What Makes an Asset Inflation Proof?
What Makes an Asset Inflation Proof?
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Welcome to Atlasview Insights! We are thrilled to have you join us for another edition packed with valuable content for small business owners, deal makers, and investors alike.
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In this edition of our newsletter, we cover:
Inflation-Proof Assets 101
Our Favorite Reads
Insights From Our Team
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Industry: Software and tech-enabled businesses
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What Makes an Asset Inflation Proof?
Inflation-Proof Assets
Over the past few years, governments around the world have printed record amounts of money in the past months as a response to the COVID-19 crisis.
As a result, the macroeconomic issue that stands out the most in every investor’s mind: inflation.
There are many ways to hedge against inflation; the most common one is investing in asset classes that outperform the market during inflationary climates.
In this post, we wanted to outline what to look for when making an investment to protect yourself against inflation.
Pricing power
In order to fight against rising costs, a business needs pricing power. The ability to increase prices without losing customers is key. If you believe inflation might be around 5% per year, you need to be able to increase your prices by that amount annually. A large part of this is also not being locked into long-multi-year contracts with fixed pricing.
This is why Atlasview loves mission-critical software, it has incredible pricing power. Software contracts are often monthly, annual, or multi-annual with price escalators, which gives ample opportunities to increase pricing to keep up with inflation. And since the software is mission-critical, the high costs associated with switching keep customers locked in, even when there are yearly price increases.
Low ongoing capital expenditures
Ongoing capital expenditures can best be described as the minimum expenditures required for a business to stay competitive. Some businesses & assets inherently require more capital expenditures than others, especially businesses with hard assets.
For example, in real estate, older buildings need a lot more capex (repairs & upgrades) than newer buildings.
In software, your R&D expenditure is your capex. Some software businesses inherently require more R&D than others. This is often the case when the software is in a competitive niche and has to launch new features frequently to keep up with market demand.
At Atlasview, we tend to look for software that is mature and stable and avoid hyper-competitive niches. We don’t want to invest in a business that needs to continually invest in R&D to stay competitive. We leave that to the venture capitalists, who underwrite product risk (R&D). As private equity investors, we underwrite execution risk (S&M + G&A).
Leverage
Leverage obviously adds another degree of risk to businesses. Not to mention, with leverage you’re also at the mercy of credit markets and interest rates.
But generally speaking, leverage is a good way to hedge against inflation. This is because the value of debt owed decreases with inflation. For example, if a business owes $1m today, that $1m will be worth less in 10 years in an inflationary environment.
This is an acceptable argument for hard assets, you can generally borrow against them much easier.
Final Thoughts
While inflation is an evergreen topic for investors, ever since central banks rolled out their aggressive monetary policies during the global financial crisis, its prominence has grown.
If you focus on investing in businesses that are asset-light with low ongoing capital expenditures and strong pricing power, you will be well-protected against inflation.
P.s. at Atlasview, these are the exact type of businesses we invest in. If you’re an accredited investor and would like to learn more about our investment strategies and get access to our deals, please apply here.
If you’re an owner interested in working with Atlasview or an intermediary with a deal to share — feel free to reach out and contact us. We will respond within 24 hours, and we can have an offer on the table within 7 days.
We are happy to pay referral fees for any deal referred and successfully closed.
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Atlasview Equity is a private equity firm specializing in software and tech-enabled businesses. We combine patient capital with proven operational strategies to deliver predictable results for our stakeholders.