Röko – A 100x Company in the Making

Röko Deep Dive: A Young Acquisition-Driven Company Is Just Getting Started

Hi investor!

As you might already know, my investment philosophy centers on identifying high-quality businesses that you can buy at a fair price. Ideally, the company is also founder-led or has a strong, owner-oriented management in place to ensure aligned interests with shareholders. The aim with these companies is to hold them for the long term. A high-quality company, in my view, demonstrates the following key characteristics: (1) high and stable returns on capital, (2) the ability to reinvest these returns at high rates, and (3) low levels of debt.

However, over the years, my search has become even more nuanced. I have observed five business models within my quality-focused investment philosophy that stand apart. When I come across these, I tend to pay special attention as I believe these companies have the potential to create exceptional shareholder returns over the long term.

These business models are:

1. Serial Acquirers (e.g., Berkshire Hathaway, Constellation, Heico, and Lifco)

2. Scale Economies Shared (e.g., Costco, Amazon, and Wise)

3. Digital Superplatforms (e.g., Spotify, Alphabet, and Meta)

4. Oligopolies (e.g., Visa, Mastercard, Cadence)

5. Buyback Companies (e.g., Autozone and O’Reilly)

Today, I want to focus on a company within the first category. The company is called Röko, and it’s a serial acquirer of niche private businesses in Europe. Röko was founded in 2019 by Fredrik Karlsson and Tomas Billing, and was only recently listed on the Nasdaq Stockholm on March 11, 2025. It aims to find profitable, asset-light businesses with strong management teams and solid market positions in their respective niches. Even though Röko is still a very young company, it reminds me of Berkshire Hathaway, but for small European businesses.

The Management: Excellent Capital Allocation Skills

Why do I find Röko so interesting? The CEO, Fredrik Karlsson, is arguably one of the best capital allocators in the world. Before founding Röko, he was the CEO of Lifco from 1998 to 2019. During his 20-year tenure, he increased shareholder value by a remarkable 100x. This was made possible through his outstanding capital allocation skills and his strong company philosophy of simplicity and decentralization.

Karlsson and Tomas Billing are both highly competitive, and they share a long history. First, they met while studying Russian together as military interpreters in Sweden, and later as students at the Stockholm School of Economics. At the age of 25, they had already gotten to stress-test each other during a winter mountain expedition, where they had to dig a snow cave to survive an unexpected blizzard. This long personal connection and shared experience likely contributed to their strong partnership.

They explain that Röko today is a blend of their previous successes: approximately 70% Lifco’s highly decentralized culture and acquisition discipline, and 30% Nordstjernan (Tomas Billing’s former company) B2C expertise and strategic approach of partnering with co-owners for aligned interests.

Why did they both leave their respective firms? First, Billing resigned as the president of Nordstjernen in 2018 to start his own company and approached Karlsson. While Karlsson initially intended to stay with Lifco, a compensation disagreement with Lifco’s majority owner, Carl Bennet, in early 2019 led him to depart. As he explained during an interview, it was not about seeking higher compensation per se, but because he felt the agreement did not fairly represent his performance. Remarkably, Karlsson maintained a positive relationship with Lifco, even purchasing more shares after his departure. Shortly after, in 2019, he and Tomas Billing founded Röko.

The Moat: Culture and Conglomerate Structure

Röko’s primary competitive advantages, or “moat”, are its distinctive company culture and its prudent use of the conglomerate structure. As Warren Buffett noted in his 2014 annual letter, “if the conglomerate structure is used judiciously, it is an ideal structure for maximizing long-term capital growth”. Röko appears to embody this principle.

Röko’s company culture is built on two core tenets: simplicity and decentralization:

• Simplicity: Karlsson embraces simplicity, and he is a big believer in fighting unnecessary bureaucracy and complexity on all levels, as it can hinder efficiency within the company. A testament to this philosophy was his shareholder letters during his tenure at Lifco, which were truly a joy to read as shareholders. They were short, to the point, and honest. No unnecessary fluff and no ambiguous jargon.

• Decentralization: With a lean headquarters staff of only 8 people, Röko maintains a highly autonomous and decentralized structure. Just like with Berkshire, the headquarters focuses on allocating capital, and its subsidiaries focus on the operational success of each of their businesses. By leaving founders and management of the acquired companies with a 20-30% stake in the business, they are also able to preserve the entrepreneurial energy and drive of the management teams to continue running their businesses.

This combination of simplicity and decentralization, coupled with a hyper-lean and agile HQ team, grants Röko an additional critical advantage: speed. When issues arise or strategic decisions are needed, the HQ can be contacted, a team call arranged, and a decision made on the same day. Furthermore, Karlsson emphasizes continuous dialogue via email and phone for immediate problem-solving, rather than deferring issues to formal board meetings.

This efficiency and speed also extend to its acquisition process. Unlike private equity firms that often rely heavily on debt and thus require reporting extensive information to their lenders, Röko has no large leverage requirements for new acquisitions. This allows them to act swiftly in the competitive M&A landscape.

Furthermore, a crucial lesson Fredrik Karlsson brought from Lifco is the importance of avoiding self-imposed restrictions. Lifco operated in three segments: (1) dental, (2) demolition & tools, and (3) systems solutions. The “systems solutions” segment, which is the only sector-agnostic among the three, demonstrated exceptional performance, growing 10x from 2014 to 2024, while the dental segment, for example, only grew 2x in the same period. Karlsson explains that Röko can almost be seen as an extension of this highly successful, flexible “systems solutions” approach. Being sector-agnostic provides Röko with a significant advantage: it creates optionality, allowing them to avoid overpaying in “hot” sectors and access a much larger pool of potential acquisition targets in Europe.

The Acquisition Strategy: A Simple and Effective Recipe

Röko follows a straightforward yet highly effective acquisition strategy, where they focus on three key criteria:

1. Earnings Growth: Consecutive earnings growth is arguably their most important acquisition criterion. Karlsson argues that if a firm has performed well for over five years, then the probability increases that it will be the case in the sixth year as well.

2. Driven Operators: Röko wants management to stay on as shareholders, so that they are driven to continue operating the business.

3. Cost Discipline: Röko typically acquires companies for under 8x EBITA. Karlsson argues that this is very important to achieve the long-term growth objectives for Röko. Their goal is to grow earnings by about 15% a year, with ~5% coming from organic growth and ~10% from acquisitions. If they buy companies above the 8x EBITA target, they will not have sufficient cash flows to fund their acquisition strategy.

Why Businesses Choose Röko Over Private Equity Funds

Imagine you are a successful business owner. You have poured your life’s work into building your company, taking significant risks, and now stand incredibly proud of what you have achieved. Your employees are like family, as they have been instrumental in building this business alongside you.

Now, you are slowly getting older and succession planning is on your mind, but your children aren’t interested in taking the reins. You are still very driven to continue operating the business, but you would like to have a trusted partner that you can figure this out with. Furthermore, nearly all your family’s assets are tied up in the business, leaving you highly exposed to market swings and risks within your niche. Selling the company has crossed your mind as a way to secure your legacy, diversify your assets, and gain some liquidity from your hard work.

However, you are only willing to a sell to somebody that you can trust. The thought of selling to a private equity firm might fill you with dread, radical cost-cutting, layoffs affecting your most loyal employees, and stringent oversight of your financials and operations is not exactly your cup of tea. Five years or so later, it’s highly likely that the private equity firm sells your company again to the next PE firm.

This is where Röko offers a fundamentally different approach. Business owners choose to sell to Röko for several reasons that extend far beyond just financial considerations:

• Permanent Home: Röko provides a permanent home for your business. You can continue operating it as you always have, with all your employees and systems in place.

• Strategic Diversification: Röko typically acquires 70-85% of your business. This provides you with significant liquidity, allowing you to diversify your family assets and reduce your personal risk exposure. You retain a meaningful ownership stake, keeping you motivated to continue operating the business for a timeframe of your choosing.

• Trusted, Long-Term Partner: Röko offers to be a long-term, trustworthy partner. Should key strategic questions or challenges arise, Röko’s headquarters offers financial resources and business expertise. Crucially, Röko largely stays out of your day-to-day operations, empowering you to run the business as you are accustomed to.

In essence, Röko’s value proposition is compelling: it’s a long-term, trustworthy, and decentralized partner that preserves the entrepreneurial spirit, provides security, and offers a flexible, non-interfering ownership model. This approach is highly appealing to many small, privately-owned businesses in Europe.

Valuation:

Röko is currently trading at a forward PE of 40.94x. This may seem like an incredibly high multiple to pay for a company.

However, let's also look at a discounted cash flow analysis for Röko:

Key assumptions used:

• 17% growth for the first 5 years

• 15% growth for the last 5 years

• Terminal multiple of 25x

• Discount rate of 10%

• Initial Free Cash Flow of SEK 200 m (after deducting acquisitions)

• Initial Free Cash Flow of SEK 600 m (without acquisitions)

Estimated fair value: SEK 2’502

Current price: SEK 2’484

Price / FV: 0.99

With these assumptions, Röko seems fairly valued at the current price level.

However, a big part of Röko’s valuation depends on the expected growth rate (as it is with most high-growth companies). This brings to mind something he stated in a recent interview.

Karlsson: “We delivered a very good result in 2024, which was a weak year in many ways, with 17% growth. Simultaneously, we also reduced our debt. In a weak year.” (translated)

He also adds that serial acquirer companies have been the best-performing stocks on the Stockholm Large Cap Index, which have been able to grow between 15-20% per year on average over the last 10 to 20 years. It seems like he is very optimistic that he can achieve these growth rates over the long term.

So, while the current valuation level can seem optimistic, it depends on Karlsson's ability to live up to the market expectations and your own conviction in his capabilities and skills as a capital allocator.

For myself, I have started a small position in Röko, and I will add more to my portfolio if the valuation falls to more attractive levels.

Finally, I want to sum up my key investment thesis for Röko.

Summary & Key Investment Thesis:

1. Fredrik Karlsson is a world-class capital allocator who has an impressive track record of turning Lifco into a 100-bagger during his tenure from 1998 to 2019. He is still very driven to compete in the financial markets, and he is now applying his relentless energy, extensive experience, and best practices to his own company, Röko.

2. The company culture of simplicity, decentralization, and aligned incentives with entrepreneurs makes Röko the preferred choice for many small business owners, as they know their autonomy is guaranteed and that no bureaucratic complexity will be imposed on their company.

3. Karlsson maintains financial discipline by buying good businesses at approximately 8x EBITA and keeping net debt below 3x EBITDA. With his financial discipline and deep industry experience, an expected growth rate of 15-20% can be assumed.

That’s it for today. If you have any questions, feel free to reach out.

Best regards,

The Quality Investor