff Topicus). He has steadily added to his holdings over the years.

Constellation founder Mark Leonard has credited Steve Scotchmer as his most influential investment mentor. That’s quite a credit, considering that many people consider Mark Leonard to be the most astute capital allocator in Canada. Mark had a formative experience working with Steve. Steve’s basic philosophy is to own a portfolio of the “very best companies” for a very long time.

Steve Scotchmer has invested bigly in other software over the years. In 1995, he joined Cognos as vice-chair as part of a team that replaced founder Michael Potter. Jim Tory Sr (of Torys) joined as chair and Ron Zambonini became CEO. Cognos was a pioneer in business intelligence software. In 2008, Cognos was sold to IBM for US$5B cash.

In 1999, Steve was a co-founder of Manitou Investment Management, a firm that keeps an extremely low profile. His original partners were Robert (Biff) Matthews (a former corporate lawyer at McCarthys) and Michael Sprung (a former manager at Ontario Hydro and Teachers). Sprung was the main trigger-puller. Both Sprung and Matthews now have their own shops, Sprung and Longview, respectively. Manitou started with a $50m mandate from an insurance company. Steve was the original lead manager of the Manitou Global Equity Fund.

But as far back as 2006, Steve has been described as a “private investor” and a director of Manitou (in Constellation’s IPO prospectus). And so he must not have been actively managing their investment decisions for a long while. Forgive me for saying so, but I did not find anything noteworthy about Manitou, aside from Steve’s involvement. The performance numbers I saw were pretty ordinary, nothing indicating some prescience about “software eating the world”. They do have a $5m minimum investment. I am aware of one firm run by people trained by Steve that has great numbers and I wish I could tell you about it.

How did Steve originally get rich? He trained as an engineer at Queen’s University and is an operator turned investor. His first big score was as President of Bay Mills Ltd, a TSE-listed company involved in manufacturing engineered materials. In 1986, no less an authority on investing than Warren E. Buffett wrote to Bay Mills congratulating them on their investment philosophy. In 1987, Steve made a pile when Bay Mills got sold to French multinational Saint-Gobain.

Following that sale, Steve looked for other advanced materials companies to acquire. He was backed in this quest by Mark Leonard, who at the time was a venture capitalist at Ventures West. However, Steve’s bar for quality was so high that they did not manage to buy anything. Even Steve’s accumulation of his Constellation stake was very gradual. I found another private investor who had a much bigger stake early on. As Steve himself was switching from operator to investor, he shared what he was learning with Mark. He passed on his obsession with quality business models, introduced him to great Canadian investors, and the rest is history.

If you have any info about Steve or Manitou or anything that hasn't already been said about attention hound Mark Leonard, let me know, I can update this post.

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