San Francisco City and County Employees' Retirement System Chief Investment Officer
SFERS William J. Coaker Jr., CFA, MBA San Francisco Employees' Retirement System
INVESTMENT COMMITIEE CALENDAR SHEET Investment Committee Meeting of October 21, 2020
DATE: October 21, 2020
TO: Members of the Investment Committee
THROUGH: Jay Huish Executive Director
FROM: William J. Coaker Jr. - CFA, MBA Chief Investment Officer
SUBJECT: Science and Technology Revolution
Overview
The human experience is fast evolving toward an Era of Science, Technology and Innovation. The Era of Science and Technology will have more impact on the human experience than the transition from the Agriculture Era to the Industrial Age.
The Industrial Revolution began in the latter part of the 18th century. Previous to then, people and business were primarily confined to the farms, growing food and traveling into town by foot or horse periodically to exchange goods produced by others. The Industrial Revolution brought enormous improvements in the human experience including modern transportation, communications, conveniences, entertainment, healthier food, medical improvements, and a significant rise in the quality and longevity of life. Innovations during the Industrial Age included the steam engine, railways, automobiles, electricity, the telegraph, telephone, radio, cameras, airplanes, the assembly line, and much more. Harnessing the possibilities of the Industrial Age enabled the U.S. to become the global economic powerhouse from late in the 19th century through the 20th century. The Era of Science, Technology and Innovation
Microprocessors to Personal Computers to Software The very early seeds of the Era of Science, Technology and Innovation began in the 1960's with the development of the microprocessor. That made personal computers possible, which began being adopted in the latter part of the 1980's. Personal computers made software possible, and three decades plus later software remains the fastest growing industry in the global economy.
Every business needs a suite of software solutions, including programs for Human Resources, Payroll and Benefits, Financial Reporting, Financial Planning and Analysis, Strategic Planning, Project Management, Sales and Marketing, Customer Experience, Internet Security, Applications Management, Data Analytics, Cloud Computing, Database Management, Spreadsheets and Word Processors, Creative Works, and more.
DMDatabases.com estimates that there are 18.2 million businesses in the United States. Many businesses need multiple software solutions and large organizations utilize dozens of software packages. Of the . approximately 18.2 million businesses in the U.S, 18.15 million have fewer than 500 employees. Approximately 17 million businesses have fewer than 10 employees. Further, personal computers and mobile phones include loads of software programs. In sum, the need for software solutions is massive.
Networks The next innovation was networks, created so organizations could share information and businesses could operate more efficiently.
The Internet The next great innovation was the internet. The internet will be the time when "everything changed." For the first time in human history, learning was available to everyone from anywhere, and business opportunities went from local to global.
Social Media Social media was the next great innovation in the Era of Science and Technology. Approximately 3.8 billion people worldwide are now connected via social media.
Smart Phones The next large-scale innovation was smart phones. Approximately 5.1 billion people use a mobile device. Smart phones were founded in 2007, and in just 13 years approximately 2.7 billion of those devices are now smart phones. In the coming adoption of 5G, smart phones will become supercomputers. In about 30 years, supercomputers will have been transformed from spaces requiring a very large room to the size of a mobile phone ..
Artificial Intelligence, Cloud Computing and the Digital Transformation Artificial Intelligence is the ability of computers to perform tasks that normally require human intelligence, such as visual and voice recognition, organizing data, analytical insights, and decision-making. The digital transformation is being enabled by the explosive advances in modern computing power and the colossal volume of available data. Further, with advances in data analytics and the power of modern databases, data does not need to be structured or well organized. 2 Additionally, with advances in predictive analytics, business leaders are able to utilize both structured and unstructured data to become more informed and better manage their business. Medical scientists for the first time are able to quickly assemble mass volumes of data - including physician notes, diagnosis, images, treatments, and results, as well as knowledge of biology and chemistry - to become more informed about their patients condition, potential therapies, and improve drug discovery, patient care, and save lives.
Many people are concerned that computers will take the work done by humans and that there won't be enough jobs. Automation and artificial intelligence are estimated to displace about 40% of existing jobs.
While many jobs conducted by humans will be automated, the Era of Science, Technology and Innovation will free people from work that requires mundane tasks to create, innovate, and interact. The impact on jobs will be as transformative as evolving from the Agriculture Era, when 60% of people worked on farms to the Industrial Age in which about 2% of humans now plow the land. There will be plenty of work to do. It's just that the types of work people do will change, and the types of work we do - being paid to innovate, create and interact -will be far more fulfilling than the work many people do now.
Speed, Scale and Impact of Innovations Has Accelerated ... As shown in the attached presentation, the speed, scale and impact of innovations is accelerating.
When airlines were created, it took 68 years for SO million travelers to utilize air travel. Automobiles and telephones took 60 and S2 years, respectively, to reach SO million users. Electricity took 46 years, Credit Cards needed 28 years, and Televisions took 22 years, to reach a base of SO million users. More recently, Personal Computers took 14 years, Mobile Phones needed 12 years, and use of the Internet took 7 years until SO million people were using these innovations.
Recently, the speed of innovation is accelerating even further. In just the past lS years or so, new companies and products such as AirBnB, Facebook, lnstgram, the I-Pad and the I-Phone, Lyft, Snapchat, Square, Tesla, TikTok, Twitter, and Uber have already becoming very large. In 2004 it took Facebook 3 years to reach SO million users. More recently, it took We Chat just 1 year to reach SO million users, and most recently new businesses and services such as Pinduoduo, Meituan, Pokeman, and TikTok achieved SO million users in one month or less .
... And is Poised to Accelerate Even Further Looking forward, backed by the "emergence of cloud computing, the explosion of available data, and artificial intelligence, the next wave of innovations will be much more impactful than what has occurred thus far. Innovations poised to arrive in the next decade or two that will transform the human experience include improvements in human health, transportation, energy, education, finance, and much more.
Just 60 years ago, companies in the S&P SOO spent an average of 60 years in the index. Now they spend an average of just 20 years in the composite, and by then end of the decade consensus expects that will drop to lS years. Cathie Wood, Founder, CEO and CIO at Ark Invest thinks the average company will soon spend an average of 10 years in the index. In sum, the speed, scale, and impact of innovation across every sector and business is accelerating. 3 Risks of Investing in Science and Tech
The Era of Science, Technology and Innovation brings investors an enhanced opportunity to earn high returns, and it also comes with additional risks. Risks include the potential for regulation, anti-trust initiatives, and higher valuations. Importantly, investors need to be more adaptable, more nimble and less bureaucratic, visionary, and strong at selection, to succeed in this new era where disruption and opportunity take place quickly.
Investment Returns in Science, Technology and Innovation
Public Equity The past 10 years through June 30, 2020 the S&P Information Technology Index returned 20.5% annualized and the Nasdaq Biotechnology Index gained 18.3% per year, compared to the S&P 500 and the MSCI ACWI gaining 14.0% and 9.7%, respectively. On a compound basis, the Technology Index gained 545% and the Biotech sector returned 437%. Comparatively, the S&P 500 and the MSCI ACWI posted gains of 271% and 152%, respectively.
Importantly, innovation is disrupting the business of incumbents while also creating new markets. Goldman Sachs computes that since 2014 companies leading in innovation outperformed the S&P 500 by 83% while businesses lagging in innovation underperformed the index by 61%.
Many investors oftentimes think that Public Equity is a mostly efficient asset class and that it is unlikely investors can outperform in the asset class. I think differently - that Public Equity is an excellent source to post high excess returns.
To begin, emphasizing investing in science, technology and innovation in Public Equity has produced substantial excess returns, as noted in the preceding paragraphs.
Further, the wealthiest people in the world are founders of public companies, including Jeff Bezos, Mark Zuckerberg, Sergey Brin, Larry Page, Elon Musk, Jack Ma, and many others. Warren Buffet has earned vast wealth investing in a concentrated portfolio of public equity companies.
Amazon went public in 1997 at a valuation of $450 million. The company today is valued at $1.5 trillion. As a public company, Amazon has posted a 3,300x return in 23 years. In that same time period, the S&P 500 has returned about 5.5x.
In sum, investing in science, technology, and innovation as a theme, and investing in specific businesses that are leaders in innovation in where the world is going, has provided public equity investors with substantial returns.
Private Equity Venture Capital is a vital engine that drives innovation. SFERS has invested in venture back to 1987. Since then SFERS Venture Capital investments have posted an IRR of 21.5%, outpacing our Private Equity
4 program as a whole which has posted an IRR of 15.8%. To be sure, SFERS early venture capital returns in the late 1980's and 1990's were especially high, when the space was relatively new and uncrowded.
Even so, our 10-year returns in Venture Capital through March 3i, 2020, which includes the 202020 COVID-19 driven meltdown and not the recovery since then, is an IRR of 14.7%. The past 10 years our Venture Portfolio returr~ of 14.7% has outpaced our Buyout program which has posted an IRR of 12.0%.
It is important to remember that returns in Venture Capital, just like Tech investing in Public Equity, is more volatile than Buyout investing.
Innovation Other Asset Classes Leaders in innovation produce meaningfully higher returns, particularly in Public and Private Equity.
Other asset classes.can also invest in innovation. In SFERS Absolute Return program, two of our highest performing managers are long-short managers. One manager is a Life Sciences specialist while the other invests heavily in technology, e-commerce, the digital transformation, and health care. Both managers invest long and short and have a relatively low net long exposure. Investing long and short enables a manager to invest long in leaders in innovation and invest short in businesses that have fallen behind. Even though both managers have a low net exposure to the equity market, they have both delivered double digit returns.
Another example of innovation outside of Public and Private Equity is in the credit space, a space where most investors would not think to find a leader in innovation. However, the recent explosion of data and improvements in predictive and data analytics has enabled credit managers to be more informed about with whom to take credit risk.
While most innovation and the potential to earn high investment returns are in public and private equity, innovation also takes place in every asset class. The key to posting high returns is to invest in leaders in innovation, in great businesses that will be significantly larger in 5, 10, even 15 or 20 years from now than they are today.
Summary
It is important in investing to be thoughtful about where the world is going, and to then invest in the leaders in where the world will be. The Era of Science, Technology and Innovation began several decades ago, and it is accelerating. Most investors are underestimating the speed, scale and impact of inn.ovation, and that investors can earn significant returns by investing in the leaders in innovation.
Attachments: PowerPoint presentation on "The Science and Technology Revolution: Seeking High Returns by Investing in Innovation."
5 The Science and Tech Revolution
Seeking High Returns by Investing in Science, Technology, and Innovation
William J. Coaker Jr: - CFA, CFP, MBA Chief Investment Officer San Francisco Employees' Retirement System Agenda
I. The Technology Revolution 11. Al & Digital Transformation 11 1. Software IV. Manufacturing Revolution v. New Age Consumer VI. Life Sciences VII. Risks VII I. Investment Returns in Science & Technology IX. Summary
2 c 0 ·-...... , ::J 0 > OJ a:: > t:lD 0 0 c ..c u rOJ OJ ..c r • The Science and Technology Revolution
• Agriculture Era
• Industrial Revolution
• Age of Science, Technology, and Innovation
• Science, Technology, and Innovation will be as impactful on the human experience as the Industrial Age from the Agriculture Era
4 The Revolution is Underway
Innovation Company Vear Outcome
Microprocessor Intel - 1968 Leads to ...
Personal Computer Apple 1976 Leads to ...
Software Microsoft 1985 Leads to ...
Networking Cisco 1989 Leads to ...
Internet Amazon/Google 1998 Leads to ...
Social Media Face book 2004 Leads to ...
Artificial All of the above. Now Combined impact ... Intelligence
5 Innovation is Accelerating
0'1oay Adoption Rates
Smarten ones
Web
Mobil• Phone
PC
Television
Radio
B ectric:ity
0 10 20 30 40 50 Years taken u I adopted by 25% of the U.S. popu,anon st'l Source U S Census. \Nall Street Joumal 6 Innovation is Accelerating
• Transformational companies and products formed in the last 25 years
Airbnb 2008 "'$20 billion Salesforce 1999 $220 billion
Amazon 1994 $1.5 trillion Shopify 2004 $110 billion
Face book 2004 $700 billion Uber · 2009 $60 billion
Google 1998 $1 trillion Zoom 2011 $130 billion
iPhone* 2007 $75b to $1.9t Pinduoduo 2015 $100 billion
Netflix 1997 $210 billion Alibaba 1999 $740 billion
PayPal 1998 $210 billion Tencent 1998 $640 billion
Tesla 2003 $370 billion
*Apple 7 Innovation is Accelerating
• Companies and products founded/created since 2003
AirBnB Palantir WhatsApp Android Palo Alto Networks WorkDay AWS Pinterest You Tube Coupa Service Now Adaptive and Ascendis Face book Shopify AveXis, Audentes, and Spark lnstagram Snapchat Black Diamond and Revolution I-Pad Splunk Blueprint and Loxo
~ I-Phone Spotify Kite and Juno Kindle Square Beigene Lyft Tableau ByteDance and TikTok Mango Tesla Meituan Oculus Twitter Pinduoduo Okta Uber Snowflake
8 Five Transformational Themes
New Age Consumer Digital Transformation Software E-commerce Artificial Intelligence Financial Reporting Social Media Big Data Financial Planning and Analysis Online Gaming Cybersecu rity Data Storage Online Music and Video Internet of Things Data Analysis Education Evolution Communications Applications Management Sharing Economy News Experiences Over Goods Media Entertainment Customized Advertising
Manufacturing Revolution Life Sciences Robotics Precision Medicine 3D Printing Digital Health Mobility Robotics Surgery Drones Genomic Medicine Clean Energy Quality and Longevity of Life Future of Work
9 0 M
c ·-0
-ro +-' ·-tl.O ·-0 ~ <(- - • Artificial Intelligence
• "Machine Learning would be worth 10 Microsoft~s."
- Bill Gates, 2004
• ''Artificial Intelligence could be to investing in 2016 what the internet proved to be in 1996 and what social media proved to be in 2006."
- Jim Breyer, 2016
• "Deep Learning Could Approach $30 trillion Market Cap in 20 years."
-Ark Investments, 2017
11 Artificial Intelligence
• Explosion of data is driving unprecedented disruption
• Investors need to position their portfolios for the future
• Disruption is creating opportunities for significant investment returns
• Significant excess returns can be achieved by constructing differentiated portfolios
12 Digital Transformation
• Companies in the S&P 500 are turning over much more rapidly
#of Years in the index 70
60
50
40
30
20
10
0 1960 1980 2000 2020 2030 est - Asset 13 -Management Data is Growing Exponentially
• Expected growth of 35x from 2010 to 2025
Annual Size of the Global Datasphere 180
160 ,,, 140 'l> .6- 120 (1) ~ 100 l"J 80 60
40
20
0 2010 2011 201.2 2013 2014 2015 2016 2017 :Wl8 2019 2020 2021 2022 2(J2-3 2024 2U25
Source: Adapted from Data Age 2025, sponsored by Seagate with data from IDC Global DataSphere, Nov 2018 14 The Cloud Effect
• Cloud-based software has enabled companies to launch, operate, and compete at lower costs, thus disrupting incumbents while accelerating new entrants and innovation
Declining Cost to Launch a Start-Up
$6,000,000 $5,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $500,000 $50,000 $5,000 $- • .. 2000- Open Source 2005 Public Cloud 2009 2011
-lllil Asset 15 Management Quicker Pace of Disruption and Innovation
• Median age of the 8 largest companies has declined from 100 years old in 2005 to 22 years old today ·
In 2005 Formed Years In 2020 Formed Years General Electric 1892 113 Apple 1976 44 Exxon 1870 135 Microsoft 1975 45 Microsoft 1975 30 Amazon 1997 23 Pfizer 1849 156 Alphabet 1998 22 Ci ti 1812 193 Berkshire Hathaway 1839 181 Wal mart 1962 43 Face book 2004 16 BP 1909 96 Alibaba 1998 22 AIG 1919 86 Tencent 1999 21 Average 107 Average 47 Median 100 Median 22
16 • - Software
• Growth of software is accelerating, with growth rates that are 3.Sx higher than global GDP and 2.Sx greater than IT spending
18 Software • Revenues were p_ositive throughout the Global Financial Crisis • Operating Margins are more consistent and less volatile %Change in Y-o·Y Quanerly Revenuet %Change in Y·o·Y Quarterly Operating Margint
60%
30%
40% 24% 17%
10% 20% 4%
(10%) %)
(20%) (30%) a2'0e a3'08 04'08 01'09 mm aJoo 04'09 orrn 02'10 Q2'00 Q3U6 04'08 01'09 Q21l9 03'09 04'09 01'10 02'10
.....softwa~ Cofll!S ..... NASDAQ .....S&P 500 19 M&A Activity llx Growth in Software Related M&A since 2010
Saas M&A Annual Deal Volume 1,2.118 • Q1 • 02 Q3 Q4
984
831
143
'°'
iU7 189
299
197
114
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20 Fastest Growing Sector Globally
Market Capitalization Growth
2011-2018 2018-2025 21.3% O\€r this period, software had the fastest O\€r the next seven years, software is 19.2% 18 market cap growth rate and the largest projected to remain the fastest growing sector . % 17.0% 11.4% .0% 16 5 17.2% 15 market cap and the largest in size ·9% 15.1% 13.5% 13.5% 13.9% 12.4%12.4% 11.7% 12 9.8% 10.1% 10.7% ll.4% •0% 12.1% 12.1% 10.7% 9.0% 9.4% 9.7%
6.7%
5.1% 0.9% iii 'iii I A .k~ ~ ,e ~e ~ ~., ~e ~'Ii . ~ • t$' (f ef; ~ ~ ~e ~e ~ ~ ~ ~ ~ ~ ~ ~ t$' ~ (f ef; ~ ~ 0~ ~ ~ ~e"'°· ~o· .,..
Top Se\€n Comparative Market Capitalization by Sectcr: 2018 Projected Top Se\€n Comparative Market Capitalization by Sectcr: 2025
Real Transporlaliai Automotiw Insurance Energy H Ith Financial • Transportatiai Insurance Energy Healthcare FinancialS . . • . - ea care Services • - Estate erv1ces $2.21N $2.41N $2.81N $4.61N $6.31N $7.21N Im $4.81N $6.41N $6.61N $7.31N $11.BlN $16.31N ma
Source: Vista Equity Partners; Gartner, proprietary research as of May 2019. The information presented in this slide was prepared by a third party and Vista makes no representation regarding its accuracy. There can be no assurance that historical trends will continue during the life of any Vista Fund. Please see "Important Disclosures" for important information regardingthe estimates and projections included herein. There can be no assurance that any projections contained herein will be realized. General projections on software companies' market is not indicative of the 21 strategy, trend or future performance of any Vista Fund. Continued Growth Expected
• Software TAM (U.S.) - Software TAM as% U.S. GDP
3.0% I j $5008
-~ I - 2.5% ~ en -.. 0 GI $4008 ::i- ~... ~ co ..,Ill ~ ID -t ~ .c )> co :s: Cl) Cl) $3008 Ill GI Cl) ... 1.5% Ill "C "C 0~ < ....0 ca.. c:: 0 $2008 I- 1.0% en GI G> ... c ::co ,, =en0 $1008 I _.,- 0.5%
SOB 0.0% 1990 1995 2000 2005 2010 2015 2020F 2022F
Source: Thoma Bravo; Bank of America Global Research - "Software 2020 Year Ahead" (December 2019); Bureau of Economic Analysis 22 c 0 ·-+-' ::l 0 Q)> a: tl.O c
>• Automation
Global Robotics Market ($billions) 9x Growth in 25 Years
$80.0
$70.0 $66.9
/ $60.0
$50.0
$42.9
$40.0
$30.0 $26.9
~ $20.0 $15.1 $10.8 $10.0 $7.4 I $- 2000 2005 2010 2015 2020E 2025E
24 Mobility as a Service (MAAS)
MAAS and autonomous vehicles can make transportation more efficient, leading to less traffic, less urban density, and higher household savings
Owning a vehicle may not be the most Cars are parked 94% of the time .. efficient model
Cars will be linked via wireless Customers will have the ability to request a Networks .. vehicle on demand from anywhere
Vehicle ownership costs 70 cents MAAS costs 35 cents per mile, reducing .. cost of transportation by $5,000 per per mile household 740 million parking places and real estate MAAS could generate $10 trillion .. totaling $10 trillion becomes available for in annual sales better use, such as affordable housing 25 Artificial Intelligence and Automation
•Will There Be Enough Jobs?
•Al will improve employee productivity by 40% and increase GDP by 100% (Accenture)
•Science, technology, and innovation will increase GDP by $12 trillion, or 30 percent v. growth ex-future automation (Ark Investments)
•Al and Quantum Computing combined with a centralized repository of data, physician notes, images, diagnostics, treatments, results, biology, and chemistry can significantly increase the quality and duration of life while also reducing costs
26 Artificial Intelligence and Automation
•Will There Be Enough Jobs? (continued)
• There will far fewer jobs where people are paid to do something
•Automation will replace 47% of American jobs but it is net job positive
•There will be plenty of work to do ("Futurist Speaker: 152 Jobs of the Future" describes the work that will be done in the future economy)
• In the future, people will be paid to innovate, create, and interact
•The work of the future will be far more fulfilling than much of the work people do now
27 Artificial Intelligence and Automation
ulet the Machines do the Work and Humanize Jobs. The Mundane to the Machines and Purpose to the People!n - Ron Hancock, Deloitte
28 L.. QJ E :J (./) c 0 u QJ tl.O <( s zQJ >• Millennia ls
• Millennials are poised to drive the global economy as the largest demographic in history • 86% of Millennia ls are in Emerging Markets and entering their prime earning years, potentially providing a tailwind for consumer spending
Population (millions) 2500
2000
1500
1000
500
0 Millenials Gen-X Baby Boomers Silent II Asset 30 Management Accelerating Pace of Adoption
• Impact of the first generation of digital users
Number of Years to 50 Million Users
Pokeman Go o.os Meituan 0.10 Pinduoduo 0.1 We Chat • 1 Face book - 3 Internet 7 Mobile Phones 12 Computers 14 ATM's 18 Televisions ------• 22 Credit Cards Electricity ------28 Telephones ------46 Auto's ------so Airlines ------...... 62 68 0 10 20 30 40 so 60 70 80 II. Asset 31 Management The TikTok Boom
• TikTok is growing 4x faster than Facebook and lnstagram at their same age of adoption
ikTok has reached 1bn users faster than any other social media app Monthy achve users since product launch (millions) 2,500
2.000
1500
1.000
500
0 0 years afff't launch 5 10 15
'Y.>ut <. .. J. f r •..,..., ( "1 ( f T
32 Ease of Access
• The increasing ease of access to goods, services, and information is reshaping the way business is conducted
Transaction Traditional New Consumer Companies
Goods Purchase Subscription-based Adobe, Microsoft
Transportation Auto purchase Rideshare Uber, Lyft, GetAround, Tesla?, Waymo?
Vacation Hotel Homestay Airbnb, VRBO, HomeExchange
Finance Bank Lending Peer-to-peer Lending Club, Prosper, SoFi, Kickstarter
Work Sole Occupant Co-working Link Coworking, The Coop, Fueled Collective, WeWork
Resale Few or no options Online Amazon, eBay, Craigslist, Kidizen
Home services Yellow Pages Online TaskRabbit, Zearly
Counseling services Yellow Pages Online Live Person
Talent sharing Yellow Pages Online Fiverr, Upwork
Repetitive tasks Few or no options Online Mechanical Turk
Bike rental Few or no options Online Spinlister, Bcycle
Dog walking Yellow pages Online Rover
33. The Sharing Economy
• The "Sharing Economy" will grow from 7% in 2013 to 50% by 2050
Advantages Disadvantages Future
Cheaper goods and Privacy and safety More flexibility in work and life . services concerns Extra income for Impact on incumbents More ways to earn money providers Connection to larger More ways to save money marketplace Stronger communities Less worry about valuables
More adoptable businesses
34 L!') ("(')
Vl (]) u c (]) ·-u Vl ~ ·-_J • >- Recent and Upcoming Breakthroughs
,... lmmunotherapy: Enabling the immune system to recognize and destroy cancer cells
,... Gene Therapy: Ability to edit or replace defective genes
... CRISPR: Ability to replace defective genes and perhaps even end genetic disease
,... Protein Degradation Damaged proteins are recognized and rapidly degraded within cells, eliminating mistakes that occur during protein synthesis
,... Genomic Testing: Genomic Testing and Sequencing combined with big data and Al will reduce costs of expensive and inconclusive tests and misdiagnosis, resulting in more personalized medicine, more accurate diagnosis, and more effective treatment plans
,... Positive Social Impact: Hundreds of rare diseases may be cured; people with disease will live much longer and more comfortably; the longevity and quality of life is poised to significantly improve
36 Large Unmet Needs
• Top 6 drugs by gross revenue still leave room for new therapies
!... • Responder T Non-Responder
1. A81LIFY 2. NEXIUM 3. HU MIRA 4. CRESTOR 5. CYMBALTA 6. Am!.,AJR DISKUS Schizophrenia Heartburn Arlhrit1s High Cholesterol Depression Asthma • • -~ ~ • • 'ft' • • • • • • • • • • • • • • TTTT• • 1 T TTTT T • • • tttt T ,,,,• • • ,,,-• • • • • • TTTT• • • • t t t ti • • • • • • • • ~ ....!... ~ .:. • • • • . t . • • • • •
Source: Nature, "Personalized medicine: Time for one-person trials" (2017). Copyright© 2018 by Cambridge Associates LLC. All rights reserved. Confidential. 37 Decreasing Cost
Cost Per Genome (July 2001 - August 2019) $100,000,000
$10,000,000
r Moore's Law $1,000,000
~ QJ E 0 c: i1l $100,000 ..... QJ c._ +-' 8
$10,000
$1,000
$100 ~ ~ ~ -~ b ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~& ~& ~& ~ ~& ~ ~& ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
Source: National Human Genome Research Institute. Wetterstrand KA. DNA Sequencing Costs: Data from the NHGRI Genome Sequencing Program (GSP) Available at: www.genome.gov/sequencingcostsdata. 38 Copyright© 2018 by Cambridge Associates LLC. All rights reserved. FDA Approvals
• FDA approvals up 50% from 2000-2009 compared to 2010-2019 60 ., -59 I 1992: 53 Accelerated - 2012: so ., I 1997: Food and Drug 48 Approval Program 46 Food and Drug Administration 45 - instituted and ~ I Administration - Prescription Drug Safety and _4 .. I 39 40 ~ Modernization Act lnnovation9Act User Act - ~ 35 36 I I r:-- - I 30 30 30 30 30 28 .-- .,.... - ,_.. 27 27 26 25 26 - : - 24 24 - - I 23 - I 22 ' 22 I - I - 21 22 - I - 21 I ! - I - r:--, I 20 - 18 I - I I I 17 - I I I I - I I I - I 'I I I I I I I I I . I I : I I 10 I ! - I I I ! I I I I I I I i ' I I I I I I I I i I 0 - ~ ~ ~ ~ ~ b ~ ~ ~ ~ ~ ~ ~ ~ -~ b ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ y~ y~ y~ y~ y~ y~ y~ y~ y~ y~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~
Source: U.S. Food & Drug Administration. Data as of December 31, 2019. Copyright © 2020 by Cambridge Associates LLC. All rights reserved. 39 The Pipeline KeepsGrowing
• Pipeline of lnvestigational New Drugs is up Sx since 2013
160
.....,Vl u ::l 140 Breakthrough-designated -c a..__ development programs c.. -c indicate a healthy pipeline .....,Q) 120 ro -~ ~ Vl Q) 100 ~ E I c_ ..c a llD - ::l Q) 80 a..__ Q)> ..c 0 ~ Q) ro > Q) ·.;:::; ..__ u 60 co <( '+-a·-c ..__ Q) 40 _c E ::l z 20 .....,ro ~ 0 "' ... ~ "' '° " CD °' -2- -2- -2- -2- -g. -2- -2- -g. 111 Ill Ill Ill Ill Ill Ill Ill ...6 ...0 ...0 ' ...0 ...0 ...6 ...0 ...0 • IND Phase mReview Phase
Source: U.S. Food & Drug Administration. Notes: Data as of September 30, 2019. Figure includes total number of granted breakthrough designations for drug/indications under 40 active IND development but have not received marketing approval or rescission decision. M&A: Increase in Number & Size
• M&A transactions are up 75% from 2010-2014 to 2015-2019
M&A is getting 540 bigger 432 435 376 332 281 $2028 194 196 151
2010 11 12 13 14 15 16 17 18 19
~------0•• 1 size ------, Less than S500 M $58 • $5B-$20B • Greater lhan $208 (megcmergers)
Source: Bain Global Healthcare Private Equity & Corporate M&A Report, 2020, Dealogic, and AVCJ. Notes: Excludes spin-offs, add-ons, loan-to-own transactions and acquisitions of bankrupt assets; based on announcement date; includes announced deals that are completed or pending, with data subject to change; deal value does not account for deals with undisclosed values. Copyright© 2020 by Cambridge Associates LLC. All rights reserved. 41 Life Sciences
"There are few times in our lives when the science truly amazes us, when it becomes possible to do today what we could not do yesterday. This is one of those times."
- Editas website
42 Vl ~ Vl ·-a:: - • >- Risks and Mitigating Factors 1-Anti-Trust Legislation or Could slow Innovation and M&A... or boost Regulation both, also reduce wealth concentration, some legislation appears to be in current prices, and impact would be company specific
2 - High Valuations in Tech Tech valuations are 20% higher than the - and/or Lower Biotech Prices S&P 500, but normal compared to its history v. the index; tech prices have always been high, but the sector has still substantially outperformed; biotech prices are backed by very strong demand and improving science
3 - Impact on Jobs Automation will displace 40% of jobs but is net job positive
4- Unintended Consequences Social Media has immense benefits, and also a dark side 44 Q) u c Q) ·-u V> -~ Gil cV> 0 !..... 0 :J c ...... c Q) u 0::: Q) ...... t c Q) ~ ...... E V> Q) > -c - • >- In Public Equity Tech and Life Sciences Have Posted High Excess Returns • Tech has returned 20.5% the past 10 years, outperforming the S&P 500 by 6.5% (Compound Tech 545% v. Index 271%) • Biotech has returned 18.3% the past 10 years, outpacing the S&P 500 by 4.3% (Compound Biotech 437% v. Index 271%)
1Yrs 3Yrs 5Yrs 10Yrs S&P 500 Health Care Index 10.9% 10.3% 8.1% 15.7% NASDAQ Biotechnology Index 25.4% 9.8% 2.2% 18.3% S&P 500 Info rm ation Techno logy Index 35.9% 26.8% 23.4% 20.5% MSCI USA Software &Serv ices Index 29.1% 26.6% 24.1% 21.7% S&P 500 Index 7.5% 10.7% 10.7% 14.0%
Returns annualized through June 30, 2020 46 Compound Returns of Tech and Life Sciences Investors tend to underestimate the impact of posting high long-term returns
Index Compound 10-Year Returns Beginning Capital $3 billion Equals 22% of SFERS $13.Sb AUM at 7-1-2010 in $millions
$25,000 $21,381 $19,364 $20,000 $16,105
$15,000 $12,896 - $11,122
$10,000 - $7,367
$5,000 •
$- MSCIACWI S&P 500 S&P 500 Health Nasdaq S&P 500 MSCI USA Care Index Biotechnology Information Software & Index Technology Index Services Index
Returns compounded from July 1, 2010 hrough June 30, 2020 47 SFERS Public Equity Significant Excess Returns in Science and Tech
l YEAR 3YEARS 5YEARS 7YEARS
Sector Stock Sector Stock Sector Stock Sector Stock Allocation Selection Total Allocation Selection Total Al location Selection Total Allocation Selection Total HealthCa re 0.60 1.13 1.66 0.78 1.30 1.95 0.87 1.65 2.43 1.44 2.32 3.57 Information Tec hnology 1.38 0.87 2.23 1.94 1.61 3.46 2.56 1.28 3.80 3.48 2.34 5.36 Other Sectors (incl. Cash) 2.45 1.65 4.19 2.91 1.79 4.92 3.59 1.41 5.13 5.14 2.95 8.74 Total 4.43 3.65 8.08 5.63 4.70 10.33 7.02 4.34 11.36 10.06 7.61 17.67
48 Disruption Has Led to Significant Excess Returns
S&P 500 Composition - Name Count S&P 500 Periormance Decomposed
Indexed Returns
300
250 Disruptors S&P 500 - Disrupted +83% 200 Oulperformance
150 -56% Underperformance
• Companies that have displayed or are developing disruptive characteristics 100
• Companies t1hat have been disrupted or are vulnerable to future disruption
• Companies fhat are adopting new tech nology to stay competitive 50 ..J__~~~~~~--...,.-~~~-.---~~~,----~~~ sep-14 Sep-15 Sep-1 6 Sep-"17 Sep-18 Sep-19 Lm
Source: GSAM, Factset. As of September 2019. Past performance does not guarantee future results, which may vary. lllil Asset 49 Management Public Equity Source of High Excess Returns
• Amazon went public in 1997 at a market cap of $450 mm
• Amazon now has a market cap of $1.5 trillion · As a public company Amazon has posted a return of 3,300x • Over the same period the S&P 500 has returned 5.5x • Almost all of the world's wealthiest people are founders of publicly traded companies (Bezos, Gates, Zuckerberg, Musk, Brin, Page, etc.) and gained the vast majority of their wealth as a public equity company
so Private Equity Technology and Health Care Have Outperformed
35% 34.4% 8.0x
30% I I 27.2% ~ 6.0x 25% -1 I 24.7% ii ...c ·a...... 1 23.0% =cu u 20.5% 'ti"' a: 20% Cll ....c 1 19.5% ..... cu 18.4% 1 20.~ 18.6% Illcu ..... 4.0x 1 a:"' .... ii 15% c c... 14.6% Cll .....cu 2.7 a. c 2.6 ; 2.5 2.4 rt 2.3 r--i 2.2 . .., .., -::E= 10% -l I 1 2.1 - 1.9 1.9 r 2.0x I f II II I II 5% • I •
0% O.Ox Consumer Financials Health Care IT Total Combined
Sector Specialist MOIC • Generalist MOIC • Sector Specialist IRR • Generalist IRR
Source: Cambridge Associates LLC Private Investments Database. Notes: Data represents realized and unrealized investments within the Cambridge Associates US Buyout and Growth Equity Benchmark initiated between 2001 and 2015. MOICs and IRRs are based on the aggregate performance of investments categorized as sector or generalist. All performance is gross of fees and expenses. Sectors represented include consumer, financials, health care, 51 and technology. Copyright© 2020 by Cambridge Associates LLC. All rights reserved. SFERS' Private Equity Returns Science And Tech Have Significantly Outperformed
Horizon Returns 6/30/20201 Sector Commitment IRR 1 year IRR 3 year IRR 5 year IRR 10 year . IRR ITO .. Health Care 706,116,204 41.9% 28.5% 22.5% 22.8% 19.8% 0.4b 1.75x 1 2 Cambridge Health Care Benchmark ' 19.6% 21.0% 14.6% 17.1% 14.0% 0.86x 1.73x Difference 22.3% 7.5% 7.9% 5.7% 5.8% (0.43x) 0.02x
Information Technolo1y 3,192,087,206 16.8% 20.0% 1&.3% 19.6% 45.0% 0.49x 1.72x 1 2 Cambridge Technology Benchmark ' 15.4% 21.5% 16.1% 19.1% 14.6% 0.87x 1.75x Difference 1.4% {1.5%) 0.2% 0.4% 30.4% (0.38x} (0.0 3x)
Other Sectors 9,080,458,059 6.1% 12.9% 12.3% 13.2% 15.0% 1.16x 1.61x PE Total Portfolio3 12,978,661,469 12.9% 16.5% 14.2% 15.0% 16.0% 0.98x 1.64x
52 Public and Private Equity Source of High Returns
• Yale has outperformed in Public Equity by 5.4% and by 7.7% over the past 10 and 20 years, respectively (through 6-30-2020)
10-Year 20-Year Asset Class Annualized Annualized Return Return Public Equity 15.9% 14.1% MSCI ACWI 10.5% 6.4% Venture Capital 20.0% 20.2% Buyout 16.1% 12.6% Real Estate 8.0% 9.0% Natural Resources 5.7% 14.7% Absolute Return 6.4% 8.8% Yale University Endowment 11.1% 11.4%
53 Valuatio·ns
• Tech and Life Sciences valuations are in line relative to the index and their own history
Data as of 12/31/2019 20Year Avg · .Current Premium v. Sector Weight Foreign Sales Forward PE Forward PE History Communications Services · 10.4% 45% 18.2 18.8 3% Consumer Discretionary 9.8% 34% 17.8 22.2 25% Energy 4.3% 51% 17.1 17.7 4% Financials 13.0% 30% 12.5 13.4 7% Health Care 14.2% 39% 16.2 16.2 0% Industrials 9.1% 44% 15.9 16.6 4% Materials 2.7% 57% 14.0 18.4 31% Real Estate 2.9% 0% 15.6 19.9 28% Staples 7.2% 33% 16.8 20.2 20% Technology 23.1% 58% 19.7 21.8 11% Utilities 3.3% 0% 14.4 19.9 38% S&P500 100.0% 43% 15.5 18.2 17%
54 Value Created From Earning High Long-Term Returns The S&P 500 Has Returned Aprx 6.3% the Past 20 Years While Yale has Earned 14.1% Pursuing High Returns in Public and Private Equitv is Worthwhile
Growth of $16.8 Billion Spending 4.0% Earnings from 8.0% to 12.5% $120.0 $111.1
$100.0 $88.8
$80.0 $62.2 $60.0 $36.8 $40.0 $31.1 $ $24.9 . 16.8 _ $16.8 _ .. $16.8 .... $16.8 $20.0
$0.0 Earnings = 8.0% Earnings = 10.0% Earnings = 11.5% Earnings = 12.5%
• Start Year 1 • End Vear 10 • End Year 20
SFERS Current Public Equity Portfolio is $10.5 billion and Private Equity Portfolio is $6.3 billion= Total of $16.8 billion 55 !ii....> ro E E . :J V> • -x Summary
• Science and tech have historically delivered high returns • Speed, scale, and impact of future innovations is underestimated • Innovations over the next 10 to 30 years will be more disruptive than what has occurred thus far
• Science and Tech are poised to continue delivering high returns • For Science and Technology to realize their potential of improving the human experience, responsible and responsive leadership from governments, business leaders, and philanthropists will be important 57 Summary
Bill Gates to college students:
"If I were starting out today ... I would consider three fields.
One is artificial intelligence. We have only begun to tap into all the ways it will make people's lives more productive and creative.
The second is energy, because making it clean, affordable, and reliable will be essential for fighting poverty and climate change.
The third is the biosciences, which are ripe with opportunities to help people live longer, healthier lives."
58