Graham & Doddsville An investment newsletter from the students of Columbia Business School

Inside this issue: Issue XXXVIII Winter 2020 2019 Graham & Paul B. Kazarian ’81 Dodd Breakfast p. 3 Japonica Partners 2019 CSIMA Stock Pitch Challenge p. 3 Paul B. Kazarian is the Founder, Chairman, and CEO of Paul B. Kazarian p. 5 Japonica Partners and its non-profit affiliate, the Charles & Agnes Kazarian Foundation. Japonica, CBS Students’ founded in 1988, is a private investment firm that has Investment Ideas p. 17 built its track record by creating transformational investments with low risk high return. Heron Foundation p. 25 Japonica’s culture, under Mr. Kazarian’s leadership, is to . see what others do not see and to use “education- education-education”, a Japonica mantra, to accomplish what others believe is impossible.

Editors: Japonica’s transformational investments have three building blocks developed over Mr. Kazarian’s career: Frederic Dreyfuss discover systemic misconceptions, discover a massive MBA 2020 Paul B. Kazarian ’81 undervaluation, and create extraordinary value. Using Sophie Song, CFA this model, Japonica’s investment track record includes MBA 2020 (Continued on page 5)

John Szramiak MBA 2020 Heron Foundation

Rodrigo de Paula MBA 2021 Heron is a private founda-

Matt Habig tion established in 1992. MBA 2021 Its mission is to help peo- ple and communities help Alison Tien themselves out of pov- MBA 2021 erty. Heron pursues its mission by championing people, places, and firms From left to right: Dana K. Bezerra, Preeti that challenge broken Bhattacharji ’14, and Nisha Prasad ’17 conventions and dare to change. Visit us at: www.grahamanddodd.com Dana K. Bezerra is the president of Heron. Bezerra began her career in agriculture www.csima.info in California. Her family owned a dairy farm in the San Joaquin Valley, where she witnessed the bankruptcy of a local creamery, the formation of an independent milk producers’ cooperative, and the provision of a local tax abatement package to a multinational food company, leaving a lasting impression on the complicated rela- tionship between communities and markets.

Bezerra proceeded to work at Merrill Lynch, where she specialized in Philanthropy and Nonprofit Management, then joining Heron in 2006. As a program officer, Bez- (Continued on page 25)

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Welcome to Graham & Doddsville

We are pleased to bring you the Mr. Kazarian also discussed ’20, Kyle Campbell ’21 and K.Y. 38th edition of Graham & how treacherous he thinks the Wong ’20 recommended buy- Doddsville. This student-led sovereign bond market is, and ing Etsy (NASDAQ:ETSY). investment publication of Co- shared invest in sovereigns. lumbia Business School (CBS) is Lastly, you can find more inter- co-sponsored by the Heilbrunn We also sat down with the views on the Value Investing with Center for Graham & Dodd President of the Heron Foun- Legends podcast, hosted by Investing and the Columbia Stu- dation, Dana Bezerra, along Professor Tano Santos. Recent dent Investment Management with recent CBS alumni Preeti guests include Leon Cooper- Association (CSIMA). Since our Bhattacharji ’14, VP Integrat- man, Joel Greenblatt, and Fall 2019 issue, the Heilbrunn ed Markets, and Nisha Prasad Meredith Trivedi, Managing Bruce Greenwald. Center hosted the 28th Annual ’17, Senior Associate Integrat- Director of the Heilbrunn Graham & Doddsville Breakfast in ed Markets. They discussed the We thank our interviewees for Center. Meredith leads the October 2019 and the 5th An- evolution of impact investing contributing their time and Center, cultivating strong nual CSIMA Stock Pitch Competi- over the past several decades, insights not only to us, but to relationships with some of Heron’s mission to invest 100% the world´s most experi- tion in November 2019. the whole investing community. of its capital in socially respon- enced value investors and We first interviewed Paul B. sible investments, their unique creating numerous learning G&Dsville Editors Kazarian ’81, Founder, Chair- investment process for analyz- opportunities for students man, and CEO of Japonica Part- ing socially impactful compa- interested in value investing. ners. Mr. Kazarian shared with nies, and what the future holds us his extensive experience, for impact investing and how starting as corporate white this will affect the entire invest- knight in the 1980s and Fortune ing landscape. 500 CEO in the 1990s, before becoming - with $4bn - one of We continue to bring you the largest owner of Greek stock pitches from current CBS Sovereign Debt during the Euro- students. In this issue, James zone crisis in the 2010s. He Shen ’20 shares his long idea on explained why he does not be- Nuance Communications lieve in the standard risk/return (NASDAQ:NUAN), Bruce Kim framework and how Japonica ’20 presents his short thesis on built a 30-year track record of Peloton Interactive investment displaying high return (NASDAQ:PTON), Alvaro with low risk, and how the firm Pasquin ’20 presents a long Professor Tano Santos, the finds and addresses systematic thesis on Rolls-Royce Holdings Faculty Director of the Heil- misconceptions in the market. (LSE:RR.), and Mingming Wu brunn Center. The Center sponsors the Value Investing Program, a rigorous academ- ic curriculum for particularly committed students that is taught by some of the indus- try´s best practitioners. The classes sponsored by the Heilbrunn Center are among the most heavily demanded and highly rated classes at Columbia Business School.

Value Investing students visit the set of Professor Tano Santos and Meredith CNBC’s Fast Money with Guy Adami Trivedi record the Value Investing with Legends Podcast

Volume I, Issue Page 2 3 Page 3

Graham & Dodd Breakfast - October 2019

Kent Daniel delivers opening remarks Attendees at the 29th Annual Cliff Assness and Professor Tano Graham and Dodd Breakfast Santos

CSIMA Stock Pitch Challenge - November 2019

CBS team presents their pitch Judges at the 5th Annual CSIMA Stock Pitch Challenge

Heilbrunn Center team and CSIMA Stock Pitch VPs CSIMA Co-President Dao Hao '20 interviews Michael and AVPs Weinberg '98 and Anna Nikolayevsky '98

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SAVE THE DATE

The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School presents

THE 11TH ANNUAL From Graham to Buffett and Beyond OMAHA DINNER

Friday, May 1, 2020 6 p.m. to 9 p.m.

The Hilton Omaha 1001 Cass Street Omaha, Nebraska

Tickets go on sale in March at www.grahamanddodd.com

The annual From Graham to Buffett and Beyond event is generously sponsored by:

For inquiries, please contact: [email protected] Page 5 Paul B. Kazarian, Japonica Partners

a select number of including at Harvard started strong at Columbia transformational Business School, OECD, Business School. At CBS, I investment efforts such as: INET, Oxford, London learned from some of the best one of the largest private School of Economics, professors in the world on owners of Greek CESifo, London Business investing, finance, accounting, government bonds School, credit rating and management. Often when (GGBs), majority agencies, U.S. Military making difficult and important stockholder who assumed Academy at West Point, decisions, I remember key executive positions National School of wisdoms learned at CBS. (Chairman, CEO, and Development at Peking CFO) at Fortune 300 University, and ISCTE “My exposure to Sunbeam-Oster Company, Business School at the largest stockholder of Instituto Universitário de investing, and value Paul B. Kazarian CNW Corp, largest Lisboa. Mr. Kazarian ’81 creditor and sole served as the Sole Special investing in particular, proponent of successful Advisor to the Center for started strong at joint plan to reorganize European Policy Studies Allegheny International, (CEPS) Task Force on Columbia Business and lead sponsor and Government Balance global institutional investor Sheets. Mr. Kazarian School. At CBS, I organizer of Borden Inc. received the 2016 William Pitt the Younger Award learned from some of Japonica’s non-profit for extraordinary affiliate, The Charles & leadership in strengthening the best professors in Agnes Kazarian democracy through the world on investing, Foundation, named after government financial Mr. Kazarian’s management. finance, accounting, grandparents who were survivors of the first Graham & Doddsville and management. genocide of the 20th (G&D): What was your path century, the Armenian to investing? Often when making Genocide, is a philanthropic operating Paul B. Kazarian (PBK): My difficult and important foundation whose core path was very simple and clear. decisions, I remember competency is to improve I had one professional job in public financial my life before Japonica and wisdoms learned at management (PFM) and that was in the corporate financial literacy. The finance department at CBS.” Foundation’s year-end Goldman Sachs with a wide 2018 assets and spending range of clients from the US G&D: What important lessons since founding are over a government, to high tech start- would you like to share as a quarter-billion US dollars. ups, to the firm’s largest and white knight investing in most important clients. By corporates and sovereigns? Prior to founding Japonica chance or design, I don't know and the Kazarian which, I worked closely with PBK: There were many, as Foundation, Mr. Kazarian many, if not most, of the this ties in with our focus on was an investment banker members of the senior double bottom line. Japonica at Goldman, Sachs & Co. management committee. This was the largest stockholder in Mr. Kazarian is an adjunct was an amazing learning one of the largest railroad professor in the sector of experience and I made the firm holding companies in North public financial a lot of money with my hard America, CNW Corp., and management at Columbia work, good judgment, and commenced a US$1.6 billion Business School and has execution skills. white knight tender offer and lectured and presented My exposure to investing, and full board proxy to maximize extensively and globally, value investing in particular, shareholder value. We started (Continued on page 6) Page 6 Paul B. Kazarian, Japonica Partners

as a white knight to save company would be destroyed PBK: With 26 businesses CNW from value destructive by a leveraged buyout and bad around the world, 10,000 management, a potential management. However, acting employees, and an investment destructive leveraged buyout, in a contra-fiduciary manner, grade balance sheet, I and community dislocations. incumbent management confirmed my ability to create Japonica achieved a 2.2 times adopted scorched earth tactics extraordinary value from a investment multiple and 57% and we accordingly withdrew double bottom line IRR in 1.5 years with no our proposal. perspective. Japonica leverage, and an initial management created value by estimated downside return of “Greece presented the turning around this positive 1.4 times. underperforming global special greatest challenge: the situation, assuming the Next, as the largest creditor Chairman/CEO and other and sole proponent of the challenge to save a senior executive positions, and successful plan for the US$690 country...after changing its culture to become million bankruptcy entrepreneurial. Japonica reorganization of Fortune 200 launching a US$3.8 senior management who Allegheny International, assumed positions at the Japonica saved the company billion ... our GGB underperforming global special from being mired in situation were perfectly aligned bankruptcy with the business investment resulted in with our investors and declining by the day, resulting received no equity in a 1.3 times investment an 8.9 times multiple on compensation, transaction multiple and 181% IRR in 7 capital invested at exit fees, or non-shareholder months with no leverage, and approved compensation. an initial estimated downside and 35% IRR after return of positive 1.2 times. G&D: How did Japonica build about 5 years with no a 30-year plus track record of Then, as majority stockholder transformational investments and after assuming key C-level leverage.” with low risk high return? executive positions (Chairman, CEO, and CFO), Japonica led Greece presented the greatest PBK: Since 1988, Japonica has the US$1.5 billion turnaround challenge: the challenge to save built its track record of highly of Fortune 300 Sunbeam-Oster a country. As one of the select transformational Company. We saved 10,000 largest private owners of investments with low risk high jobs at Sunbeam-Oster, Greek government bonds return using the same three reinvested in communities, and (GGBs), after launching a building blocks to make our shared our wealth creation US$3.8 billion (2.9 billion) investments. The Greek throughout the 26 companies unmodified Dutch auction government bonds (GGBs) under the corporate umbrella, tender offer for select GGBs, were our latest and clearly our from senior management to we improved Greek most rewarding. We stay with the factory employees. This government public financial these building blocks because resulted in a 5.9 times management with broad and they are in our culture and it is investment multiple and 104% widespread benefits to Greek only with them that we have IRR in 3 years with investment society. Our GGB investment again and again accomplished grade corporate leverage, and resulted in an 8.9 times what others believed to be an initial estimated downside multiple on capital invested at impossible and have used risk of positive 2.0 times. exit and 35% IRR after about 5 “education-education- years with no leverage, and an education” as our most At Borden Inc., we were lead initial estimated downside powerful value creation sponsor and global institutional return of positive 2.8 times. weapon. Value investing traits investor organizer proposing a are imbued in each building US$2.4 billion restructuring of G&D: How did your success block, and these building the Fortune 100 company. We as a Fortune 300 CEO help blocks are essential to us told the board that the you as in investor? successfully making low risk (Continued on page 7) Page 7 Paul B. Kazarian, Japonica Partners

high return transformational becoming a world leader in significantly exceeding the best investments, which includes public financial management, key performance indicators the GGBs. The balance sheet we now have the ability to globally, in both business and part of value investing is positively impact entire philanthropy. essential for each of our countries and, indeed, transformational investments continents. G&D: Would you explain how to maximize what we call a Japonica has consistently seen double bottom line: low risk “Discovering systemic what others have not? high return from a financial perspective, and hugely misconceptions is the PBK: Discovering systemic positive social benefits. starting point for low misconceptions is the starting point for low risk high return Let me give two quick risk high return transformational investments. examples of why. From a As in the past, with the GGB financial perspective, there is transformational investment, we started by no one at Japonica or outside identifying systemic who believes we can continue investments.” misconceptions, which is our low risk high return track building block one, as they record in transformational To amplify on this point, given related to the Greek investments without our three our track record, our government, peer building blocks. It would have relationships, and our capital, governments, and third-party been impossible to have built there is no one in the world produced materials. The our track record since 1988 that we cannot access, and massive quantity of relevant with an average 4.6 times even with this wide reach, we materials, which was essential return on invested capital, a have found no one who can to critically dissect, produced 94% IRR, and an initial match the powerful by third-party organizations estimated downside return of combination of these value was staggering compared with a still very attractive positive investing-based building blocks our prior transformational 1.9 times. And, the building in creating low risk high return investments. Materials by blocks were so powerful with transformational investments. organizations such as the IMF, our GGB transformational Japonica’s risk return analysis the OECD, and the European investment that we achieved using no leverage is starkly Commission, in addition to an 8.9 times return on invested different from fund managers countless think tanks, capital at time of exit with an who commonly use four or academics, and investment estimated downside return of more levels of debt to juice advisors, felt like a tidal wave a very attractive positive 2.8 their returns to offset the of new information each day. times. As an aside, Japonica illusory benefits of Equally staggering was the uses GIPS to measure returns diversification. Japonica shoddy quality of their for internal-only management contrasts with fund managers analyses, which grew worse purposes. who leverage LP commitments, every day. Volumes of garbage leverage holding companies, information seemed to be From a social perspective, leverage subsidiaries, and valued over quality of precise these value investing-based whose LPs leverage their insights. When analyzing the building blocks have saved interests. materials, we could see the thousands of jobs, saved hands of staff people who had communities that were on the When I say Japonica is highly been promoted for their very brink of economic selective, it means that we internal political prowess, their collapse, and gave personal focus on only one use in promoting the agenda of pride and satisfaction to transformational effort at any their superiors, or their ability employees who lost or never one time, which provides a to espouse mind-numbing knew economic success. The unique competitive advantage complexity over simplicity. The GGB investment took the over the standard and volume of material was so social part of our double customary investment models. great, we had a full-time bottom line to a new and This singular focus has allowed librarian to keep the materials much higher level. By us to build a culture of organized. (Continued on page 8) Page 8 Paul B. Kazarian, Japonica Partners

With a long list of systemic was true when the denizens of education-education” to create misconceptions, we then built the bankruptcy world extraordinary value both in a new PFM technology dismissed our reorganization financial and social terms. framework to assess sovereign plan for a company nobody– risk and the fair value of the not even the management– “Our most valuable GGBs in a 3 to 5 year time believed could survive. This horizon as well as the was true with Sunbeam-Oster team members…truly downside risk. Our math when none of the major understand the produced an 85 target price international headhunting firms with GGBs trading in the could find a turnaround importance of teens, and a downside price in executive willing to stake their the 40s, which clearly qualified reputation as CEO. This was “education-education- as discovering a massive true with Borden when we undervaluation - our second told the board they were going education” to create building block. The third and to be destroyed by a leveraged final building block was buyout and bad management. extraordinary value constructing a plan to create both in financial and extraordinary value and then And, most importantly, this start execution. Effectively was true when virtually every social terms.” executing the plan necessitated major sovereign bond investor that we build a superstructure and a long list of talking heads G&D: What are the three team of over 230 of the best could not understand why building blocks of Japonica’s professional specialists in an Japonica was so willing to buy transformational investments? unprecedently large number of such a large percentage of the fields. Greek government bonds. The PBK: Japonica's GGBs were our most transformational investments G&D: Could you provide profitable investment and the have three building blocks: insight into Japonica investment where we had the discover systemic accomplishing what others greatest positive social impact. misconceptions, discover a believed to be impossible? massive undervaluation, and Accomplishing what others create extraordinary value. PBK: With all of our believe impossible comes back Discover systemic transformational investments, to our three building blocks misconceptions rooted in those considered to be the and our superstructure teams. financial statements (especially smartest in the sector The systemic misconceptions balance sheets), which do not dismissed our plans as set the foundation for the reflect economic reality. impossible. They would be so future. The superstructure Discover a massive sure of their convictions that teams help confirm that the undervaluation, which starts they would confidently be systemic misconceptions are with building detailed quoted in the mainstream real. Discovering the massive consolidated and segment media. In the end, they were undervaluation provides the financial statements. Create dead wrong. Thankfully in our financial resources to execute extraordinary value by world, the economic and social our plan. Having a optimizing these discoveries, rewards provide a nice prize superstructure team dedicated often through informal and to our superstructure teams. to this one investment enables formal education, with the As for the those who were so us to execute our plan to balance sheet as the primary wrong, their arrogance and create extraordinary value, as financial performance ignorance seem to keep them execution to perfection is an measurement tool. in a bubble of denial. This was absolute must. true with CNW, when the Our most valuable team G&D: Would you briefly industry wags dismissed our members share our culture of describe what qualifies as a $1.2 billion tender offer to passionately living our systemic misconception save what they called “nothing transformational investment. building block in a Japonica more than two strips of rust They truly understand the transformational investment? fading into the sunset.” This importance of “education- (Continued on page 9) Page 9 Paul B. Kazarian, Japonica Partners

PBK: To qualify as a systemic walked out. I figured Steinhardt sovereign bond investment misconception, a very who suggested the meeting framework compare to the important financial fact must would never invest with me. frameworks used by the be universally stated and be Since I couldn't convince largest sovereign bond wrong. The systemic Ehrman, the most respected investors globally? misconception must have a rail analyst, I figured that was direct relationship to a massive it. Yet, when I came out and PBK: Over the past eight undervaluation. The systemic we met, Steinhardt wanted to years, we’ve met with or misconception must be sign a partnership. analyzed the research of the so unquestionably accepted by the -called best investors in lead steers in all sectors “Our first encounter to sovereign bonds. The financial including investment, academic, research and analysis we found political, and NGO. The test our systemic was so deficient that if done by highest value systemic a professional equity manager, misconceptions are repeated misconception came they would be criminally guilty blindly and unquestioned as of gross negligence and more fact by the media. And, even when Michael likely recklessness. What better, those talking heads masqueraded as financial must initially view any Steinhardt set up research ranged from futilely challenge to existing meetings with George seeking to boil an ocean of orthodoxy as deserving of information, to building ridicule. Soros and Bill Ehrman, complex models that have zero track records of accurate Knowing our numbers were who was Soros’ leading predictability, to abdicating the 100% correct with our GGB research to financially clueless investment, we gained greater rails analyst. I went in theoretical academics, conviction when the status quo economists, or political espousers would walk out of and debated CNW operatives. meetings without hearing the against Ehrman. He material, create fabricated What is even more surprising negative stories about us, or completely disagreed is the investors with the comment in the media that "no primary fiduciary responsibility respected economist would with me. Completely. for the third-party funds, who agree with Japonica's you expect to know better, numbers." As Michael He was so irritated with that readily accept and make Steinhardt told me during our investment decisions on this first meeting, "your systemic me he got up and garbage financial research. In misconception is not a walked out.” sum, the so-called systemic misconception if I can sophisticated sovereign bond make calls to the smartest on investors resemble sheep the topic and any one of them With the GGBs, we had standing in line at the slaughter tells me that you have a valid discovered 25 major systemic house. And, as for the point." misconceptions. It wasn't just technical legal investors in the debt and the many debt sovereign bonds, these Our first encounter to test our related metrics, but systemic investment decisions are not at systemic misconception came misconceptions across a broad all based on understanding the when Michael Steinhardt set up horizon. And, we had ten financial position of the meetings with George Soros major work streams to create sovereign government issuer. and Bill Ehrman, who was extraordinary value. Both Soros’ leading rails analyst. I contributed to the massive Using new PFM technology– went in and debated CNW undervaluation. including heavily weighting against Ehrman. He completely what we call the three disagreed with me. G&D: How does your new Indicators (Citizens' Wealth, Completely. He was so PFM (Public Financial Total Government Net irritated with me he got up and Management) technology Worth, and Total Government (Continued on page 10) Page 10 Paul B. Kazarian, Japonica Partners

Net Worth as % of GDP) and The financial numbers worse credit.” We do this prioritizing related insights–can reported by governments are work, and, when we find the significantly improve the all too often extensions of a better credits, we'll buy their deficient predictive track political power process where bonds, and, when we see record of the current obsolete fraudulent numbers and worse credits, we don't touch sovereign government credit cooking the books is them. risk rating framework used by considered both an absolute S&P, Moody’s, Fitch, and DBRS right of those in power and to “Think about going into which futilely attempts to boil be rewarded. The challenge to an ocean of considerations and produce government balance an investment universe focuses on only approximately sheets and financial statements without financial 30% of sovereign Government from the outside is not for the Total Balance Sheets. faint of heart. And, when you statements... people ask governments how long it G&D: Why has the sovereign will take to produce a proper will start boiling the bond market proven to be balance sheet, don’t be fertile ground for Japonica? surprised when they say they ocean, because they need 10 to 15 years. The real PBK: Sovereign debt markets answer is that they do not have to produce ... are massive, hugely inefficient, want to produce proper reports. People want to and among the most financial statements because treacherous in the world. First, they do not want to be believe they know the numbers published by constrained by reporting governments, NGOs, and numbers that reflect economic what's going on.” rating agencies all too often do reality, and they do not want not reflect economic reality to be held accountable for the In 2011, rating agencies had and are not internationally financial consequences of their Greece rated A-minus and, 18 comparable. Whatever actions. months later, Greek bonds numbers get headlined, you are became the largest default in well-served to assume that “Sovereign debt the history of the world. The they are politically motivated rating agencies don't know, garbage. Examples include markets are massive, and two of them give their numbers hidden from the hugely inefficient, and research away for free. It's like public, politicizing of numbers believing you can make money going undetected, and the among the most from reading the FT or the lemming-like behavior of rating Wall Street Journal. agencies, NGOs, IBs, lead treacherous in the steer sovereign bond I think it starts with the fact investors, and the media and world.” that government financial their talking heads. We've always done sovereign statements have really only Government Total Balance debt, but never to the extent existed for the last 12 years. Sheets and financial statements of the Greek situation. Around Think about going into an and notes are a very different 1993, we started looking at the investment universe without animal than in the corporate rating agencies’ material on financial statements. By default, world and require a special sovereigns and realized there people will start boiling the skill to analyze and extract is no reason to believe that ocean, because they have to meaning both historically and their analyses are going to give produce research reports. by comparison. We invested any support in determining almost endless hours and what's going to happen. None. People want to believe that scores of people to get This makes it a fertile ground they know what's going on. government balance sheets for someone who can do a Then, you meet with the major that represent economic better analysis to say “No. investors, which we had to do reality rather than the desires There are obvious flaws in with Greece. We had to look of the political actors. their work. This is a much at every large bond holder. better credit. This is a much Some of them do legal analysis. (Continued on page 11) Page 11 Paul B. Kazarian, Japonica Partners

For example, when they go because the auditors are found financial assets after Argentina, it's a legal usually on the side of the purported to be 325 billion decision. Others make political government. So, when you euros that in fact were only 70 decisions, and our view is that read them, you have to go and billion euros. political decisions really are a readjust them in order to kick crap shoot. We do not invest out all the fraudulent We found government pension based on political decisions at accounting. You have to funds that had been reduced all. No, it's all the numbers. I triangulate. You have to do by more than half-a-trillion think that's another big plus for very hard work, and that's a when in fact they had us because when we were great space for us to be in. increased by over half-a- buying the Greek bonds, we You're in a space that is like a trillion. And, as for were buying from people who no-man's land. government economic were selling because of politics, statistics, numbers constantly and they had no idea about the G&D: How difficult is it to have to be corrected to balance sheet. None, none, build a government balance represent economic reality and none. How much time is spent sheet and compare to other for comparability. with government balance sovereigns? sheets in economics courses? Our team had to build 18 None. PBK: Members of our team years of total government were dedicated to updating balance sheets for 18 member “For government our government balance sheet states where none had existed numbers daily and did not stop and still currently do not exist economic statistics, refining our numbers for new outside of Japonica. Our team numbers constantly information. We realized early built a database of sovereign on that daily attention to our government financial statement have to be corrected to government balance sheet information adjusted for numbers were an essential part restatements and comparability represent economic of our GGB investment. for 14 governments going back as far as 1991. Our team had reality and for Our government financial to dig deep to get balance statement database is sheet details and changes comparability. Our unparalleled to anything in the including individual financial team had to build 18 world, especially given the high asset appraisal, annual quality of the information that depreciation, government years of total has been adjusted to accurately pension funds, hundreds of reflect economic reality, and individual financial debt government balance the extensive testing of the instruments, and intra entity numbers using alternate consolidating adjustments. Our sheets for 18 member sources of financial statement team had to become intimately information and economic familiar with the seven major states where none had statistics. government accounting existed and still standards as well as the unique The importance of developing local government accounting currently do not exist our own numbers and standards of sovereigns. statistics became obvious very outside of Japonica.” quickly as we found that the Our team had to collect quality was worse than any of information by traveling to You have a market with us could have imagined. Highly widely diverse locations entities that just started respected organizations and around the world to read hard producing financial statements individuals were publishing copy material and interview and people who don't read numbers purported to be facts knowledgeable individuals. Our financial statements, and many that were at best garbage and team needed to find nuggets of of these statements are often more likely reckless value from over 100 different populated with fraudulent attempts to mislead the public primary sources, including government accounting and oversight entities. We government budget reports, (Continued on page 12) Page 12 Paul B. Kazarian, Japonica Partners

government agency reports, Japonica organized major the country to become the parliamentary reports, audit conferences globally that were eurozone leader in monthly reports, NGO reports, and attended by world leaders and financial reporting, and educate various databases. To test our directly challenged the Greece the senior financial leadership information to ensure it was debt myths and educated of all the major political by far the best available Greece key stakeholders parties. Within Europe, our anywhere in the world, our through free and open debate. role as sole senior advisor to team collected and vetted The conferences were the CEPS task force on EU materials produced by any attended by hundreds including government balance sheets has credible entity or individual senior individuals across the changed the financial dialogue. that claimed to have produced political spectrum in Greece And, these are only a few government balance sheet and Europe. Two of the examples of the social benefits information for any of the EU highest impact conferences of our work on the GGB member states or any of our were held at CESifo in Munich investment with public financial 14 sovereign government and the University of Southern management. benchmarks. California. Additionally, the Japonica team gave over 400 G&D: What is Japonica's G&D: How does Japonica high impact presentations on relationship with sovereign Partners add value to its public financial management wealth funds? sovereign investments? and Greek debt sustainability to organizations including: the PBK: To date, Japonica has PBK: The process to add American-Hellenic Chamber of extensively educated through what we call extraordinary Commerce, British Hellenic multiple and lengthy sessions value is similar across all our Chamber of Commerce, CEPS, the senior-most leadership of investments but has important CIPFA, Economic Council of 12 of the largest 14 sovereign differences. Once we have CDU, EGPA, European Court wealth funds in the world, who discovered the systemic of Auditors, FEE, Harvard collectively have assets under misconceptions and a massive Business School, ICAEW, IIF, management of US$8.0 trillion undervaluation, we then build a IFAC, IMF, INET, IOBE, ISCTE, with an approximate US$4.0 plan to create extraordinary London Business School, trillion in fixed income. value. OECD, Oxford, PMI Congress, Standard & Poor’s, and the G&D: How does Japonica For the GGB investment, we World Bank. change the views of the most built the largest superstructure influential decision-makers? team in Japonica’s history of “Japonica extensively over 230 best-in-sector educated through PBK: It’s through our professionals to create relentless education that we extraordinary value by multiple and lengthy change the views of the most correcting the systemic influential decision-makers. We misconceptions through sessions the senior-most educate with research and education and convincing facts that are irrefutable under Greece key stakeholders, leadership of 12 of the critical analysis. Getting people including the Troika and all to realize that very important major Greek political parties, largest 14 sovereign conclusions they hold as to embrace the best practices wealth funds … who unquestionable are false is very of public financial management. challenging. Our information The team accomplished what collectively have AuM must be perfect, well was considered impossible by researched, and have building Greece and peer of US$8.0tn.” considered the material of country government balance every knowledgeable person sheets through analytical In Greece, we worked hard to on the topic. We have learned triangulation of over 100 get adoption of International that it often takes seven primary and official secondary Public Sector Accounting encounters, yes seven, to get sources covering up to 20 Standards (IPSAS), install an the person to recognize that a years of data. essential chart of accounts, for systemic misconception is just (Continued on page 13) Page 13 Paul B. Kazarian, Japonica Partners

that. Furthermore, we need to especially compared to specialists, micro-economists, educate several of the corporate, hedge fund, or NGO executives, private individuals they trust on the private equity transaction sector C-level managers, topic. This is super hard work teams? professional investment and takes a relentless work managers, public and private ethic. PBK: Japonica has a huge sector accountants, public competitive advantage in that private sector auditors, With our Greek government our entire superstructure statisticians, sovereign wealth bond investment, we changed teams are focused on one fund executives, and think tank views of the senior-most transformational investment at executives. leadership of major a time. Japonica’s international stakeholders, superstructure team members Our process of building and including prime ministries, span a comprehensive global managing our superstructure finance ministries, parliaments landscape of the best and team minimizes risk and throughout Europe and Asia, brightest in their respective increases return, which is very IMF, IIF, ECB, OECD, UN, sectors. different from the AUM World Bank, CDU, EWG, process of using diversification ESM, Paris Club, US SEC, “I don't want to get to purportedly lower risk IFAC, CIPFA, AHCC, CESifo, while seeking to compensate CEPS, ICAEW, BHCC, and into theoretical for the return lowering impact credit rating agencies. discussion. Let's get to of diversification and improve upside returns by adding ever In recognition of the firm’s the real world: if you more layers and types of expertise as one of the world’s leverage (while ignoring the leading public financial take more risk, you're increased downside exposure management and sovereign probably going to lose of this debt). debt experts, Japonica leadership served as sole more money. … You I don't want to get into Special Advisor to the CEPS theoretical discussion. Let's get Task Force on Government can't add more value to the real world: if you take Balance Sheets and received more risk, you're probably the 2016 William Pitt the through better analysis going to lose more money. Sit Younger Award for and better work? You back for a minute and think extraordinary leadership in about it. You want to make strengthening democracy have to take more risk more return. What do you do? through public financial You take more risk? That's the management. to get more return? best you can do? You can't add The Harvard Business School more value through better case study, “Greece’s Debt: Sounds like you're analysis and better work? You Sustainable?” focused on the setting yourself up for have to take more risk to get Greece debt systemic more return? Sounds like misconception and Japonica’s mediocrity at best.” you're setting yourself up for efforts. The case study was a mediocrity at best. This is our seminal tool educating the For example, the GGB view. It's our 30-year track most influential decision- transformational investment record. This is how we built makers and has become a superstructure team exceeded Japonica. Japonica does not cornerstone case study, 230 including: academics, aspire to AUM metrics nor do globally, across a range of capital markets specialists, we want to manage dumb classes from public financial conference organizers, credit money. management, to value rating agency professionals, investing, to accounting. domestic law specialists, I think the traditional risk- finance specialists, government reward framework could make G&D: How do Japonica administrators, historians, some sense institutionally. But superstructure teams impact international lawyers, macro- I'm not taking more risk to get the risk-reward relationship, economists, lobbyists, media more return, because maybe (Continued on page 14) Page 14 Paul B. Kazarian, Japonica Partners

it's going to be more risk and Net Worth, should be the show actual Citizens’ Wealth less return. We are super most heavily weighted at a point in time, or often to selective and everything we do indicator in a sovereign reveal a value created or is designed to minimize that government credit risk rating destroyed ratio. risk, so that our downside is framework based on its actually still an upside. You comparative superiority to “I think the traditional constantly get prodded to take other metrics, including its more risk by peers and integration of: the most risk-reward framework bankers, especially if you're in comprehensive measure of a could make some sense New York City. I think the government's financial position benefit of not being here is (Total Government Net institutionally. But I'm that I'm not caught up in Worth defined as 100% of competition, because I'm so Total Government Assets less not taking more risk to predisposed to competition. I 100% of Total Government spend a lot of my time in Debts), audited annual financial get more return, sleepy places like Lisbon where statements with Total I just work. Work every day, Government Balance Sheets because maybe it's and that's just it. It's easier that and Notes based on going to be more risk way, because you really can international public sector stay focused. accounting standards, the most and less return.” widely used economic growth G&D: Would you explain the metric GDP, and a When Total Government Net creation of the Citizens' communication friendly per Worth/Total Government Net Wealth metric to evaluate person indicator. Debts are not available, government financial Citizens’ Wealth is as performance? Citizens’ Wealth is a new per simplified Citizens’ Wealth* citizen government (with an asterisk) by replacing PBK: Citizens’ Wealth was by performance indicator Total Government Net Debts far the most important number providing significantly better with government financial net we looked at during our GGB historical and comparative debt (government financial investment. We made our insights into the relationship debt less government financial purchase decision based on between the total economy assets). Also, worthy of note, Greece’s vastly better number GDP and Total Government our team surveyed economists than Eurozone investment Balance Sheet (especially and others who seek to grade sovereigns and our compared to GDP or a debt to evaluate sovereign government decision to exit by assessing GDP ratio). Citizens' Wealth financial performance and Greece Citizens' Wealth can expose touted claims of asked them to rank Citizens' changes between 2012 and economic prosperity (i.e., GDP Wealth and the most common 2017 and the comparison to growth) that in reality is metrics used to evaluate the peer group. No one else financial destruction resulting sovereigns using ten essential had these numbers and still no from hidden increases in traits. The result, Citizens' one else has these numbers government financial burden Wealth consistently scored today. Without them, put on its citizens. Citizens’ close to 10 out of 10 and the investors are flying blind when Wealth is calculated per best of the others 4 to 5 out investing in any sovereign citizen, which can be more of 10. government including those in meaningful, easier to Europe. understand, and a more helpful G&D: How socially important management performance is working to improve Citizens' Wealth and Total metric than abstract government financial Government Net Worth are percentages or numbers in the performance? two of the most incredibly millions, billions, or trillions. important and widely ignored Citizens’ Wealth is measured PBK: Sovereign debt investing metrics. Citizens' Wealth per per citizen and can be offers an opportunity to create person, which is total economy calculated: to show changes in major benefits for society. The GDP less Total Government Citizens’ Wealth over time, to social importance of each (Continued on page 15) Page 15 Paul B. Kazarian, Japonica Partners

Japonica Partners with honest and accurate We gave 300 media interviews transformational investment is information that contrasts with (resulting in approximately significant. We call this the that which creates and 1,000 articles in 20 languages, double bottom line. With supports systemic some front page and covers); Greece, it was to save a misconceptions. Horizontally made dozens of media country of 11 million people means as many people at appearances including BBC, from a devasting economic similar levels as practical and CNN, Bloomberg, and collapse. The historical vertically means from senior domestic outlets; ran 46 full government financial editor and editorial board to page public notices (12 mismanagement was clear to staff reporter and fact checker. different series) in key us and the absence to public publications including FT, WSJ, financial management was at “Sovereign debt NYT, Institutional Investor, the heart of the problem. And, Washington Post, and many with the government investing offers an regional publications; authored composing over half the opportunity to create several highly regarded papers economy, the ripple effects and brochures; produced a were enormous. So, we major benefits for long list of innovative media started with convincing the campaigns including editorials, financial leaders within each society.” airport advertising, web portal political party of the campaigns, videos, and popular importance of PFM, then Media has an important role in artist drawings; spoke at 15 winning the adoption of IPSAS, correcting or perpetuating universities; made over 400 establishing a proper chart of systemic misconceptions. It is presentations; and organized accounts, and credible monthly important to keep in mind that and sponsored seven major financial statements. The editors and reports cover international conferences. results were both positive and many topics at one time, and Educating and correcting clear, and the Prime Minister are constantly fed systemic misconceptions held and the shadow Prime Minister misinformation, which makes it by senior editors and a large both publicly supported PFM very difficult to be an expert majority of their editorial with videos available online. who can properly synthesize boards is mission critical; it Additionally, there was an EY and explain specialized topics. takes a significant commitment study that confirmed Greece Correcting systemic of resources even though they had the best monthly financial misconceptions can be usually do not have an reporting in the Eurozone. especially hard as it is human economic vested interest in nature to revolt when firmly perpetuating the systemic G&D: How important are held views are challenged. misconception. media communications to However, through relentless Japonica's investments? “education–education– G&D: What is the role of education” efforts built upon Japonica's philanthropic PBK: Media communication rational and accurate facts, we affiliate? has always been an important have built great relationships tool for our transformational throughout the media PBK: Japonica Partners investments. The foundation is landscape who are willing to philanthropic affiliate, The set with our “education– invest the time to begin to see Charles & Agnes Kazarian education–education.” We what others do not. The most Foundation, is named after my need to educate key decision respected members of the grandparents who were makers and the public in order media appreciate our honest survivors of the first genocide to correct systemic and efficient education efforts. of the 20th century, the misconceptions. Key to our One of our goals is to help the Armenian Genocide, and has a success with educating the media outlet and staff win core competency to improve media to recognize systemic positive peer recognition for public financial management misconceptions is to go attitude-changing articles. and financial literacy. The consistently and repeatedly These efforts are essential to Kazarian Foundation is funded both vertically and horizontally correcting systemic solely by affiliates of Japonica within a media organization misconceptions. Partners and had spending (Continued on page 16) Page 16 Paul B. Kazarian, Japonica Partners

since founding plus year-end PBK: The best advice we can former chief accountant at the 2018 assets of over one give to an MBA starting a new SEC and one of my professors quarter-billion US dollars. career is to find outstanding at CBS, both provided a solid mentors or role models. The foundation to appreciate the G&D: Why did Japonica use lessons learned from those importance of dissecting and only partners’ capital to invest whose judgment, skills, and inspecting public financial in GGBs? accomplishments you aspire to communications. Wash Sycip, a will set a rock-solid foundation legendary figure throughout PBK: The decision to use only for your growth and success. Asia, advised us extensively on partners’ capital was based on Michael Steinhardt, a legendary both Asia and our the impact on our risk reward hedge fund manager, was our philanthropic efforts. ratio. We had ample capital to first limited partner, and invest, but we did not want to provided our team with “We … essentially live exceed 8.9% of targeted series. invaluable wisdom across a And seeking to deploy more wide range of topics, including the lives of monks with capital ran the risk of relationship building; assessing 110% devotional focus increasing our purchase price real risk/return relationships; and potentially reducing our and convincing us to have zero on our transformational liquidity at time of exit. This management fee, a 20% real was not an easy decision, cash back hurdle rate, and, investments. I know this especially when two sovereign perhaps most importantly, 50% wealth funds recognized the equal sharing of profits. We observation may not be great perils and opportunities were honored to give Michael of the sovereign debt market his Institutional Investor currently welcomed by and asked us to manage 10 Lifetime Achievement Award. the “hard work does billion US dollars each. A successor to Max Heine’s firm, one of Japonica’s early not equal success” G&D: How would you limited partners, helped us on describe Japonica's work ethic? constructing and defending the crowd” integrity of perfectly aligned, PBK: Creating win-win limited partner At the early stages of transformational investments relationships. Japonica’s first billion-dollar with low risk high return investment (the CNW requires huge personal John Whitehead, former co- transportation holding sacrifice that only a very rare managing partner of Goldman company), we were asked to few will make. We and our Sachs and US Deputy attend a meeting with Warren best performing team Secretary of State, was a Buffett to discuss our CNW members essentially live the senior advisor to Japonica’s investment. He had a lives of monks with 110% non-profit affiliate and was relationship with one of our devotional focus on our very helpful in building our superstructure team members. transformational investments. I international government We discussed our three know this observation may not relationships, especially in the building blocks, and he was be currently welcomed by the US and Asia. Bill Johnson, the helpful in motivating us to gain “hard work does not equal CEO who built IC Industries, the support of CNW’s almost success” crowd, but this is our encouraged me to start 20 different rail unions. Buffett experience in building our Japonica and gave invaluable saw this as our biggest risk, track record over the past 30 advice on turning around large and we dedicated the years, and I don’t sugarcoat international businesses resources to win union reality. without staff reductions, support for our plan to acquisitions, or increases in streamline operations and G&D: What advice would you debt. expand short line segment give an MBA looking to pursue sales thus lowering our a career in investment? Rod Hills, a former Chairman downside risk and creating of the SEC and our board extraordinary value. member, and Sandy Burton, a G&D: Thank you. Page 17

Peloton Interactive, Inc. (NASDAQ: PTON) - Short ($7 PT, +76% Upside) 2020 Artisan International Value Stock Pitch Challenge Finalist

Bruce Kim - [email protected]

Executive summary Peloton (PTON) is an $8.6bn fitness company with 563K subscribers that 1) manufactures and sells fitness equipment ($2,245 for the stationary bike) and 2) generates subscription revenue ($39/month). PTON is an attractive medium-term short for the following reasons:

Bruce Kim ’20 1) PTON is an expensive add-on fitness product with a smaller TAM than market expectation. Bruce is a 2nd year student at 2) PTON’s churn is artificially low due to the legacy contracts. CBS and a member of the Value Investing Program. Last summer, 3) PTON has no moat against competition (SoulCycle). he worked at Alyeska Invest- ment Group, covering tech, consumer, and healthcare sec- 1. PTON is an expensive add-on fitness product with a smaller TAM than market expectation. tors. Currently, Bruce is intern- PTON’s current customer profile is in-line with a high-end boutique add-on fitness service, which limits its ing at Marshall Wace Global Opportunities Fund, covering TAM to 2-3M users. Bulls and the management argue that PTON is an affordable gym-replacement product/ the US consumer sector. service (with financing) that can reach 5-10M users (as reference, Planet Fitness has 14M members at $10-22 price range). However, currently 2/3 of PTON users have gym memberships:

“I think two-thirds (users with gym memberships) is kind of on the money, if not maybe a little low in terms of just boutique fitness users having multiple streams of fitness.” (Former senior director of software engi- neering at SoulCycle)

While PTON’s S-1 defines the upper funnel of its TAM at households with $50K+ income, its showroom loca- tion distribution indicates that the company is primarily targeting high-income households. The average house- hold income of zip codes with PTON showrooms is $140K, with the distribution skewed to the high-end. Using $120K as the realistic upper funnel of the TAM, PTON’s SAM is limited to 2-3M (see the table below).

10

9

8 Showroom Median HH Income 7

6 National Avg. Showroom Avg. HH Income PTON Showroom Zip Code Statistics (n=70) 5 HH Income Avg. HH income: 142K 4 # of Showrooms # Median HH income: 121K

3

2

1

0

Showroom Region Avg. Household Income

2. PTON’s churn is artificially low due to the legacy contracts. PTON’s low reported churn (~8%) is artificially deflated due to the legacy long-term contracts, and the recent cohort data shows steadily increasing churn. PTON discontinued the 12, 24, and 36-month contracts in 2018. Users with legacy contracts (~10% of users) are included in the churn calculation as having no-churn. Assum- ing that legacy contracts have ~20% churn (accounting for the 2-3 years age of the cohort), PTON’s real churn is close to 11-13% (see table below). The churn calculation is close to the churn rate of the 2018+ cohort according to Yippet tracking data. More importantly, Yippet’s 3m rolling churn is tracking around 18% — showing a consistent trend of increasing churn among new cohorts. Page 18

Peloton Interactive, Inc. (NASDAQ: PTON) - Short ($7 PT, +76% Upside)

3. PTON has no moat against competition (SoulCycle). PTON has no moat against increased competition. With SoulCycle set to launch its connected bike product in early 2020, PTON’s pace of gross ads will decline: · While bulls argue that PTON has network effects due to its social features, less than 5% of its users participate in live class sessions according to Yippet data. · The learning curve for the hardware development is low, and SoulCycle has the best-in-class modality: “Anyone including Fly- wheel and lots of other lower-priced competitors can easily create a bike in 6-9 months (hardware)… SoulCyle has the best in class modalities: Soul = Spin, Equinox = bootcamp, meditation with Head- space, Running with Precision Run.” (VP of finance at SoulCycle) · Fixed cost barrier is low (content library created by 34 instruc- tors in 4 studios). PTON’s private competitors have VC funding and are not constrained by near-term margin expectations. PTON also has key talent risk — top 5 instructors have outsized Instagram followers vs. the others.

Valuation & financials · At 2.45M 2024 subscribers (assuming no pricing power given intensifying competition), I am pro- jecting a base case revenue of 2.9bn 2024 revenue. (vs. 5.2bn consensus) · Gross margin for the subscrip- tion business tops out at 65% with 2.45M subs (improvement limited by the 40% variable cost — mostly music royalty). · Modeling 6% EBIT margin in the base case (SG&A leverage is limited due to the increasing CAC — in- creasing churn + intensifying compe- tition). · Applying 15x terminal EV/ EBITDA multiple in the base case (a relatively high multiple given the limited revenue growth and margin improvement runway I am project- ing after 2024). · Discounting back 2024 EV at 10% discount rate.

Based on the assumptions outlined above, the base case price target is $7 (76% upside for the short). In the upside scenario (PTON suc- ceeds as a gym replacement and gets to 8M subs), the short has a 253% downside. However, given my analysis on TAM, churn, and moat of PTON, this is a low probability scenario.

Risks · Implementation risk: low float and high short-interest can result in implementation difficulty and volatility. However, the increased competition in early 2020 provides a near-term catalyst roadmap for the short. Increased liquidity after the lock-up expiration (Mar 24th) might provide a better entry point. · Disappointing execution by SoulCycle: SoulCycle has experienced setbacks with negative PR headlines and management change in 2019. If SoulCycle and other competitors fail to execute, PTON will gain market share without experiencing a spike in CAC. How- ever, recent announcements regarding additional VC funding and Equinox partnership indicates that SoulCycle is committed to pene- trating the connected fitness product market. Page 19

Rolls-Royce Holdings Plc (LSE: RR.) - Cash is coming - LONG 2020 Artisan International Value Stock Pitch Challenge - Winner

Alvaro Pasquin Llorente - [email protected]

Trading stadistics Actual FYE December 31, Projected Fiscal Years Ending December 31, in GBPm except when stated otherwise Financial summary 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E Price in GBP (01/24/2020) 6.75 Revenue £13,783 £13,671 £15,067 £16,128 £16,682 £17,387 £18,013 £18,803 Shares outstanding 1,896 y / y growth (0.8%) 10.2% 7.0% 3.4% 4.2% 3.6% 4.4% Market Capitalization 12,796 EBIT £915 £306 £616 £637 £1,116 £1,655 £2,059 £2,401 Net debt 683 Margin 6.6% 2.2% 4.1% 3.9% 6.7% 9.5% 11.4% 12.8% Álvaro Pasquín ’20 Provisions 3,425 EPS £0.33 £0.08 £0.18 £0.16 £0.36 £0.61 £0.77 £0.91 Enterprise value 16,904 FCF / Share £0.11 £0.08 £0.34 £0.32 £0.61 £0.48 £0.83 £1.14 Alvaro is a 2nd year student at CBS and a member of the Value EV / EBIT 8.5x 19.5x 14.1x 10.7x 7.8x 5.9x 4.6x 3.6x Investing Program. Before CBS, 52 Week Range £6.50-10.03 P / E 23.1x 106.2x 50.6x 42.0x 18.4x 10.4x 7.3x 5.1x he was a senior investment analyst at the Alantra EQMC 2022E Target price £13.5 FCF Yield (1.9%) 5.2% (6.9%) (6.3%) 3.7% 8.3% 10.7% 12.7% Fund, a friendly activist fund Upside 100% ROIC 9.4% 3.1% 6.2% 6.9% 12.3% 17.6% 21.9% 26.6% based in Madrid, Spain focused on European small caps. Recommendation: I recommend a long position in Rolls-Royce, with a target price of £13.5 in 2022 (100% upside - 27% IRR). After the largest investment period in its history, coupled with extraordinary costs in one of its engine programs, profitability has struggled over the last years in its Civil segment, which is loss-making today. However, my view is that consensus is completely unaware of the amount of cash flow coming over the next few years (FCF to multiply by 2.5x), mainly driven by the growth of the Aftermarket division.

Company description: Rolls-Royce manufactures and services engines for three markets a) Civil (50% of sales), mainly for Boeing and Airbus planes, b) Defense (21%), including jets, helicopters and turboprops, and c) Power Systems (24%) for marine and industrial applications. The remaining is the recently consolidated ITP.

Recent developments: Since 2010, Rolls-Royce has undergone the highest investment period in its history, focused on its Civil division. In total, it has invested around £11bn in CAPEX and R&D for 6 different engine designs. In addition, the Trent 1000 program on the Boeing 787 has been a complete disaster and will imply £2.4bn of extraordinary costs throughout the 2017-2022 period. However, the result of the aforementioned investment period is that, despite being only 11% of the total en- gine market, RR has over 30% of the Wide Body market and over 50% of the WB firm orderbook, with exclu- sivity in the growing A330neo and A350 planes.

Investment thesis: After the aforementioned investment period, Rolls-Royce has set the grounds for huge Cash Flow generation over coming years (FCF to multiply by 2.5x) thanks to: •Increasing aftermarket profits driven by a growing installed base and solving the T-1000 extra costs •Reducing loss per engine sold from £1.4m to £0.4m, leading to £400m impact at EBIT level •Normalizing R&D and CAPEX expenditures after years of heavy investments •Cost-cutting measures at corporate level for a total amount of £400m (£100m already achieved) In addition, the company is run by an outstanding CEO with a great track-record at ARM Holdings. He is , in my view, taking the right steps towards creating the market leader in wide body engine manufacturers.

2022E upside potential Base case vs Consensus 5% 20% 2,059 46% 360 59 1,744 53% 9 5

61% 90

137% 100%

222%

Aftermarket Reduced loss Declinining Cost-cutting Other Dvd yield Multiple 2022 upside Street Civil - OE Civil - Power Defence ITP & APL 2022 growth per engine investments measures businesses rerating 2022 Service Systems corporate

1. Growth of aftermarket profits: a) Growth of service revenues: Airbus & Boeing today have 1,900 planes in the backlog (planes that can have RR engines). With prudent assumptions, they will be delivering around 300 planes annually in the next few years (370 L5Y average). On top of this, RR has a higher mar- ket share of this order book (i.e. Rolls Royce is the exclusive supplier for the A330 and A350), which will result in 460 engines delivered per year, and retirements of 140. Management has guided ~500 deliveries and 100-150 retirements, with 520 deliveries in 2019. All this, coupled with growing flying hours per en- gine and higher revenue per hour flown (better mix), will grow service revenues to above £6bn. Page 20

Rolls-Royce Holdings Plc (LSE: RR/) - Cash is coming - LONG b) Decrease maintenance costs: The company has guided towards £2.4bn of extraordinary costs in the T-1000 program throughout the 2017-2022 period. Today, 8 of the 9 fixes required have been designed, and 7 of them have already been certified and now being fitted in the fleet. This means the investment required is almost over and maintenance visits will normalize again in 2022. There are currently concerns that the Trent-1000 issues could spread to the XWB and T-7000 programs. However, primary research has given me confidence this won’t happen. The XWB has a completely different architecture and is performing even better than company´s expectations. The T- 7000 has 90% commonality with the T-1000, but the younger age of the fleet, easier operating temperature and progress made on fixing the T-1000 issues limit the possibility of having the issues spread into the T-7000 program. 2. Decline in engines losses: Today, RR loses £1.3m per engine sold (as of H1 19), reduced from £1.6m in 2018. Management has guid- ed towards £0.4m of engine losses by 2022, with multiple drivers. My conversations with people in the industry, on top of recent perfor- mance, gives me conviction in the achievability of this target. However, my base scenario is predicated on £0.6 engine losses in 2022, which would provide around £400m savings per year by 2022 (management guided towards £500m). 3. Normalization of investments: Investments in the engine manufacturing business are highly cyclical and depend on Airbus and Boeing’s new programs. Rolls-Royce has just ended 6 engine programs that will last at least until 2025, which I have confirmed with com- petitors and Airbus and Boeing, as they are not planning to start any new airplane programs soon. This will enable Rolls-Royce to reduce the investments needed in both R&D and CAPEX over the next few years to £350m per year. 4. Restructuring efforts: Rolls Royce announced a £400m annual cost reduction in its corporate functions by 2020. The aim is to make the organization more efficient, flexible and lean. Specifically, they are targeting C&A and engineering, with the idea of reducing headcount by 4,600 people. This implies £500m of cash costs until 2020, most of which has already been accounted for in 2018 and 2019. While it might take longer than initially expected, the plan is on track and has already delivered £100m savings in 2018.

Valuation: My base case assumes Rolls-Royce EBIT growing from current 2022 Main KPI´s Base case Peers Transactions £600m to over £2,000m, driven mainly by the Civil Aftermarket division P/E multiple 17.5x 26.6x 25.4x (£1,200m growth). This will result in £0.83 of FCF per share, implying a EV/ EBIT multiple 10.0x 15.8x 18.9x 10% FCF yield in a market where peers are trading at 4-6%. FCF Yield 5.5% 5.0% n.a. Assuming prudent multiples compared to peers and transactions and given the * Data from 11 Aero peers and 150 transactions execution risk attached, I believe share price can double from these lev- 2022 Main KPI´s Bear Base Bull els by 2022. Loss per engine sold -0.9 -0.6 -0.4 Bear case: It would be a perfect storm. Despite the growing installed base, Engines installed base 5,628 6,150 6,503 RR is not able to reduce costs nor solve engine problems, leading to more Shop visits as % of total 21.5% 16.5% 15.5% shop visits. Downside case from this point between 10-15%. Bull case: Management reaches all the targets in terms of cost reduction, EPS £0.50 £0.77 £0.91 elimination of issues and installed base build up. A higher deserved multiple EBIT £1,388 £2,059 £2,408 would bring the upside to 172%. FCF/ share £0.57 £0.83 £1.00 All in all, the results from the upside/ downside analysis is very com- Exit P/E 12.0x 17.5x 20.0x pelling, and too many things have to go wrong to lose money in the invest- Exit EV/ EBIT 7.0x 10.0x 12.0x ment Exit FCF Yield 8.3% 5.5% 5.0%

Major risks and mitigating factors Blended TP* £5.95 £13.53 £18.36 Accounting of service contracts: IFRS 15 implementation provides more Upside/ (downside) -11.8% 100.5% 172.0% prudency on the accounting of the Long Term Service contracts *Average of three valuations Trent 1000 issues to spread to new programs: New programs are either different in architecture (XWB) or already include improvements done with Trent 1000 and have had no reliability issues so far (T-7000). Weak WB market and backlog buildup: Just the replacement of old WB planes would provide enough planes and engines to build a healthy installed base for RR over the next years. Most of these planes don’t have an RR engine today but new ones would, given current market share and exclusivity agreements of RR in Airbus and Boeing fleet. Weak capital structure: The company has enough liquidity today (£5bn in cash + £2bn of undrawn debt) to face any need. The cash flow profile of the business should help to deleverage quickly and net cash position is expected in 12 months GE to supply the A350: Rolls-Royce has contractual security that Airbus won’t open the A350 program to GE. In addition, Airbus has confirmed to me that they will respect the contracts and exclusivities. Macro downturn: Although there will be an impact to the service revenues (that charge for each hour flown), recent crises show that the decline would not be deep and the recovery would be quick. The impact would be thus limited to the short term. Page 21

Nuance Communications, Inc. (NASDAQ: NUAN) - Long 2020 Artisan International Value Stock Pitch Challenge Finalist

James Shen, CFA - [email protected]

Key Stats $25 30 Share Price $20 EV($MM) $6,749 Price 25 DSO(MM) 284 52 Week High/Low 20/14 $20 Market Cap ($MM) $5,700 Short Interest 3.60% 20 Volume(Millions) James Shen ’20 Cash($MM) $587 EV/NTM EBTIDA 18.6x $15 15 James is a 2nd year MBA student Total Debt($MM) $1,636 NTM Fwd P/E 23.8x at CBS and a member of the $10 2018A 2019A 2020E 2021E 2022E 10 Value Investing Program. Prior to CBS, he worked at HSBC in Total Revenue $2,052 $1,859 $1,549 $1,628 $1,733 $5 5 fixed income trading and balance y / y growth 5.8% (9.4%) (16.7%) 5.1% 6.5% sheet investing teams. Adjusted EPS - JS $1.19 $1.14 $0.95 $1.15 $1.40 $0 0 Variance to Consensus 13.1% 24.6% 37.2% 22-Jan-15 22-Jan-16 22-Jan-17 22-Jan-18 22-Jan-19 22-Jan-20

Recommendation I recommend a long in Nuance (“NUAN”). Nuance is a speech recognition software company with strong and protected moat. Recent changes in the business, including a) SaaS transition, b) new CEO, and c) business rationalization have made it difficult for the street to analyze the future of the company. As a result, the mar- ket misunderstands the company’s future margin expansion and growth opportunities. Through my research, I arrive at a 3-year price target of $31, representing a 57% upside on 1/24/2020 price and IRR of 16%.

Business Description Nuance is a technology company that provides software in automated speech recognition, dialog, and infor- mation management capabilities. Its two main business segments are a) Healthcare, where Nuance provides customers speech recognition solutions used in the clinical documentation process, and b) Enterprise, where they provide automated customer service solutions.

Investment Thesis 1) Nuance is the market leader in speech recognition software used for clinical documenta- tion, which has a large and growing global TAM. The company has a defensible moat vis-à- vis its competitors due to its scale, healthcare specialization and best-in-class AI capabilities. · Nuance’s speech recognition software dominates its respective markets. Its Dragon Medical products are used by over 60% of hospitals and clinics, and its PowerScribe products are used by over 80% of radiolo- gists. Nuance’s products are rated highest by industry surveys on customer satisfaction and loyalty. · Nuance has built 96 medical dictionaries over the past 20+ years to help its speech recognition AI to achieve 99% accuracy. · VAR reveals that “Nuance’s technology is the best-in-class. Customers are very sticky.”

2) The company has recently gone through three large changes: a) transition of its core healthcare speech recognition business to the cloud, b) a new CEO, and c) business portfo- lio rationalization, and the combined effect is underappreciated by the street. a) Nuance’s clients from both the legacy transcription business and license-based Dragon software are get- ting onboarded to the cloud-based Dragon solution, and this transition will provide significant lift to the Clinical Documentation segment’s margin and revenue. · The transition from legacy transcription services (HIM) to cloud-based speech recognition Dragon Medical One (DMO) will lift margin by 2-3x. HIM is a labor-intensive service model that generates mid-30% margin, whereas DMO is a SaaS solution that can have an 80% margin. · The transition from on-premise license-based model to subscription-based model will further provide 2-3x upside to the revenue. Based on primary research, Nuance’s old license software costs $1500 per copy, whereas the new subscription model charges $100 per month. Annual- ized revenue for the cloud solution is 2x the license solution. Further, ARPU over the transi- tion period appears to be much lower than the retail price due to Nuance’s initial concession in price. This implies 30-40%+ ARPU upside once Nuance passes the transition phase. · The Street’s forecast simply extrapolates forward margin by 50bps per year. As the more prof- itable SaaS business grows relative to the less profitable HIM business, margin expansion should be much more significant if modelled using a product level margin estimate. Page 22

Nuance Communications, Inc. (NASDAQ: NUAN) - Long

JS' Healthcare Segment Margin vs Street Estimate 39% Margin Current CAGR(next 38% Estimate Weight 3Y) 37% 2% per year 36% modeling Dragon Medical & 35% Radiology & mid 80% 69% 20%+ 34% 33% 0.5% per year Maintenance 32% extrapolation 31% HIM mid 30% 22% -13% 30% 29% Other mid 30% 9% -15% 28% 2019 2020 2021 2022

Sell Side JS Estimates b) The new CEO Mark Benjamin is experienced in building cloud-based solutions. He is deeply incentivized and shareholder friendly, and based on his stated goals and track record, consensus EPS expectation of $1.02 by 2022 and $100mm annual share repurchase appear conservative. · Since joining Nuance, Mark’s initia- tives to optimize Nuance’s portfolio have introduced improved transpar- ency to investors. He has also been very active in communicating with investors compared to the prior CEO Paul Ricci. · Mark is deeply incentivized to deliver long-term stock performance. He receives a 10 to 1 stock to cash ratio as compensation. Additionally, his performance bonus is tied to a 3- year total share performance against the S&P software index. c) Recent spinoff of the automotive business and sale of the imaging business have introduced clarity to the remain co, allowing the company to de-lever, and created opportunities for more future buyback and strategic M&As.

3) Nuance has several greenfield growth opportunities that represent attractive and achievable upside optionality. · Recently announced partnership with MSFT on the ACI (ambient clinical intelligence) initiative can deliver both margin and topline growth when benchmarked against private peers. Startup company Suki piloted this idea and charges 4x more than Nuance’s Dragon software. Conservative assumptions on ACI penetration leads to $1-$3 additional value to current stock price, a 10-20% upside. · International markets represent future growth opportunities, given the fact that NUAN’s AI is able to process 80+ languages in clini- cal settings, and international customers from 46 countries are using license-based Dragon Medical currently. Valuation · Base case valuation: 22x 2022 P/E. I took a 20%-25% haircut from peer average P/E, reflecting the fact that 30% of Nuance is in enterprise where growth picture is less clear. NUAN’s projected EPS growth of 16% is also lower than the peer average of 20%. · Comparable healthcare transaction: 3M bought Nuance’s healthcare competitor M*Modal in 2019 for 5x revenue. This is a 10% premium to Nuance’s forward 4.5x TEV/Rev for a business that is 1/5 the size of Nuance. Risks & Mitigants · More startup companies can enter the clinical documen- tation software market: hospitals are slow moving organiza- tions when it comes to new technology. Due to heavy regulation and low risk tolerance, hospitals tend to work with trusted partners such as Nuance. · Hospitals cut IT spending on documentation software: documentation services are essential to physician’s day to day job and physician burn out rate is rising. Also, the cost for such software normally account for only 1% of a hospitals’ services spending. Page 23

Etsy, Inc. (NASDAQ:ETSY) - Long 2019 Neuberger Berman ESG Investing Challenge—Champion Team

Mingming Wu, CFA Kyle Campbell K.Y. Wong, CFA [email protected] [email protected] [email protected]

Mingming Wu ’20 Mingming is a 2nd year MBA student at CBS and a member of the Value Investing Program. Prior to CBS, she worked at CPPIB in Toronto, covering Recommendation global consumer and health care We recommend long in Etsy. Our 4-year price target is $86, representing 76% upside and 15% IRR. equities, and later at the endow- ment of Memorial Sloan Ketter- Business Description ing Cancer Center in New York. Etsy is a global two-sided marketplace for unique and creative goods that connects small-scale sellers with With her team, she won the 12th Annual Pershing Square buyers. There are 2.6M+ active sellers and 44.8M+ active buyers, with yearly transactions exceeding $4B in Challenge. Gross Merchandise Sales (GMS). Etsy’s revenue is derived from GMS-based commissions on each item sold, commission for payment processing through Etsy Payments, and other seller-centric services. The company offers buyers 60M+ items in its various retail categories. Etsy’s marketplace take rate, including payment fee, is 11.6% in 2018, 3 – 4% lower than eBay and Amazon’s.

Our Variant View · Seller-side: Market under-appreciates Etsy’s moat as the dominant leader in handmade e-commerce. · Buyer-side: Market under-estimates the future number of buyer growth (driven by the new Ads service).

Thesis 1) Market under-appreciates Etsy’s moat in handmade e-commerce Kyle Campbell ’21 · Etsy gets the key to success in a two-sided network: A two-sided network is an intermediary plat- form with two distinct user groups that provide each other with network benefits. In the case of Etsy, the Kyle is a 1st year student at two respective sides are sellers and buyers. Etsy’s strategy started with solidifying its seller base, which CBS. He served for 13 years as a US Air Force veteran. Alongside Etsy leverages to attract buyers. his military service, he managed · Etsy treats sellers differently, resulting in high seller retention: Etsy, once a B-corp, is commit- his family office, making deci- sions in equities, bonds, and real ted to keeping sellers’ interest in mind. It is more like an incubator that seeds sellers to start their own estate. He is now an intern at businesses and generate income. In contrast, other platforms act like landlords providing the space and StackLine Partners. treat sellers as tenants. Our comparison below shows that Etsy charges lower fees and provides better services. One seller told us during our interview, “When changes were made at Etsy and people were saying they were going to leave, I said, ‘What do you think Amazon is going to do to you?’”.

K.Y. Wong ’20 K.Y. is a 2nd year MBA student at CBS and a member of the Value Investing Program. Prior to CBS, he worked at buyout PE firm EmergeVest focusing on the industrial sector in Europe and Asia. He interned at APG Asset Management and Robeco in the summer of 2019, covering global emerging market equity and ESG analysis. With his team, he won the 12th Annual Pershing Square Challenge. · Etsy’s network effect within the seller community reinforces the moat: what protects Etsy’s ability to retain sellers is its close knit community. Sellers become friends and exchange ideas on how to produce and sell goods. A seller shared with us, “there is this tight knit community where people really care about each other. You make friends here. We all support each other.” It is difficult for competing platforms to break Etsy’s social network. A comparison of seller online forums’ activities also shows that Etsy has the most active online community: Page 24

Etsy Inc (ETSY US) - Long | 2019 Neuberger Berman ESG Challenge Champion

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2) Market under-estimates the future number of buyer growth (driven by the new Etsy Ads service) · New Etsy Ads service: In August 2019, Etsy rolled out a new service for its sellers: Etsy Ads. It allows a seller to allo- Etsy Ads ROI Calculation $ Formula cate a specified marketing budget to Etsy, whose automated Amount spent on Etsy Ads $29.95 a system then allocates the budget to Google Ads and Etsy Pro- Extra revenue generated 118.00 b moted Listing Ads. · Market’s view: The market is skeptical about the adoption of Gross margin of Ms. R’s business 51% c Etsy Ads by sellers, given that some sellers expressed their Gross profit 60.30 d=b*c resistance to the new service on the Etsy forum, citing disrup- ROI 101% d/a-1 tion to their businesses. · Our experiment demonstrates high ROI for Etsy Ads, which will drive high adoption rate: We conducted a proprietary experiment on Etsy Ads: we sponsored an Etsy seller with $30 for a two-week trial. She has 6 years of selling experience on Etsy with ~3,000 sales made and did not use any advertising on Etsy in the past 2 years. Our experiment showed that ROI of the Ads campaign was 101%, with $118 incremental revenue or $60.3 incremental gross profit, using $29.95 Ads expense. Building on this insight, we believe that Etsy Ads will be favorably adopted by sellers once sellers be- come aware of the high ROI. · High adoption of Etsy Ads will result in higher-than- consensus growth in number of buyers: how Etsy Ads works is that part of the charge (we estimate to be 50%) is allocated to Google Ads to drive buyers to the Etsy platform. This serves as additional advertising spending on top of corpo- rate marketing expense. We performed a cohort analysis to project the number of buyers in the forecast years, consider- ing 1) buyer churn rates provided by Etsy, 2) projected mar- keting expense (both corporate and through Etsy Ads), and 3) buyer acquisition cost. As a result, our projected growth in number of buyers is higher than consensus (market assumes mid-teens CAGR vs our of forecast of low-twenties CAGR). Bear Base Bull Valuation Number of Buyers Avg Growth YoY 13.5% 24.7% 32.1% · Assuming a forward EV/EBITDA multiple of 13x, we derive a 4 GMS per Buyer Growth 0.0% 2.0% 5.0% -year target price of $86 under the base case, which incorpo- rates a higher-than-consensus growth in number of buyers Marketplace Take Rate 12.0% 12.0% 12.0% (per the model above), 2% buyer basket size growth p.a., un- COGS % of Revenue 29.3% 28.3% 28.3% changed marketplace take rate, operating leverage, and multi- Marketing Expense % of Sales 27.6% 24.7% 24.7% ple contraction to 13x EV/EBITDA from the currently 25x. Prod. Development % of Sales 13.2% 12.2% 12.2% This implies 76% 4-year investment return, or 15% IRR. 2024E Adjusted EBITDA ($M) 402.0 744.3 935.7 · Under a Bear Case scenario, we model slowing growth in Forward EV/EBITDA 10x 13x 15x number of buyers, inability to improve buyer basket size, sig- nificantly higher marketing expense, and multiple contraction 2023E EV 4,020 9,675 14,036 to 10x EV/EBITDA, resulting in –21% 4-year investment re- Less: Debt 776 776 776 turn, or –6% IRR. Plus: Cash 1,758 2,412 2,682 Equity Value 2,992 11,312 15,941 Key Risks $38 $86 $122 · Macro downturn leading to shrinking discretionary spending. Stock Price -21% 76% 150% · Increase in online advertising costs (mainly Google). Investment Return · Intensified competition from Amazon and eBay. IRR (4-year) -5.8% 15.2% 25.7% Page 25 Heron Foundation

erra engaged with non- vesting Initiative and with their excess wealth and profit and community served as Chief Investment they would start to ask funda- leaders who were opera- Officer for Microlumbia, a mental questions like, “What is tionalizing Heron’s mis- student-run impact fund. wealth for? How do I think sion. As President, she Nisha holds a BS in Fi- about making an impact wheth- sources deals, identifies nance from NYU Stern er through investment or phi- and develops relationships School of Business and an lanthropy?” And I would find with investors, and syndi- MBA from Columbia Busi- myself reflecting on those cates capital. She has been ness School, where she questions. active in several philan- won the Nathan Gantcher thropic organizations. Bez- Prize for Social Enterprise. Eventually, one of my clients erra holds a BS in Agricul- She currently serves on told me, “If you want to inno- Dana K. Bezerra tural Business and Public the Young Professionals vate and experiment in this Policy from Cal Poly, San Board of Exhale to Inhale. space, you have to get out of a Luis Obispo. regulated institution.” He in- Graham & Doddsville troduced me to an article Preeti Bhattacharji is a (G&D): Could you talk about called New Frontiers in Mission- Vice President of Integrat- your backgrounds and how Related Investment, the first ed Capitals. Prior to join- you got into impact investing? piece Heron had ever written ing Heron, she served as on the topic. It led me to track an Assistant Director of Dana Bezerra (DB): I've down Luther Ragin, who was the Heilbrunn Center for been at Heron for almost ex- the vice president of Invest- Graham & Dodd Investing actly 14 years. Prior to that, I ments at Heron. In January and a Research Associate had been at Merrill Lynch for 2006, I made the decision to for the Council on Foreign almost a decade. But don't let move from La Jolla, CA, to Relations. Preeti has com- that fool you — my family im- lower Manhattan, and I've been pleted projects for Impac- migrated from the Azores and here ever since. tAssets, Center4, the NYC we were dairy farmers out in Preeti Bhattacharji ’14 Department of Small Busi- California. When I was grow- Preeti Bhattacharji (PB): I ness Services, and the Ra- ing up, I lived through the ex- entered Columbia Business chel Maddow Show. She perience of losing major em- School thinking I would do received her BA from Co- ployers and saw the economic microfinance because that was lumbia University and her and cultural effects that has on where the people who were MBA from Columbia Busi- a community. My father ended interested in finance and im- ness School, where she up becoming a local elected pact ended up at the time. But won the Nathan Gantcher official, and living through that I went through the impact in- Prize for Social Enterprise. trajectory, I learned that com- vesting curriculum at Columbia She currently serves on munities have to work togeth- and came to the conclusion the Investment Advisory er. It often feels like economic that I was interested in impact Committee of RSF Social forces beyond your walls can investing more generally. Finance. control your destiny, but there is a role for us all to participate I then naively assumed that Nisha Prasad is a Senior in the economic prosperity of foundations must be doing Associate of Integrated a place. Those were some of impact investing because they Nisha Prasad ’17 Capitals team. Prior to the formative experiences in have missions and they have joining Heron, she worked my childhood. capital. But I found out the in corporate finance at In- hard way that most founda- tel Corporation. Nisha has While I was at Merrill Lynch, I tions weren’t actually aligning completed projects for learned a ton and I was incred- their capital with their missions Veris Wealth Partners, ibly grateful for the experience. back in 2012. So I spent gradu- Nonprofit Finance Fund, But there was still so much ate school wandering through and The Educational Foun- about the economy and invest- the market, looking for some- dation of America. She co- ment that didn't make sense to body who was working on the founded Columbia Busi- me. We would help families type of alignment that I craved, ness School’s Impact In- think about what they could do and the name that kept pop- (Continued on page 26) Page 26 Heron Foundation

ping up in my coffee chats was One of the philanthropists I DB: Heron is a private founda- “Heron.” So I started here as learned the most from was Dr. tion by legal structure. But the an intern, and have been here Joseph Jacobs, who was the board of directors became ever since. founder of Jacobs Engineering. dissatisfied with the business He and his family introduced model of private foundations, Nisha Prasad (NP): I also the idea of what it meant to be where only 5% of the funds are thought I would start in micro- "strategic philanthropists." I obligated to be used toward finance when I started at Co- had the opportunity to ride services that align with the lumbia Business School. I did a sidecar on their ambition and foundation’s mission. They few internships in impact VC, that's what started my interest believed that the entire 100% which was all the rage at the in impact investing, and a more should be working in service time. Through many coffee strategic, impactful, and aligned to society. So they asked, chats with Preeti, whom I had philanthropy. "Shouldn't we be more than a met on my first day of school private investment company on an alumni panel, I learned “Impact investing was that uses its excess cash flow that Heron was a truly unique for good?" place. We can use every tool still considered an asset in our toolbox, which means class when I was in So we started in grantmaking, using grants and investments to as all private foundations do, do impact work. school… In the three but we followed quickly with program-related investments. G&D: Did impacted investing years since then, we Program-related investments exist when you began your are mission-related invest- career in this field? have come across many ments that include uncompen- sated risk. For most of the DB: It really didn't in the mid- asset managers that are world, that basically means 90s. You had to chase it on including impact cheap loans, but you can also your own if you wanted to use program-related invest- learn more about it. Being in investing in their ments if you’re investing in California at the time, I saw a private equity or venture capi- couple of prominent business investment processes tal that includes uncompen- people that were vocal on how sated, mission-aligned risk they did business — such as from the beginning” (such as a first-time fund or a Sol and Robert Price from management team who lacks Price Club; Dr. Beyster, the NP: I also want to give credit experience and can’t attract founder of SAIC, a $9 billion to the evolution of the indus- capital from conventional in- ESOP at the time; and Murray try. Impact investing was still vestors). As a fundamentals’- Galinson, one of the founders considered an asset class when based investor, we try to be as of San Diego National Bank, I was in school, as opposed to specific as possible about un- who were speaking about pur- a part of the investment pro- derstanding and pricing the pose-driven businesses. cess. In the three years since risks we take on. then, we have come across It was a complicated path, but many asset managers that are We then moved into mission- over time, the field started to including impact investing in related investing with the en- pay attention to this notion of their investment processes dowment, which was tricky “venture philanthropy”, or from the beginning, whether it because the only means to philanthropy that was trying to comes from client demand or fund our budget year over year "act more like a business." self-interest. is with investment earnings. There were business people We knew we wanted to align talking about how they wanted G&D: What makes Heron our portfolio with our values to change philanthropy, and different, and how did it get to and mission, but we weren't there was dialogue in the mar- invest 100% in socially respon- sure in the beginning what that ket talking about how busi- sible investments? meant. As a result, we had nesses themselves should be some interesting experiences different. early on. (Continued on page 27) Page 27 Heron Foundation

For example, we had grants to tion across a full 30-year amor- selves, those pieces of paper vertically integrated nonprofit tization. are well aligned with our mis- housing developers that sion. worked with low-income fami- “…as we headed into lies for everything from credit It's a constant exploration repair and mortgage counseling the housing crisis, …we around how we can put more to acquiring land and building assets and resources (including homes. We provided program- did not own any not only our financial assets, related investments in the but also our social and rela- form of acquisition and pre- exploding adjustable- tionship capital) toward our development capital and then, rate mortgages. We had mission. We have continually as the families moved into optimized over time so that mortgages, we would buy the made a mission-driven more and more of our assets mortgage-backed pools as se- are in play for mission, but curities in our fixed income decision to limit our we're still not satisfied because portfolio. it’s clear there is more poten- purchases to 30-year tial in front of us. We were on site visits with a number of those housing de- fixed mortgages G&D: Can you talk about velopers back in mid-2000s because that’s what your investment process, spe- and they said a couple of things cifically, the Net Contribution that were interesting. They worked for low-income framework? mentioned that families who needed credit repair were people. And that DB: We own the intellectual dropping out of credit counsel- property for a publicly traded ing because they were coming mission decision really index, the U.S. Community in with pre-approved mortgag- Investing IndexTM (USCII). That es. Somebody was giving them delivered alpha.” investable universe starts with mortgages even though they the S&P 500. With our data were not credit-worthy. As you might imagine, as we provider, we run through fun- As philanthropists, we were headed into the housing crisis, damental analysis and further concerned because saddling that decision served Heron screen the universe using the families who aren’t really well — we did not own any “Net Contribution” frame- mortgage-ready with mortgag- exploding adjustable-rate work. es could force them into finan- mortgages. We had made a cial distress. And as philanthro- mission-driven decision to limit Before we had the Net Contri- pists who use all of our tools, our purchases to 30-year fixed bution framework, we had a we brought that information to mortgages because that’s what couple of less-than-fabulous one of our fixed income man- worked for low-income peo- outcomes. For example, com- agers, Barbara VanScoy. ple. And that mission decision ing through the recession, we With VanScoy, we realized really delivered alpha. were thinking that jobs were that the one thing these mort- the key to helping people and gages had in common was that And so, over the years, we communities to help them- they were never 30-year fixed constantly looked for opportu- selves. Therefore, we decided mortgages — they were al- nities to express our mission in to invest in companies that ways something else (shorter our portfolios. Over time, that employed lots of people (not durations, variable rates, etc.). included things like SBA 7A, as an inefficiency matter, but as So VanScoy and Heron made SBA 504, and USDA Rural a function of their business the joint decision to put a Development loans. (Those model). At the time, we no- mandate on our fixed income are markers for borrowers ticed that we were invested in accounts that said we would who would not have been able a company, through a vehicle, only buy mortgage-backed to obtain bank financing.) As an that had a high headcount-per- security pools that were in- organization who works on dollar-of-revenue. At the out- dexed as affordable to the bor- placemaking and helping people set, this seemed exciting. How- rower at the time of origina- and communities to help them- ever, when we looked under- (Continued on page 28) Page 28 Heron Foundation

neath the hood, we learned Tactically, we then had to find effect of the opioid crisis on that the company was actually a way to organize the infor- civic capital. The opioid crisis is a private prison. By picking mation in a way that was not ravaging people in communi- jobs as a single metric, we end- unwieldy. So we ended up ties, and local governments are ed up with data that said that identifying a few broad types of struggling to pay for all of the private prisons were what we capital — human, natural, civic effects of the epidemic. We should own. and financial — and clustering know that's very real from a our analysis into those four community point of view. And As a poverty-fighting organiza- pillars. Those are the things while elected officials divert tion, owning private prisons that are consumed and emit- their budgets to fight the crisis, was really not an acceptable ted. Under each of the four they’re routing that funding answer. But we are a rules- pillars are indicators. For ex- away from other fundamental based investor, and it felt disin- ample, under human capital, services that would be needed genuous to swoop in with a we care about benefits pro- to make their community values lens and say, “No, never grams, treatment of employ- work well. mind.” So, we took a deeper ees, and continuity of shift look to ask, “What just hap- work. Depending on the indus- Meanwhile, a well-respected pened? How did private pris- try, we care about things like and publicly traded pharmaceu- ons come to the top? How can accident performance records. tical company was recently we do better in analyzing the Unsurprisingly, in natural capi- fined for its role in the opioid data to get a result that's more tal, we look at things like car- crisis. If you look at the contri- suitable given our mission?” bon emissions and carbon bution scoring for that compa- That's when we realized that footprint. And at Heron, be- ny, the opioid business line of we had successfully isolated on cause of our mission, we tend that company is less than 7% of a series of data points around to tilt our analysis towards its business model. Meanwhile, job creation, but accidentally human and civic capital. other parts of that company’s obfuscated the fact that enter- business fund important work prises are actually complex “…we try to take into in the area of vaccines. As a with a variety of inputs and mission-driven investor, how outputs that affect a wide consideration do we think about that bal- range of stakeholders. (And by ance? the way, we refer to business- everything that es as enterprises because, at enterprises consume In the same exploration this Heron, we invest in for-profits past year, we looked at tax and nonprofits). and emit and subsidies and disclosures So we decided that we had to around that. Communities acknowledge that enterprises determine, on net, often offer subsidies to ware- of all types consume things house-companies because new (like labor, clean water, land, whether they are a net warehouses can lead to the or taxes from subsidies) and creation of new jobs. But also emit things (like pollution, contributor or a net warehouses also tear up local wages, and ideally, taxes). detractor from the infrastructure because their Now, we try to take into con- trucks use local roads heavily. sideration everything that en- communities in which Employees are not always well terprises consume and emit compensated, and so some of and determine, on net, wheth- they source, operate, them also utilize public benefits er they are a net contributor in that place. And many of or a net detractor from the and sell.” those employees have children communities in which they in the school system, which source, operate, and sell. After Based on what we're experi- creates further costs for the we do all of that math, we de- encing in communities or in community. Subsidy is not in- termine whether we want to the world in any given year, we herently bad, and companies own it. That's really where the will focus and go deep on one are not wrong for seeking sub- Net Contribution framework of the four pillars. Last year, sidies. But we ask whether the came from. for example, we looked at the effect is mutual for the com- (Continued on page 29) Page 29 Heron Foundation

munity and the company. So about C-level executives.) Brockovich. If we, as philan- those are the types of things Part of the trouble with oper- thropists working in that com- that we end up looking at in ating this index over time is munity, know that a company any given year. how dissatisfying current data is dumping things unsafely, can and disclosure is. We learned we genuinely say we shouldn't Coming through the Net Con- that self-reported disclosure use that knowledge when we tribution framework, compa- isn't really data — it usually think about whether to invest nies get scored -5 to 5, and constitutes promises and in the company? When you they have to be at a certain pledges that are not quantifia- have very long-time horizons, threshold to be considered ble and measurable over time. as foundations do, many addi- investable. Then we ask ques- We are most interested in tional things become material tions around how the invest- things like the square footage to your performance over ment affects our mission. We of brownfield a company is time. We struggle all the time also run controversy screens associated with per dollar of to decide whether to adhere based on our knowledge from revenue, because that tells us to the standard that things communities about how these how they choose to operate as have to be peer-relative and companies are performing. a company. It’s different than a peer-comparable, or whether Heron has override abilities full-page color advertisement to incorporate more ad hoc and can take companies out if a pledging to be a good actor. data. controversy is severe. We have actually been ap- “We learned that self- There are often two answers proached by a number of insti- for Heron. One is, if it's our tutional investors who like the reported disclosure isn't own capital, we have a lot Net Contribution framework more leeway to think about but have different missions. So really data — it usually utilizing bespoke pieces of in- we are asking ourselves if we formation. In the case of the are willing to hand over the constitutes promises USCIITM, we have more of an data and let those investors tilt and pledges that are obligation to adhere to more towards natural capital, for broadly accepted rules, be- example, if that's their mission. not quantifiable ... We cause other people are invest- We haven't done it yet, but ed alongside us. that's the type of thing we're are most interested in experimenting with. G&D: How do you get around things like the square the unreliable self-reported G&D: Are the four pillars in data? Net Contribution always quan- footage of brownfield a tifiable? Can you always get company is associated DB: Our team goes very deep consistent, quantifiable indica- in communities, which gives us tors across companies? with per dollar of conduits to ask additional questions. I will give you a re- DB: When it comes to the revenue…” cent example: We recently GIPS-compliant public equity came across a publicly traded index we own, the USCIITM, In terms of consistency, as company that claims that it the methodology has evolved fundamental investors, we're receives zero government sub- over the years because every taught that if we're going to sidies. But we know through time we learn something new utilize data, it needs to be peer our community partners that or get new data, we incorpo- -relative and comparable at least one local government rate it. (When we first started across the entire industry. We has provided that company the index, for example, we always strive for that. But you with a subsidy. wanted to own companies that have to remember that we're shared their ownership broad- also philanthropists who are This is where things get tricky: ly with their employees., but working in communities. I The disclosures we're seeing discovered that data was hard grew up in the shadow of a from the local government are to get because standard disclo- large utility company that be- a few years old. It could be sure at the time was mostly came popularized by Erin true, in this case, for the com- (Continued on page 30) Page 30 Heron Foundation

pany to say that they did not G&D: How long is your hold- terms “market rate” and receive any subsidy this year ing period generally? “below market rate” return from the government. But if almost become amorphous. they are making a more gen- DB: Since we're a mission- During the downturn in the eral claim, then that's a prob- driven investor, if we're buying, economy, our “below-market lem. In which case, how do for example, a bond because rate debt” portfolio was our you score that as part of an it's on mission and it's in a best performing portfolio for investment methodology? Do community, we will hold it to three quarters in a row. you give the company a null maturity. We are typically a because you don't believe their buy-and-hold investor. The PB: One of the things that self-reported disclosure, or do exception is often in our public attracted me to Heron was you give them a haircut? equity portfolio and driven by that Heron emphasizes the these human, natural, civic, and importance of providing the These are the kinds of things financial impact scores. right type of capital to an en- we have to constantly evaluate, terprise based on the enter- which is different from what G&D: How does the rate of prise’s needs. We try to be often gets discussed at most return come into play in the clear about what our rate of other foundations. decision-making process? return is, what trade-offs are driving it, for whom value is G&D: What’s the breakdown DB: We're very mindful of it. being created, whose value is among fixed income, public Even though we’re not here to being extracted, and what's equity, private equity, and make money with money, it is appropriate for the enterprise grants in Heron’s portfolio? our only source of revenue. at any point in its growth. The We're just not seeking to max- impact investing community DB: We break down roughly imize returns at all costs. has learned the hard way that 70/30 equity/debt (with about we should not be cramming 68% in public equity and 25% in We don't think of ourselves as market-rate capital into enter- public debt). We have small index-constrained or modern- prises that can’t really produce slugs in private equity and pro- portfolio-theory constrained. market-rate returns, or pump- gram-related investments. Of Instead, we look at opportuni- ing overly discounted capital course, we carry a little bit of ties through the lens of, "What into companies because we cash to fund our operations. are we learning that communi- can’t be bothered to price ties need, and then what are their risk. That ends up badly We have not owned things like the investible opportunities we for everybody involved, and hedge funds in many years. can find?" that's something I wish the That was never a value-driven sector as a whole talked about decision, it was a transparency When it comes to fixed in- more. decision. There was belief come and public equity, we amongst our board that we track indices because people G&D: How do you balance should know what we own expect us to, and I'm happy to lending to borrowers with from our earliest days. We felt say we have outperformed credit risk and fulfilling the like we could not invest in ve- often. But by the same token, mission of the foundation? hicles where we could not see it would be foolish for us to the underlying holdings. And have positions that match the DB: The SBA loans I men- because we're an institutional index. For example, looking at tioned are market-rate loans, investor, we don't often invest fixed income, we are a tax- which are marketable and se- in commingled vehicles be- exempt organization, so we curitized into pools. Take SBA cause in a mutual fund, for have no business owning treas- 7A for example — in those example, the positions are uries that make up a big por- cases, the borrower was al- constantly changing. Most of tion of the Barclay’s Aggregate most able to access a tradition- our investments are in sepa- index. Therefore, we often al loan, but couldn’t quite jump rately managed accounts so have a large R2 with the index. the hurdle, so the Small Busi- that we can see and have clari- ness Administration (SBA) ty on what our underlying po- I should add that, having been stepped in and provided a gov- sitions are. here for a very long time, the ernment guarantee on the (Continued on page 31) Page 31 Heron Foundation

loan. It's a good marker for us care. But we have an obligation been in the housing sector in of a market-rate, impact in- to be the most responsible and the San Joaquin Valley for the vestment. aligned investor we can be. last five-plus decades and has The public equity index is our not defaulted on an interest And those loans finance real, way of saying, based on what's payment or a principal pay- visible, recognizable companies knowable, we choose to own ment in 54 years. They develop in a community. For example, these companies. It's not saying and manage affordable rental there were years when we we have some affirmative ef- properties for underserved were active in Buffalo where fect because we own them. populations, including immi- we owned the loan for Dog grants and farmworkers, and Days of Buffalo, which was a “The impact investing they provide technical assis- doggy daycare place. Every- tance and leadership develop- body in Buffalo who has a dog community has learned ment in rural communities knows the place. Yet it’s a with clean water, sanitary sew- standard loan. It's made by a the hard way that we er, and other infrastructure bank and guaranteed by the should not be cramming challenges. SBA, and because of that, we can get great data about the market-rate capital Incidentally, right around the borrower. Because they are in time we made the $1 million the guarantee program, we into enterprises that direct investment in SHE, we know they are part of a popu- also purchased $1 million of a lation that we want to support. can’t really produce bond offering that also helped The risk is frankly de minimis. to finance SHE’s work. So, In fact, we are assuming less market-rate returns, or we’re investing in that one risk than we would from nor- pumping overly nonprofit using several differ- mal business pools. So, we are ent financial tools right now. able to get a twofer. discounted capital into DB: Because we do the level G&D: Could you tell us more companies because we of looking that we do, we about the U.S. Community know the impact is real. This is Investing IndexTM (USCII)? can’t be bothered to “self-help” housing, meaning the families in their homes do DB: Heron started down the price their risk.” not have the cash to make a path of the USCII 16 years ago down payment, so they “self- because we couldn't find exist- PB: One of the things that help.” They have to build their ing products in the market that excites me about the USCII is own house with the construc- spoke to our mission. We are it ingests data sets from for- tion supervisors, put in sweat a social investor and most of profits and nonprofits alike. equity equal to the down pay- the products in the market at We scrape together data from ment. That, I would argue, is the time were around environ- anywhere we can find it, and more readily apparent impact ment. Environmental impacts data isn’t just the purview of than you are ever going to get didn’t always translate into Bloomberg terminals. There is from calling a fixed income social effects. Since we couldn't so much latent wisdom in the manager saying, "I want some find it, we started to build it. communities in which we op- of that impact stuff." Over time, that became the erate, and in the nonprofits intellectual property for the that serve them. And we try to G&D: For these and other USCII. surface that and incorporate it. pooled securities, do you al- ways look through to the un- People who don't like what we G&D: Are there any invest- derlying assets? do will often say there is no ments you are excited about? impact in owning the USCII. DB: Yes. Since we work in Public companies don't care PB: We just made a $1 million communities, we prefer to buy whether the little Heron Foun- program-related investment in fixed income securities from dation owns them or not. We a nonprofit called Self-Help those communities. Most peo- don't pretend that they do Enterprises (SHE). SHE has ple would say that's concentra- (Continued on page 32) Page 32 Heron Foundation

tion risk, but we believe those What we learned is that com- ordering the divestment of markets are what we are mercial and the residential those loans even though at the knowledgeable in. loans operate differently. Resi- outset, PACE looked like a dential loans are sold by con- great impact investment. It To give you an example: We tractors who want the busi- made us rather unpopular with found a revenue bond from a ness. The program seems very some of our grant-funding col- community that we have done cheap upfront, but it's repaid leagues who had funded the some work in, and we wanted through property taxes. The program into existence. to understand where the reve- problem, however, is that the nue was from. It turned out loan becomes the senior-most G&D: What are some other the revenue was from fees and lien on the person’s house — notable investments you have fines, and we were concerned and the loans are not income- made? because we know it’s a low- underwritten. So they were income community and fees cascading some low-income DB: We don't do a lot of di- and fines are often regressive homeowners into foreclosure. rect private equity anymore against low income people. As you can imagine, the mort- because, as a small shop, we Digging further, however, we gage-holders were not at all don't have the underwriting found that it’s from red light happy that this government capacity on staff or the risk camera revenue, which theo- sponsored program was sub- appetite. But there was a peri- retically can't discriminate ordinating them without no- od when we did, and we in- based on age, race, creed, col- tice. vested in a company that was or. That sounded okay, but an aseptic food processing then we asked, “Are they only “If your lens is company. Our diligence af- putting red light cameras in firmed that the technology was low income communities?” environmental-only, real, and if the technology suc- That, again, would be a prob- this is definitely an ceeded, it would be a big deal lem. That's the level of look- in the food processing space. through we do. impact product. But at We invested in the company because they moved into a Another example: A fixed in- Heron, we’re looking at former furniture warehouse in come manager brought us a Troy, North Carolina (a com- pool of Property Assessed the net effect of an munity deeply disinvested by Clean Energy (PACE) residen- the departure of the furniture tial loans. It's got a pretty good investment, and this industry when it moved over- name, and we know from a one was problematic seas). The aseptic food compa- number of our environmental ny was revitalizing one of the grant-funding colleagues that from a civic, human, furniture facilities and bringing millions of dollars have gone about 700 jobs to Troy. into making this PACE pro- and financial capital gram work. These loans would Financially, at the time, it was a go to people (often low- perspective. On net, we home run. However, manage- income people) to do energy ment then made the appropri- assessments and energy up- ended up ordering the ate decision that they were grades. It’s good for the envi- divestment of those too CAPEX-intensive to be the ronment because it tends to manufacturer, so they were lower the carbon footprint of loans…” going to license the technology the house. It also makes the to the food processors them- house more energy-efficient, If your lens is environmental- selves. That was the right deci- which over time should lower only, this is definitely an impact sion by management, but it cooling and heating bills. These product. But at Heron, we’re meant that all the jobs disap- are all great things. And in this looking at the net effect of an peared from Troy. That was an case, we actually knew the investment, and this one was example where we ended up originator, so we called to do problematic from a civic, hu- seeking a liquidity event. We some checking. man, and financial capital per- ended up contributing our spective. On net, we ended up investment into an incentive (Continued on page 33) Page 33 Heron Foundation

pool for the employees that good first and then we'll talk DB: There is a sea change they started. This is an exam- about investing" and that just coming. I think that these new ple of where mission and finan- puts people on their heels. “ESG portfolios” that the large cial return can often run into The other challenge is impact- shops are creating will eventu- juxtapositions. washing. My concern is that ally become their default port- people will appeal to specific folios because we’ll all come to PB: An interesting position we interests and we're going to realize that ESG factors (like hold right now is a public equi- get monolithically focused im- climate change) really are fi- ty manager, Ownership Capi- pact funds without speaking to nancially material. tal. People often assume that the unintended bad conse- everything in our portfolio is quences that they create. I PB: We’re on the brink of the high-performing from a social think that's dishonest as an biggest intergenerational perspective, but that’s not true investor. wealth transfer in human histo- because some managers in our ry. Capital is about to change portfolio have a barbell strate- “…one of the biggest hands demographically and gy, and Ownership Capital is culturally. I think institutions one of them. What that means challenges is that the who fail to acknowledge that is Ownership Capital takes are going to miss out on a space wants to be positions in companies that are massive market opportunity. great social performers, but acknowledged as they also invest in companies G&D: Which stakeholder, the that are poorer performers different more than it investors, the managers, the and work actively to improve board, the employees, or the their behavior. Annually since wants to be consumers voting with their inception, we've seen 18% re- wallets, do you think is respon- turns from that particular man- acknowledged as sible for driving change in this ager, which is exciting against a similar. At Heron we’re industry? benchmark of roughly 8%. constantly saying, ‘Let's DP: Everybody. Heron speaks G&D: What are the biggest vocally to asset owners to re- challenges facing the impact start with sameness.” mind them that they are the investing space? client, and it’s important to NP: Some of the peer groups take back their power and DB: I think one of the biggest have been obsessed with the ability to drive change. One of challenges is that the space idea of impact measurement. the challenges before all of us wants to be acknowledged as There's this idea of, "We need is, “How do you take retail different more than it wants to to have the perfect framework demand and aggregate that in a be acknowledged as similar. At with exact metrics before we way that people feel they have Heron we’re constantly saying, can start doing investing," and power?” Everybody talks about "Let's start with sameness." If that’s letting the perfect be the the behemoth pension funds traditional investors under- enemy of the good. Just get who can create change, but stood how similar we actually started. Go through ups and pension funds only have money are, there would be more ca- downs the way Heron and because of their pensioners. pacity to understand what we many others did and just start. So, we often raise the issue of layer on in addition. If you look Because all investments have fiduciary duty and try to re- at Larry Fink’s most recent impact. mind people that your fiduciary letter, what he's saying is that duty is to your pensioners, there are more things that are G&D: Speaking of Larry Fink’s your 401k holders, your foun- material than we last knew and letter and Marc Benioff’s com- dation and its mission. If you're existing risk models are failing ment on stakeholder value, do not representing your pension- to take them into account. you see a sea change in impact ers or your 401k holders, This is all we're saying too, but investing becoming mainstream you're failing on your fiduciary I think philanthropy tends to or is it just for PR? duty. Whereas fiduciary duty come at it by saying, "We want has been allowed to mean you to take a pledge to doing “maximize profit,” we think we (Continued on page 34) Page 34 Heron Foundation

need a restoration to the ba- sics, which will help with this “Whose voice matters?” and “Who drives change?” discus- sion.

“Capital is about to change hands demographically and culturally. I think institutions who fail to acknowledge that are going to miss out on a massive market opportunity.”

G&D: Do you have any advice for students trying to learn more about ESG?

PB: There's quite a bit of ma- terial available online on the methodology of the USCII. Tear through that and stress test it. If you find datasets you think we should be looking at or logical disparities, email us. Also cut through the rhetoric by looking at filings (990s, 10Ks, and 13Fs). Look at what people are actually invested in and figure out where there's alignment and where there's not.

NP: Be open to all opportuni- ties you can think of. Walking into Columbia, I was very si- loed in my thinking of what impact investing was, but there is impact in everything that we do. As this industry grows, there will be many more op- portunities to be involved. Be open-minded about what those opportunities are.

G&D: Thank you.

Volume I, PageIssue 352 Page 35

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Contact Us: Graham & Doddsville Editors 2019-2020 [email protected] [email protected] Frederic Dreyfuss ’20 [email protected] Fred is a second-year MBA sponsored by Columbia (Columbia Fellow). He spent the summer working in the Equity Investment Group at Capital Group. Prior to Columbia, he was an Investment Manager in the Principal Investments de- partment of BNP Paribas, where he invested across the capital structure of unlisted companies active in various industries all over Europe. Fred graduated from Sciences Po Paris with a Corporate Strategy concentration. He can be reached at [email protected].

Sophie Song, CFA ’20 Sophie is a second-year MBA student and a member of Columbia Business School’s Value Investing Program. During the summer, Sophie worked in the Fixed Income group at Capital Group. Prior to Columbia, she worked at the Royal Bank of Canada and the Office of the Superintendent of Financial Institutions in liquidity and market risk management in Toronto. Sophie graduated from the University of Toronto with an Accounting and Economics concentration. She can be reached at [email protected].

John Szramiak ’20 John is a second-year MBA and is a Columbia Fellow. He is currently interning in the Digital Investments team at Sony Music. He spent the summer working at a leading e-commerce company in India, where he built a new credit scoring engine for the company’s lending platform. Prior to Columbia, he worked in the Private Credit group at First Eagle Investment Management. John grad- uated from Boston University with a concentration in Finance and a minor in Eco- nomics. He can be reached at [email protected].