In the ever-evolving landscape of investment, a fascinating trend is emerging: family investors are increasingly turning to old-economy businesses as a hedge against the disruptive forces of artificial intelligence (AI). This strategic shift, as explained by Mark Sotir, president of Equity Group Investments (EGI), is driven by a desire to invest in industries that are likely to endure over the long term, despite the allure of tech startups and the challenges posed by AI.
EGI's diverse portfolio, which includes a John Deere dealership, a bluefin tuna fishery, and a pedestrian bridge, exemplifies this approach. By focusing on businesses with strong geographic moats and substantial barriers to entry, EGI aims to mitigate the risks associated with AI disruption. For instance, the company's ownership of John Deere and Kenworth dealerships is protected by franchise terms, ensuring a limited number of competitors in the immediate vicinity.
The 'HALO' strategy, short for 'heavy assets, low obsolescence', is gaining traction on Wall Street. This approach, favored by family offices, emphasizes investing in asset-heavy businesses that generate reliable cash flow and are less susceptible to rapid obsolescence. Economic uncertainty and tax reforms have further bolstered the appeal of these businesses, as they offer a more stable investment horizon compared to the short-term goals of traditional private equity firms.
One significant advantage of asset-heavy businesses is their eligibility for bonus depreciation, a tax benefit that allows companies to deduct the full cost of qualifying assets in the first year of use. This is particularly attractive to family offices, as it provides a substantial tax advantage and encourages proactive tax planning. Brian Hans, a tax efficiency strategist at UBS, highlights the importance of this benefit, especially for families with highly appreciated stock holdings.
Auto and equipment dealerships, for instance, are prime candidates for this strategy. Despite economic challenges like inflation, these businesses offer resilient cash flow and high margins. Joe Mowery, head of dealership investment banking at Stephens, emphasizes the necessity of these businesses in people's daily lives, making them a 'must-have' rather than a 'nice-to-have'.
The agricultural sector also presents attractive opportunities for family investors. With farms facing significant challenges such as rising costs of fertilizer and fuel, EGI can afford to wait for the right moment to invest. Sotir believes that the current uncertainty in the space is a golden opportunity for long-term investors like EGI to step in and buy, even if the payoff takes a few years.
In conclusion, the trend of family investors favoring old-economy businesses over tech startups is a strategic response to the challenges posed by AI and economic uncertainty. By focusing on businesses with strong geographic advantages, substantial barriers to entry, and reliable cash flow, these investors are positioning themselves for long-term success in a rapidly changing world. This shift in investment strategy highlights the importance of adaptability and a forward-thinking approach in the ever-evolving world of finance.
