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

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

Investment Experience

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

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

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

MCPS (cont.) Plan at 8/1/11 Plan at 12/31/13 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

MCPS (cont.) Other changes Results 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

PERA CIO since January 2014 Investment organization $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

PERA (cont.) Returns (FYE 6/30) New Strategic Asset Allocation 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

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

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

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?

Digital Media Company (cont.) Decision Outcome Where is company today?

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?

Payment Software Company (cont.) Decision Outcome Where is company today?

SaaS Company Vendor management software solution Modular sales 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?

SaaS Company (cont.) Decision Outcome Where is company today?

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?

FinSec Software Company (cont.) Decision Outcome Where is company today?

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?

Online RE Brokerage (cont.) Decision Outcome Where is company today?

Investment Philosophy

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

Investment Philosophy (cont.) Investment management firms Public vs. private Multi-strategy vs. single strategy Investment strategies 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)

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

PERA Strategic Framework Fund Objectives Asset Allocation: Drives 90% of the variation of a portfolio’s return Investment Structure: Drives 5-7% of return variation Manager Selection: Residual return

PERA Strategic Framework (cont.) Risk Management is Central Step 1: Asset Allocation Step 2: Investment Structure Step 3: Manager Selection Step 4: Monitoring & Evaluation

Q&A