The Allure of Old-Economy Investments
In the ever-evolving world of finance, a fascinating trend is emerging among family investors. They are turning away from the glitz and glamour of tech startups and AI-driven ventures, instead seeking refuge in seemingly mundane 'old-economy' businesses. But what's driving this shift?
The Anti-AI Trade
The rise of the 'HALO' (Heavy Assets, Low Obsolescence) strategy on Wall Street is a telling sign of the times. Family offices are increasingly drawn to businesses like dealerships, fisheries, and even pedestrian bridges. These sectors, often overlooked by traditional private equity investors, offer a unique set of advantages.
Personally, I find this shift intriguing. It's a strategic move to invest in industries that are less likely to be disrupted by AI and other cutting-edge technologies. As Mark Sotir, president of Equity Group Investments (EGI), rightly points out, the longevity of these businesses is a key factor. When you're investing for the long haul, you need to bet on industries that will still be standing a decade or two down the line.
The Allure of Asset-Heavy Businesses
One of the key attractions of these old-economy businesses is their asset-heavy nature. While many investors are enamored with asset-light models, Sotir offers a refreshing perspective. He argues that paying a premium for asset-light businesses may not always be advantageous. This is a sentiment I strongly resonate with, as it highlights the often-overlooked benefits of tangible assets.
Moreover, the recent 'one big beautiful bill' law, which renewed bonus depreciation, has made these asset-heavy businesses even more appealing. The ability to deduct the full cost of qualifying assets in the first year significantly boosts tax efficiency. This is a strategic move for family offices, as Brian Hans from UBS explains, showing a proactive approach to tax planning.
Geographic Moats and Resilience
Another aspect that caught my attention is the concept of 'geographic moats'. Sotir mentions that old-economy businesses can limit competition through franchise terms or geographical barriers. For instance, EGI's ownership of John Deere and Kenworth dealerships ensures no nearby competition. This is a powerful advantage, creating a local monopoly of sorts.
Additionally, these businesses demonstrate resilience in the face of economic challenges. Despite inflation and other consumer trends, the parts and service sectors remain robust. As Joe Mowery from Stephens notes, these are 'must-have' services, ensuring a steady demand. This kind of stability is a rare gem in today's volatile market.
Opportunities in Uncertainty
What many people don't realize is that economic uncertainty can create unique investment opportunities. EGI, backed by the Zell family, is in a position to capitalize on this. They receive inquiries from business owners facing various pressures, from tariffs to rising costs. This allows EGI to invest in stressed sectors like agriculture, knowing that they can afford to wait for a payoff.
In my opinion, this strategy showcases a patient and opportunistic approach. It's about recognizing value where others see risk. While the general sentiment might be to avoid troubled sectors, family investors with a long-term vision can step in and potentially reap significant rewards.
Conclusion: A Timeless Investment Strategy
This shift towards old-economy businesses is more than just a temporary trend. It's a testament to the enduring value of tangible assets, stable cash flows, and strategic tax planning. Family investors are rediscovering the charm of these sectors, which offer a unique blend of resilience and profitability.
As we navigate an increasingly AI-driven world, the allure of these 'old-school' businesses might just be the smart investment move. It's a reminder that sometimes, the best opportunities are hiding in plain sight, waiting for the discerning eye of a savvy investor.
