Business Strategy Analysis

Jonathan GrabelCIO, Public Employees Retirement Association

of New MexicoSeptember 8, 2013

2

Introduction

• Agenda– Investment experience– Business strategy– Investment Philosophy (time permitting)

• Ask questions throughout

Investment Experience

4

Baker Capital

• GP, investment committee member• NY-based, late stage venture and growth

equity• $1.5B in commitments from institutional LPs• TMT focus• Control and non-control investments• 1/3 of portfolio in non-US companies

5

Baker Capital (cont.)

• 45 portfolio companies– AKAM, INXN, SQSW, QSC.DE (public exits)– Many strategic sales

• Served on 15+ portfolio company boards– Corporate governance– Market insight– Business strategy – Corporate actions– Team building

6

Montgomery County (MD) Public Schools

• MCPS– Top national public K-12 school system– 160,000 students– 25,000 employees– $2.5B annual operating budget

• CIO– $1.2B defined benefit plan– $1.2B defined contribution plan

• Investment organization– Trustees– Investment staff– Consultants – Custodians– Investment managers

7

MCPS (cont.)

• Plan at 8/1/11– 60% – large cap value, developed, active, long-only– 35% – investment-grade fixed income– 3% – core real estate– 2% – private equity fund of funds– - private equity a PE FoF

• Plan at 12/31/13– 50% – global equities– 25% – intermediate term investment grade FI– 25% – diversified alternatives program

• Reallocated 80+% of assets• New roster of investment managers

8

MCPS (cont.)

• Other changes– New investment policy statement– New trustees– Beta overlay– Risk view of total plan– Lower fees

• Results – Improved funded ratio– Returns and sharpe ratio > benchmark– Lower downside capture, higher upside capture

9

PERA

• CIO since January 2014– $14.6B DB plan– $500M DC plan

• Investment organization– Member-elected and ex-officio Board Members– Investment staff– Consultants – Custodians– Investment managers

• Mission-driven organization– 90,000+ members– FY14 ~$1B member benefits paid

10

PERA (cont.)

• Returns (FYE 6/30)– 1 year – 17.03% (~$2.1B net gain)– 3 year – 9.6%– 5 year – 13.1%

• New Strategic Asset Allocation– Domestic Equities – 21.1%– International Equities – 24.8%– Core Fixed Income – 26.1%– Fixed Income Plus – 5%– Alternatives – 23%

• Focus on liquidity• Focus on risk management

Business Strategy

12

Business Strategy

• Work from top down and bottom up• Understand industry– Competition – Pricing– Market size– Regulation – Product pipeline– Geographic factors– Potential disruptive events

13

Business Strategy (cont.)

• Assess resources– Human capital– Financial

• Evaluate– Comparative advantages– Relative weaknesses

• Honest assessment– Be emotional– Be dispassionate

• Limit moving parts• Fail fast

Examples

15

Digital Media Company

• Aggregator of digital media content– Music– Video– Books

• White label business model• Name-brand global customers • Low margins• Business strategy – go direct to consumers?

16

Digital Media Company (cont.)

• Decision• Outcome• Where is company today?

17

Payment Software Company

• High volume, high available transactions – Banking/ATMs– Retail– Credit card systems

• High price point, long sales cycles• Significant implementation• Global market opportunity• Business strategy – go global; if so, how to

structure international organization?

18

Payment Software Company (cont.)

• Decision• Outcome• Where is company today?

19

SaaS Company

• Vendor management software solution– Temporary labor– Complex service management– Compliance management

• Modular sales• Web-based solution• Moderate sales cycle• Fortune 2000 customers• Business strategy – should company move down-

market?

20

SaaS Company (cont.)

• Decision• Outcome• Where is company today?

21

Financial Security Software Company

• Network security software solution– Credit unions– Small banks– Thrifts

• New financial regulation would require significant product upgrade

• Business strategy – invest in the product or change industry verticals?

22

FinSec Software Company (cont.)

• Decision• Outcome• Where is company today?

23

Online Real Estate Brokerage

• Democratization of information for consumers• Easier customer acquisition for realtors• Ability to expedite real estate transaction cycle• Regional focus (Southeast)• Additional revenue opportunities– Mortgage– Title

• Great financial crisis impacts business • Business strategy – merge, expand geographies, change

business model, shut down?

24

Online RE Brokerage (cont.)

• Decision• Outcome• Where is company today?

Investment Philosophy

26

Investment Philosophy

• Efficient Markets– Take advantage of efficiencies– Low cost, commodity, economies of scale– Index strategies– Examples

• Inefficient markets– Don’t follow the herd (very difficult to do)– Benefits of active management– Focus on independent/focused managers– Examples

27

Investment Philosophy (cont.)

• Investment management firms– Public vs. private– Multi-strategy vs. single strategy

• Investment strategies– Public vs. private– Liquidity premium– Locking up capital– Should you be a contrarian

• Get beta right, importance of – Asset allocation– Rebalancing– Monitoring expenses (don’t pay alpha fees for beta)

28

Investment Process

• Starts and ends with the board• Strategies must fulfill objectives of investment

policy statement– Identify strategies– Identify source of capital– Within attractive strategies, research managers– Visit managers and conduct diligence– Presentations to Board– Role of attorneys and investment consultants

• Monitoring as important as initial investment

29

PERA Strategic Framework

30

PERA Strategic Framework (cont.)

Q&A