A point someone made about childcare, but extends well to more industries than you might think. Genuine operating leverage is pretty rare, and then, when it comes along, people tend to overpay for it, because it looks so amazing when it’s in action.

Here, RHC have surprisingly little operating leverage, although what leverage there is, is on full display with weak capacity utilisation thanks to COVID.

More broadly, when you do have something akin to constant or increasing returns to scale, someone else usually competes hard to get a piece of the pie (platform centric business, for example) which in end-state are “winner take all”, resulting in enormous ad spend in the now, eating returns.

A case in point. Pathology is truly scalable. Funds management is truly scalable. Hence people overpay to acquire the volumes (blood, or money, sometimes both!). But anyway, the main point was the graph about RHC, given KKR gave up.

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