Binary Capital Investment Management

Binary Capital Investment Management Whitepaper Disruption as an asset class: what is it, how to invest in it. Long-termism shapes our relationships and our investments January 2021 binarycapital.co.uk Disruption investing: a thematic view Summary Authored by: Is disruption a thing, a theme, an asset class? If so, what exactly is it and how can we access real disruptive investments, having it all aligned to our investment philosophy and importantly it being relevant to all client types? Real genuine opportunities that are transformative and highly exceptional. This paper sets out our thinking around disruption investing, and how we bring together such thinking into investable investment ideas and solutions. We Saftar Sarwar do not just talk about disruption in academic and entrepreneurship Chief Investment Officer terms but within an investment perspective in real active, investable portfolio management. We are active, long-term investors; this gives us an edge, a real edge – we can take a longer-term view and take positions in such disruption areas in a more optimal manner than other investment professionals. This methodology of thinking is new in wealth and asset management, we like to believe we lead the way in some of these areas. We ourselves are a ‘disruptor’ investment firm. We have alignment to how we are as a business, and how we actually invest for clients. Amir Miah Junior Portfolio Manager We believe that investment thinking should not be in narrow silos, focused on next quarters earnings or about weekly jobs data, but it should be broader, much broader. A deeper understanding of innovation and entrepreneurship can be a competitive advantage for investment professionals. We do that here at Binary Capital, and importantly execute our thinking into actual client results. This paper is part of a series of papers on long-term, high conviction investing. We welcome your comments, feedback and engagement at [email protected] Introduction We are witnessing a profound change in the way we live, work, think and act. Disruptive innovation is changing the way the world works. The next decade and decades will be unprecedented in the innovation we will witness. Disruptive innovators will displace and/or eclipse industry incumbents, increase efficiencies and gain majority market share. The next 10 years will be much more revolutionary than the last 10 years. We believe that we will all look back upon these years with astonishment—that the world delivered so much innovation in such a short period of time. The work being undertaken is exceptional, we witness it every day. As technologies emerge and transform entire industries and their value chains, we note that investors in benchmarks or investment indices may face more risk than historically – as past winners become future losers. The threat to existing businesses is severe and the opportunities and indeed the rewards for companies taking full advantage of the latest pervasive technologies, will probably be in the trillions of dollars. There requires a forced shift and restructuring of existing business models to capitalize on this new world or paradigm. Those with flexible, high-tech infrastructure will persist. Those will adaptable management will persist. In this paper we explore what innovation is, examples of disruption and importantly how one can gain investment exposure to such disruptive opportunities within investment portfolios. We hope the reader reflects on whether they are positioned on the right side of the innovation curve and understand that it is all about looking forward at times, every single time. We discuss the following: 1. Innovation economics 2. Pervasive technologies 3. The disruptors and the disrupted Building portfolios with disruption 4. investment ideas and themes Our approach to investing in 5. disruption stocks 6. Disclaimer Disclaimer: The Information in this document is not intended to influence you in making any investment decisions and should not be considered as advice or a recommendation to invest. Any Information may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors and relevant offering material. Capital at risk. Please review full disclaimer. 1. Innovation economics Entrepreneurship and growth are little understood topics in economics. A deep understanding of modern entrepreneurship and growth concepts have become a competitive edge for some optimistic investors, as we have seen extreme winners emerge (and losers) in the last decade, and therefore delivered extreme risk- adjusted excess returns for such investors. This phenomenon is highly probable to persist this decade. There is no compelling reason why it should not. Creative destruction There is a persistent force or gale of “creative destruction”, a concept termed by Joseph Schumpeter and used by entrepreneurs, academics and regulators to describe the constant forces of change in economies, caused by entrepreneurship that leads to a displacement of inferior innovations, and incumbent players. The forces simultaneously create newer, more superior products and services, as well as generating long-run economic growth. Some describe it as the engine of capitalist development and overall growth. The current storm of entrepreneurial creative destruction has no precedence, spurred by powerful technologies from the last two decades, the laser focus of entrepreneurs and their teams of employees that work like real owners. It is creative destruction and capitalism at its best. The latest general-purpose technologies – robotics, artificial intelligence, cloud computing, DNA sequencing, innovations in battery storage and indeed blockchain will create surprise winners. The winners will be flexible, dynamic and hold deep competitive advantages through culture, knowledge and deep infrastructure. Their efficiencies resulting in temporary human anguish from job losses and structural changes in industries and indeed, entire sectors. The destruction element will be more pronounced than previous periods of industrial change as technologies converge to replace lower skilled jobs in all sectors. Real disruptive forces are at play. Exponential thinking We live in a world where there is exponential growth. The specifics of exponential thinking is often misunderstood or not acknowledged. Rather, people still view innovation as linear - a phenomenon called exponential growth bias. People tend to underestimate such growth drivers and only see them when it is far too late. Mistakes are made when this thinking is not understood well. Exponential changes results in a world where there are shorter life-cycles for products, services, companies and industries, as a result from significant boosts in methods, efficiency and productivity. A well-known concept is Moore’s Law, where transistors in microchips double every 2 years. This empirical observation has seen applicability in other innovations such as energy storage (batteries) and gene sequencing. More applications in this area will develop and come through. 1. Innovation economics We are likely to see new products, services and much lower unit costs across sector lines over the next five years from firms taking advantage of the power of exponential thinking and the latest general-purpose technologies focused forward a decade and beyond. We will see complete value chain transformations from what was once nascent technologies (we discuss more about these technologies in section 2). These technologies will become mainstream. These technologies will become permanent. Figure 1 - Exponential change - 2 year Source: Binary Capital Investment Management Ltd, 2020 Winners-take-all ‘Competition is for losers. If you want to create and capture lasting value, look to build a monopoly’ - Peter Thiel, co-founder of PayPal and Palantir We witness global economics changing at a significant and often dizzying pace. Whilst we have seen the rise of populism politically, the movement forward of globalization has not abated. With globalization has been a rise in technology enabled opportunities across all sectors. Companies continue to dominate across not only sector and themes but globally too. We are in an era of exponential change, corporate movements and market developments on the back of such change. Naturally there will be regulatory pressures, but will it be enough to avert corporate exceptionalism? Many markets are winners-take-all due to features such as cost, extreme economies of scale, learning and very high network effects. Competitive forces such as costs, margins, innovations curves, product and service superiority will result in an even wider divergence in investment performance between winners and losers. This is winner takes all economics. In this Darwinian world, the strongest survive and take market share from the weakest. In this world, new markets open up almost overnight. New demand is created or displaced. 1. Innovation economics There are also newer, nascent markets opening. There will be new dominant market players. The markets include healthcare, where innovations such as DNA sequencing opens up mass commercial possibilities for novel techniques such as genome editing, genetic engineering. Other newer product segments such as electric and autonomous vehicles are seeing new dominant market players appear that have the potential to eclipse direct and indirect competitors. Companies are building extraordinary moats to protect their market share – through technological infrastructure,

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