Hollinger and Eisenpresser: Why You Should Invest in the Innovation Economy

There are three important reasons to invest in the “innovation economy”. These are the disproportionate returns, the disruption of existing markets and the diversification of the portfolio.

A lot of wealth is generated before the IPO. The majority of pensions in the United States achieve a 7% discount rate. There is a risk of flat returns and what the impact will be on future contribution rates.

Economists at investment giant Vanguard predict that over the next 10 years, annual returns in US stock markets are likely to average between 3 and 5%. In the new world, investors are looking to private markets for alpha.

Creating an investment strategy in the “innovation economy” is a key tool in achieving a 7% return. Venture capital transactions in the United States continue to increase, with the round sizes of angel, early stage and advanced investors all increasing in 2018.

According to Pitchbook, at all stages, pre-monetary median valuations increased significantly in the first half of 2018, with angel / seed valuations up 17% from 2017 and later stage valuations up 25%. % to 45%. This trend continues in 2019.

Disruptive technologies and innovation create new markets or modify or destroy existing markets. The disruptors yesterday mainly focused on consumer sectors such as the music industry, travel bookings, newspapers, magazines and book publishing. Today it is groceries, residential housing, entertainment and personal transportation.

Think of Amazon, Airbnb, Netflix, and Uber. Innovation and technology are transforming old world industries (e.g. financial services, healthcare, government, and logistics / manufacturing). In the smart enterprise space, companies are reinventing and replacing the decades-old technological infrastructure behind major industries. The role of technology in alternative data and artificial intelligence will disrupt our understanding of value. Technology is at the heart.

The way we invest today will not be the way we invest 10 years from now.

Prudence dictates the diversification of asset class allocation. Investing in the innovation economy gives you the diversification you need to face the wrong choices as we don’t know where the next disruption will come from and how it will affect your portfolio.

Wayne Gretzky reportedly said, “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. This philosophy is used by the best institutional investors looking to take advantage of opportunities in which future performance is not reflected in today’s price. It is the economy of innovation.

It is also a question of culture. The culture of innovation and invention does not thrive and thrive in traditional business environments. Institutions reward the ability to generate a return on investable assets – whether human or financial capital – and to execute successfully. The place where you innovate is a different place than where you manage efficiency. Innovation does not fit into an efficient organization. Innovation thrives when it has the resources, failure is approved and accepted, and waste is part of the process.

Pension funds and other large institutions need information early in the innovation economy, but struggle with how to respond. Many institutional investors cannot participate directly because they lack the credentials, structure or talent in venture / growth capital.

For example, Sidewalk Labs, Ontario Teachers and Alphabet recently teamed up to launch an infrastructure holding company spun off from Sidewalk called Sidewalk Infrastructure Partners (SIP). They are using technology on a large scale to modernize aging urban infrastructure. SIP will support large-scale infrastructure projects and buy or take stakes in fast-growing technology companies whose proceeds are used in these projects.

How to maximize the key learnings of the innovation economy for the benefit of institutional investors and create vehicles that allow them to participate?

Here is a look at some examples in the world of innovative vehicles launched to access the innovation economy.

In Canada, they can grow them in-house. The Ontario Teachers ‘Pension Plan is launching a new investment service, Teachers’ Innovation Platform (TIP). TIP will focus on early stage venture capital and growth capital investments in companies that use technology to disrupt incumbents and create new industries. UC Regents created UC Ventures. UC Ventures is an investment vehicle designed to monetize the economic value created by the University of California through its pioneering research.

Public Sector Pension Investment (PSP), one of Canada’s largest pension plan managers, has established more than 10 private equity general partners over the past decades. SoftBank’s Vision Fund, backed by the Public Investment Fund and Mubadala, has changed the landscape for venture capital. Alaska Permanent, Wafra and RailPen have collaborated to launch a private equity seed platform.

TMX Group, owner and operator of major Canadian equity exchanges, the Toronto Stock Exchange and the TSX Venture Exchange, is working with industry partners to create the Innovation Growth Fund (IGF), a new initiative designed to support Canadian start-up and innovative companies during the critical early stages of growth.

“The spirit of innovation and entrepreneurship continues to thrive in Canada as new companies with revolutionary concepts strive to redefine our country’s economic identity on the global stage,” said Lou Eccleston, Chief Executive Officer. management of TMX Group.

“TMX is a proud participant in the development of IGF, an exciting industry-led initiative designed to support Canada’s innovation economy today and into the future by connecting investors to disruptors at the cutting edge. In our role at the heart of Canada’s capital markets, we remain firmly committed to providing businesses with access to the critical growth capital they need and providing opportunities for investors to participate in that growth. “

What you need is a strategy to develop seed vehicles from scratch internally or externally and align the strategy and incentives of talented people with the goals of your own organization.

What happens if you don’t? Like Wayne Gretzky, the innovation economy is like the hockey puck. As an investor, you want to be where the puck goes.

Dana Hollinger contributed to this report.

Dana hollinger is Managing Director of ABG Advisory and previously served on the CalPERS Board of Directors, the ICGN Board of Directors and the Women’s Board of Directors of the JFK School of Government at Harvard.

Jackson eisenpresser is CEO of ABG Advisory and previously served as Director of Principal and Advisory Strategies at Tony Blair Associates.

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