Business Strategy Analysis

1. Business Strategy Analysis Jonathan Grabel CIO, Public Employees Retirement Association of New Mexico September 8, 2013

2. Introduction • Agenda • Investment experience • Business strategy • Investment Philosophy (time permitting) • Ask questions throughout

3. 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

11. 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

14. 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?

25. 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.)

31. Q&A