Asset heavy vs Asset light

February 29, 2020

by a searcher in Branchville, VA 23828, USA

During my search I have come across investors that do not like asset heavy companies. I have grasp of the concept of why asset lite businesses are desirable. However in an industry that requires significant capex to try and enter the market, an established infrastructure would be an advantage in my opinion. What is the issue search fund investors have with asset heavy companies?

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Reply by a searcher
from Westminster College of Salt Lake City in Salt Lake City, UT, USA

Agree with the comments above but would only add in one more element which might be the biggest component of doing a deal with an investor or not, that element is RISK. In my experience, being surrounded by highly conservative investors, asset heavy businesses give investors a safety net, the assets of the company, which can be sold at a discount to recover a portion of the investment basis, if everything else fails. While asset light affords a quicker, less expensive scale-up & a lower cost basis, magnifying returns. They also are conducive with higher risk, a lower probability of success & no assets to sell in a effort to recover the initial investment. I believe systematic risk should be the biggest element of risk to be considered at the moment. What is the investments correlation to the market? We are 128-months into the longest expansion in history, the average is 58.4-months. The market will contract & thanks to coronavirus, resulting in further rate cuts, if we do contract now, we don't have fiscal or monetary tools to stimulate a recovery, resulting in a recession unlike any other, deeper, longer & less forgiving. Therefore, being uncorrelated to the market should be more appetizing. Personally, I prefer asset light because they're easier to pivot & adapt to rapid changes in the economy.

Reply by a searcher
from Carleton College in Leesburg, VA, USA

Hi Darrell. I’m still getting the lay of the searchfund land myself, but it’s clear that some fund investors think pretty much like larger private equity funds in that they are looking mainly for relatively short-term gains. That’s an assumption that is often taken for granted and so not expressed. But if you’re interested in long-term value, then an asset-heavy business might better weather a regular downturn in the economy overall. Of course that depends on the nature of the assets and the downturn and so on, but there most certainly can be advantages to an asset-heavy business if your focus is slow steady growth. I think that is what Jason is referring to when he talks about family offices and evergreen funds. So my two cents is that, although searchfunders sometimes speak in absolute terms about asset-light businesses because they’ve already decided their own strategies, ultimately it’s all relative to your own goals and interests.

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