In today's rapidly evolving world, where artificial intelligence (AI) is disrupting industries at an unprecedented pace, a fascinating trend has emerged among family investors. They are turning their attention to what might be considered the 'old-school' businesses, such as dealerships and fisheries, to safeguard their investments from the potential pitfalls of AI disruption. This strategy, dubbed 'HALO' (Heavy Assets, Low Obsolescence), is gaining traction on Wall Street and among family offices, who are taking a long-term view of their investments.
The Rise of the Anti-AI Trade
Mark Sotir, president of Equity Group Investments (EGI), backed by the family of late billionaire Sam Zell, highlights the firm's unique approach to investing. EGI's portfolio includes a John Deere dealership, a bluefin tuna fishery, and even a pedestrian bridge connecting San Diego to Tijuana International Airport. At first glance, these holdings might seem disparate, but they share a common thread: they are all old-economy businesses that are less susceptible to the disruptive forces of AI and technology.
Sotir explains, "If you're thinking out 10 years, 12 years, you have to start with picking a company in an industry that you know will be around." This long-term perspective is a stark contrast to traditional private equity firms, which often aim for quick returns within a few years.
The Benefits of Asset-Heavy Businesses
Asset-heavy businesses, like dealerships and fisheries, offer several advantages to family investors. Firstly, they provide a steady cash flow, which is highly valued by family offices investing for generations. Secondly, these businesses often come with geographic moats, limiting competition and providing a level of protection against disruptive forces. For instance, EGI's dealerships benefit from franchise terms that prevent nearby competition.
Furthermore, the recent 'one big beautiful bill' law has renewed bonus depreciation, allowing companies to deduct the full cost of qualifying assets in the first year. This tax benefit is particularly attractive to family offices, who are increasingly adopting proactive tax planning strategies.
A Sizable Tax Benefit
Brian Hans, leading tax efficiency strategist at UBS' advanced planning group, emphasizes the significance of this tax benefit. "It's a very material change that can make a big difference in terms of the tax benefit," he says. Family office clients are now calculating after-tax returns and factoring them into their investment decisions, a strategic shift driven by economic uncertainty and tax reform.
The Appeal of Reliable Cash Flow
Joe Mowery, head of dealership investment banking at Stephens, highlights the appeal of dealerships to family investors. "They like a tax-advantaged income stream," he says. While economic trends can impact consumers' purchasing power, the parts and service business within dealerships is resilient, with high margins. It's a necessity rather than a luxury, ensuring a steady stream of income.
Opportunities in Agriculture
Sotir also sees attractive opportunities in agriculture, where farms are under tremendous stress due to rising costs of fertilizer and fuel. However, EGI's long-term perspective allows them to wait for the payoff, knowing that the value will come in the long run.
A Contrarian Approach
In a world where everyone is enamored with asset-light businesses, Sotir offers a contrarian view: "If you're paying an asset-light premium, then I'm not sure where the advantage is." This perspective highlights the importance of understanding the long-term value and resilience of asset-heavy businesses.
Conclusion
The rise of the anti-AI trade among family investors is a fascinating development, showcasing a strategic shift towards long-term, asset-heavy investments. It's a reminder that, in a world of rapid technological change, sometimes the old-school approach can offer a level of stability and resilience that is hard to find elsewhere. As Sotir puts it, "The amount of uncertainty that people are dealing with has oddly turned into a benefit for us." It's a unique perspective that challenges conventional wisdom and offers a fresh take on investment strategies.
