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

2. Introduction Agenda Ask questions throughout 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 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

8. 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

9. 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

10. 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

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 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?

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

27. 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)

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
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

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

31. Q&A