Dear Investor,

My son advised me that he had used ChatGPT to create a study guide for his biology class final and instructed it to assume he had skipped a decent percentage of the classes during the semester in order to focus on his computing classes, and that this would be the only material he would use to study for the exam. I had mixed feelings. On the one hand, I did not like the fact that he was skipping classes, but on the other hand I admired his creativity and thankful that he was learning “something” in college. ChatGPT is a natural language processing tool driven by artificial intelligence “AI” technology that allows one to have human- like conversations with the chatbot. Being one of the fastest growing applications of all time, industry pundits and Wall Street analysts are claiming that this technology will bring Internet-level disruption. Investors have responded by crowding into a few mega cap technology names. Although Pier 88’s research team believes no one really can predict how this technology trend will impact the business world, we do believe the AI euphoria has created an asymmetrical investment opportunity for small and mid-cap innovation companies that have largely been left behind during this hype cycle. In our view, the Lake Geneva strategy presents an attractive way to capitalize on this opportunity.

During the first half of 2023, the hedged version of the Geneva strategy outperformed its relevant benchmark due to strong security selection and good risk management, while the long only version posted strong double-digit absolute returns. That said, small and mid-cap companies lagged the broader larger cap indices as investors crowded into a small handful of mega cap stocks. Concentration risk in the S&P 500 is now higher than was at the very peak of the dot com bubble in 2000 with the largest five stocks representing 24% of the S&P 500’s market capitalization, compared to 19% in March 2000. See Chart Below:

The initial move into these large names was a tactical defensive move from investors during the high-profile collapse of several regional banks in Q1. Investors essentially sought refuge in these large companies with strong balance sheets that had promised layoffs to protect margins. This trade accelerated after NVDA delivered strong earnings and attributed the strength to demand for AI applications. The Pier 88 Team are longtime fans of these technology franchises, but submit that the opportunity to generate significant returns from here lies somewhere else. The following chart is illustrative.

AAPL’s market capitalization now exceeds the combined market cap of the Russell 2000 index. Having worked at a former large cap technology darling that no longer exists, we are cognizant that competitive advantage in the technology world can be ephemeral, especially in the midst of a broader technological shift. Although our team cannot predict the ultimate winners of a disruptive trend, we do know that these five mega cap companies do not have a monopoly on AI innovation. Approximately 75% of Geneva portfolio companies have made public announcements of incorporation of AI technology into product or service offering or in business operations to create efficiencies.

What we find most exciting is the fact that we are seeing broad experimentation and adoption of AI across multiple sectors. Having been involved during the early days of Cloud Computing in the early 2000’s, our team is very aware that technological paradigms shifts like AI, tend to take much longer to adopt than pundits initially think, but ultimately can have much larger impacts. One simple example of this is mobile computing which strategy consultants initially projected to be a fairly niche business for Motorola.

The rebound in the markets this year is a welcome relief from the volatility in 2022. Where is the opportunity from here? Our team has compiled a simple Top 10 list of why we believe the Lake Geneva strategy offers a compelling opportunity over the next several years:

• Apple market capitalization now greater than entire R2000.
• Simple reversion to mean makes case for increase to asset class.
• Extreme valuation differential between small cap versus mega cap securities.
• Non-cyclical revenue exposure compounding at 30% per year.
• Disruptive innovation via multiple growth vectors and access to strategic assets.
• Strategy has delivered 6 take-outs per year (on average) — 53 in total1.
• Heightened take-out premiums from Strategics or P/E as multiples hit lows to growth rates.
• Take-out “put” coupled with lack of cyclical earnings provides downside protection untilrecession fears recede.
• Small cap stocks generally lead out of a recession.
• Small capitalization stocks will benefit from declining rates as fed eventually unwinds ratehikes.

Pier 88’s Team does not need the assistance of an AI tool to identify a compelling risk-adjusted investment opportunity that has not existed in the public or private markets for some time. Every business in the portfolio is not only levered to secular growth trends for the next few years, but the markets have also created a scenario wherein each company presents a call-option for an exit via M&A or private equity take- out. With 53 announced acquisitions1 for the strategy since its inception in 2013, our team identifies a common pattern. Great growth franchises that trade at a discount get acquired by the bigger guys. We anticipate the dramatic sell-off in small and midcap growth assets which started last year will lead to a massive consolidation opportunity over the next 12-18 months. The strategy benefitted from 2 acquisitions in the first half of 2023 and has average 6 per year since inception.

We humbly submit that now is the time for thoughtful investors to position for outsized returns over the next few years by calmly embracing an under-utilized investment tool….duration of time. We are so grateful for the support and confidence of our clients, and view our responsibility as a steward of capital as a privilege. We look forward to connecting with you soon.

Thank you for your support and we look forward to connecting with you soon.

Respectfully,
Frank