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Citi Markets & Securities Services – Business Advisory Services

10th January 2019

Four Trends Re-Shaping Investment Management
Presentation for the Economic Club of Florida

 For Institutional Clients Only

Citi Business Advisory Services     Global:   Sandy Kaul, 212-723-5118 Sandy.Kaul@citi.com
                                    EMEA:     Robert Crossley, +44 (0) 207 986 9255 Robert.Crossley@citi.com
                                    US:       Matt Kummell, 212-723-2848 Matt.Kummell@citi.com
Strictly Private and Confidential
Agenda

    Improved Factor Understanding Drives New Thinking About Portfolio Construction

    Investors Demonstrate a Significant Shift to Passive Over Actively Managed Funds

    Actively Managed Funds Re-Align to High Conviction, Thematic & Alternatives

    Emerging Technologies Offer Potential to Democratize Access to Real Assets

2
1
Rethinking Asset Class Diversification
    Since the late 1950s, investors have sought to build diversified portfolios of asset class
    exposures that seek to balance risk and reward, but our understanding of risk is evolving
                                              Evolving Understanding of Portfolio Diversification
                                                         Real Assets                                    Real Assets

        Alternatives                                    Private Equity                                                     Common Factor
                                                                                                          Rates              Exposures
                                                        Hedge Funds                                                           Inflation
                                                                                                                               Growth
                                                           Rates                                                              Liquidity
                                                                                                                              Currency
                                                                              Exposure to
          Bonds                                                                                                              Geography
                                Diversified                                   Companies                                        Sector
                                  Asset                    Credit

                                                                                                              Companies
                                  Class
                                Exposures
                                                                            Common Factor
                                                                              Exposures
                                                                               Volatility
                                                                               Inflation
         Equities                                         Equities
                                                                                Growth
                                                                              Momentum
                                                                              Geography
                                                                                Sector

     • By diversifying across asset                • Asset classes are not mutually exclusive units   • Real assets and rate-linked
       classes, investors should be                                                                     investments also share many
       able to find the best possible              • Many are comprised of exposure to a set of         common risk factors, several of which
       return for the least possible risk            companies that share common risks                  overlap with company risk factors
    Source: Citi Business Advisory Services

3
2
Risk Balancing
    To ensure diversification without disrupting their existing fund allocation, some institutions go long
    or short specific factor exposures outside their desired range to balance their portfolio holdings
                                              Adjusting for Factor Exposures at a Portfolio Level
      Asset Class                 Fund Allocations                                         Under-     Factor Exposures      Over-
                                                                                          Exposed            0             Exposed

        Alternatives
                                                                             Volatility

                                                                             Inflation

          Bonds                                                               Growth

                                                                            Momentum
                                                                Aggregate
                                                                Exposures    Liquidity

                                                                             Duration

                                                                            Credit Risk
         Equities
                                                                            Real Rates

                                                                            Emerging
                                                                             Markets

     • Many sophisticated institutional investors look to manage their unintended                      Desired Range
       factor exposures, but there is significant debate as to whether this practice         Buy                           Sell
       undermines the value of the core allocations                                        Exposure                      Exposure
    Source: Citi Business Advisory Services

4
3
Re-Categorizing Allocations Based on Return Profile
    Other investors are re-thinking whether asset classes are the best way to categorize and diversify
    their portfolio—many are beginning to re-assign strategies based on their return profile
              Re-Assigning Strategies Based on their Return Profile                  • A wide variety of sub-strategies can be
                                                                                       found within the Equity, Bond and
           Asset Class                                              Return Profile     Alternatives buckets

                                                       Systematic      Illiquid      • Sub-strategies offer highly divergent
             Alternatives                                Macro        Limited          return profiles:
                                                                      Mark-to-       •
                                                                      Market                • ,Some align to low volatility bond-
                                                                      Returns                 like returns
                                          Distressed
                                            Bonds                                           • Some align to higher volatility
               Bonds
                                                                       Higher                 equity-like returns and
                                                       G-10           Volatility
                                                       Rates          Equity-               • Others are illiquid and very long-
                                                       Fund             Like                  term in nature and are thus only
                                                                      Returns                 occasionally marked-to-market to
                                                                                              track their contribution
                                          Emerging
                                           Markets                                   • Some institutions have now begun to re-
                                                                        Low
              Equities                     Equity                                      categorize these various sub-strategies
                                                                      Volatility
                                                                       Bond-           and group them more effectively to reflect
                                                         Quant                         the types of risks and return streams they
                                                         Long-          Like
                                                                      Returns          offer to the portfolio
                                                        Short EQ
                                                                                     • This is seen as helping ensure better
                                                                                       diversification and more effective risk
                                                                                       control according to participants in
                                                                                       proprietary Citi surveys
    Source: Citi Business Advisory Services

4
Re-Thinking Sources of Investment Returns
    Improved risk technologies allow investors to slice and dice portfolios to look more deeply into
    what is the driver of returns and thus better isolate and target the specific sources of returns
Fund or Portfolio                              Sources of Investment Returns
Return Attribution
                                                           Asset         Idiosyncratic
                                                          Selection       Exposures
                                                         & Capacity
                                                         Momentum             Technical
                                                          Volatility
                                                          Duration
                                                                               Factors:
                                                        Liquidity etc.

                                                          Growth                      Style
                                                            Value
                                                          Quality
                                                                                     Factors
                                                      Credit Grade etc.

                                                   Interest Rate Sensitivity               Risk
                                                 Credit Risk—Ability to Repay
                                                                                          Factors
                                                Equity Risk—Earnings on Cash
                                                    Inflation Sensitivity etc.

                                                         Financials
                                                                                                  Sector
                                                        Automotive
                                                          Energy                                Exposures
                                                    Consumer Goods etc.
                                                       Local Market
                                                    Developed Markets                               Geographic
                                                    Emerging Markets                                Exposures
                                                   Specific Countries etc.

    Source: Citi Business Advisory Services
5
Increasing Use of Index Exposures in Portfolio Construction
    A more precise view of the various sources of return for the portfolio allows investors to replace
    many expensive active managers with low cost indices for much of their exposures
    Traditional Approach                      Shifting Approach to Portfolio Construction   Emerging Approach
      EQ             B         A                                                                      External
                                                                      Idiosyncratic
                                                                                                       Active
                                                                       Exposures
                                                                                                      Managers

                                                                Technical
                                                                 Factors
                                      External
                                       Active
                                      Managers                    Style
                                                                 Factors
                                                                                                       Active
                                                                                                       Index
                                                                  Risk
                                                                                                      Selection
                                                                 Factors

                                                                 Sector
                                                               Exposures

             Asset                                             Geographic
           Allocation                                          Exposures

    Source: Citi Business Advisory Services

6
Agenda

    Improved Factor Understanding Drives New Thinking About Portfolio Construction

    Investors Demonstrate a Significant Shift to Passive Over Actively Managed Funds

    Actively Managed Funds Re-Align to High Conviction, Thematic & Alternatives

    Emerging Technologies Offer Potential to Democratize Access to Real Assets

7
Impact of Rising Index Offerings
    Technology is enabling managers to dynamically identify and construct indices or baskets of
    securities to provide exposure to specific factors, shifting factor-related returns from alpha to beta
                                                      Reclassification of Outperformance to Beta

                                                                                                                         *1995: 32 Stocks to
                                                                                                                         Each Tradable Index

                                                                                                                       2016: 1.2 Tradable Indices
                                                                                                                             To Each Stock

          • The ever-expanding variety of tradable index offerings are allowing investors to directly access sources of return
            that used to only be available through active management and that were considered to be “outperformance”

          • Now those return sources can be captured as an alternate type of market return or “beta”, helping to explain why
            increasingly, investors are only viewing idiosyncratic returns as alpha-generating
    Source: Citi Business Advisory Services. *“What’s Behind the Falling Number of Public Companies?”, Vanguard.com,
    https://advisors.vanguard.com/VGApp/iip/site/advisor/researchcommentary/article/IWE_InvResBhndFallPublCompanies
8
Drivers of New Portfolio Construction Approach
         The number of index offerings increased 4.5X between 2007 and 2017—the growing variety of
         index offerings and cost advantage is helping drive the move away from actively managed funds
                          Growth in Number of Passive Fund Offerings                                                                 Actively Managed vs. Passive Fund Fees
                                    ETFs & US Index Funds                                                                           Actual Paid by Institutional Investors: 2016

                                                                                                              Basis Points
                                                                                                                             70
                                                                                               7,593
Number of Funds

                  8000
                                                                                                                                                        59
                                                                                                                             60
                  7000
                                                                                                                             50
                  6000
                                                        +4.5x                                                                                                          37
                                                                                                                             40
                  5000
                                                                                                                             30       28
                  4000                                         AUM Growth by Category
                                                                      2007-Q3 2018:                                          20
                                                                                                                                                                                            14
                  3000
                                                              Equity ETFs: +5.7X $3.9T
                          1,667                               Bond ETFs: +13.4X $823B                                        10
                                                                                                                                           4
                                                                                                                                                             6                6
                                                                                                                                                                                                   4
                  2000
                                                              Int’l ETFs: +7.2X $767B
                                                                                                                              0
                  1000                                        Asian ETFs: +8.6X $508B                                               US Large Cap     US Small/Mid    Non-US EQ           US FI (Core)
                                                              US Index MFs: +3.9x $3.4T*                                                                 Cap
                      0
                          2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017                                                                   Active Managers   Passive Funds

                  • The number of passive fund offerings has expanded                                                             • Fee advantages are a major reason that many investors
                    dramatically in the past decade                                                                                 are choosing to utilize low-cost ETFs and indices

                  • Growth has occurred across a wide range of categories,                                                        • The largest institutional investors that can command the
                    boosting the variety of indices that investors can choose                                                       lowest fees paid between 14 bps for US Core Fixed
                    to gain exposure                                                                                                Income and 59 bps for US Small/Mid-Cap actively
                                                                                                                                    managed funds in 2016 according to Callan
                  • Smart Beta funds that isolate specific technical and style
                    factors are further expanding investor options                                                                • By contrast, the range for passive funds was 4-6 bps
                  *Data as of 2017. Sources: Left-hand Chart: Citi Business Advisory Services analysis based on proprietary data subscriptions to SimFund and eVestment. US Mutual fund data from
                  www.ici.org. Right hand chart: Callan 2017 Investment Management Fee Survey. Active fees are for the largest category of investor (cheapest fees) and passive fees represent average
 9
                  across all investor bands. https://www.callan.com/wp-content/uploads/2017/10/Callan-2017-Investment-Manager-Fee-Survey.pdf
Decisive Shift to Passive Fund Exposures
 Since 2011,net new investor flows into passive funds has outstripped flows into actively managed
 funds by nearly 5X – with flows into active managers showing a net negative since 2015

                                       Comparison of Net New Flows into Actively Managed vs. Passive Funds

                2,000                     Passive

                                          Active
                1,500                                                                                                           Passive Funds
                                                                                                   1,263                     2011-H1 2018 : $5.2T
                1,000                      515                                                                               2015-H1 2018: +$3.1T
     Investor Flows
       (USD billions)

                                                     461                                                         564
                        500                                    647                     927
                                           786                            640                       679
                                424                  531
                                                                                                                  282            Active Funds
                                                               190
                          0      37                                                                                          2011-H1 2018: +$1.1T
                                                                                                                 -145
                                                                         -432         -549                                   2015-H1 2018: -$447B
                   (500)                                                                                         -290

              (1,000)
                                2011       2012      2013      2014       2015         2016         2017         1H18

                        • Net investor flows into passive funds topped $5.0 trillion between 2011 and H1 2018, a figure 4.7X larger than the
                          net new flows into actively managed funds

                        • Active fund managers have in particular struggled since 2015 as both the financial press and global regulators have
                          been vocal in their views about how fees negatively impact long-term returns. Since 2015, actively managed funds
                          have registered outflows of $447 billion through H1 2018
     Source: Citi Business Advisory Services based on proprietary data subscriptions to Morningstar, eVestment and Simfund
10
Agenda

 Improved Factor Understanding Drives New Thinking About Portfolio Construction

 Investors Demonstrate a Significant Shift to Passive Over Actively Managed Funds

 Actively Managed Funds Re-Align to High Conviction, Thematic & Alternatives

 Emerging Technologies Offer Potential to Democratize Access to Real Assets

11
Shifting Goals for Actively Managed Funds
 Active managers with returns too close to a benchmark that can be replicated through a cheaper
 index fund are becoming more active in their security selection to generate differentiated returns
          Traditional Active Funds                  High Conviction Funds                         Thematic Funds

                                                            Performance                             Performance

        Performance / Benchmark                              Benchmark
                                                                                              Benchmark
                                                                                               Universe

              Full Set of Securities                 High Conviction Sub-Set                 Benchmark
                                                                                              Universe            Select
                                                                                                                  Cross-
                                                                                                                 Universe
                                                                                             Benchmark           Securities
             Benchmark Universe                        Benchmark Universe                     Universe
• Traditional actively managed funds           • High conviction funds choose a sub-set • Thematic funds choose securities
  overweight or underweight securities           of securities, concentrating their bets  across several benchmark universes,
  across the entire benchmark universe to        across a fewer number of names so        uniting those choices by a common
  outperform—this makes for returns              that correct choices can outperform the  characteristic in the pursuit of
  tightly clustered around the benchmark         benchmark by a more significant degree   uncorrelated opportunistic returns

        Actively-Managed                                                                      More Actively-Managed
     Source: Citi Business Advisory Services
12
Growth Accelerates in New Active Fund Categories
  Though AUM in traditional long only active core funds rose over the past decade, the pace of
  growth trailed those funds that offer more specialized or thematic strategies

                              AUM Growth 2008 to H1 2018                         Market Share Changes                                            • Specialty long funds that include
                                                                                    2008 to H1 2018                                                high conviction strategies added
                                   +48%             +115%            100%
                       9000                                                                                                                        nearly as much AUM as active
                                                                      90%
 Billions of Dollars

                       8000                                                          27%                                        35%                core funds over the past decade
                                  +$8.6T                              80%
                       7000                                           70%
                                                    +$7.6T                                                                                       • Specialty long funds grew by
                       6000                                           60%
                                                                      50%                                                                          115% between 2008 and H1
                       5000
                                                                      40%                                                                          2018,rising from $6.6 trillion to
                       4000                                                          73%                                        65%
                                                                      30%                                                                          $14.2 trillion and gaining 8%
                       3000                                                                                                                        market share over active core
                                                                      20%
                       2000                                           10%
                       1000                                            0%                                                                        • Active core grew 47.5% in the
                          0                                                           2008                                 H1 2018                 corresponding period from $18.0
                                 Active Core   Specialty Long (Ex-                                                                                 to $26.6 trillion—losing 8% share
                                                                            Active Core       Specialty Long (ex-ESG)
                                                     ESG)

                                                                                                                                                Growth in ESG / Impact Funds
              • The most widely recognized category of thematic funds are those                                                 1,550

                                                                                                          Billions of Dollars
                                                                                                                                                                                    $1.4T
                that isolate companies that lead their industries in environmental,
                                                                                                                                1,350
                societal or governance practices (aka ESG or impact funds)
                                                                                                                                1,150
              • Total AUM has more than doubled in these funds over the past                                                     950
                decade, rising to $1.4 trillion in H1 2018
                                                                                                                                 750    $639B
              • In our proprietary surveys, Institutional investors cite their belief that                                       550
                these companies will outperform their peers over time due to already
                existing practices and investments whereas retail and wealth                                                     350
                investors focus on these funds as a way of impacting the world with
                their investment dollars
   Sources: Top charts: Citi Business Advisory Services analysis based on the Boston Consulting Group Global Asset Management Study 2018, https://www.bcg.com/en-
13 us/publications/2018/global-asset-management-2018-digital-metamorphosis.aspx Bottom Chart: Citi Business Advisory Services analysis based on proprietary data subscriptions to
   Morningstar and eVestment
More Opportunities & Interest in Private Markets
 More foundational issues exist in the publicly traded markets beyond a shifting approach to active
 management and the move to passive--more and more activity is occurring in the private markets

                    Dry Powder in Private Equity Investments                                                     Downward trend in US & European IPOs

         •     Ready availability of private capital is allowing more companies to forego the public markets – especially small firms
               with valuations below $50 million; more growth opportunities are now only to be found in the private markets
         •     Many private companies express concern about short-termism in the public markets; institutional investors also see the
               focus on short-term financial results as out of sync with what is required to sustain long-term growth
         •     While cash may be available, staying private makes it harder for their employees to monetize their wealth tied up in
               these companies and boxes investors unable to meet suitability thresholds out of many growth opportunities

     Source Left Hand Chart: Citi Business Advisory Services Analysis based on proprietary subscription to Preqin. Source Right Hand Chart: Citi Business Advisory Services based on
     Dealogic data to 30 June 2017
14
Alternative Flows Dominate, Focus on Most Illiquid
             Net inflows into Alternative products outstripped passive flows in recent years with 79% of that
             money going to the industry’s most illiquid assets in private equity, real estate & infrastructure
                    Total Industry Net Flows: Active, Passive & Alternative                                        Breakdown of Inflows into Alternatives
                                        2014 to H1 2018                                                                   2014 - 1H18 ($4.1Tn)
                  3,000
                                Alternatives: +$4.1T
                                   Passive: +$3.8T                      1,043                                                              79%
                  2,000               Active: -$257B                                                                                             Infrastructure
                                                                                                                                                 & Real Estate
(USD Billions)

                                                                                                                           Private Equity           $1,221 B
                                880                        812          1,263                                                                         30%
                                             907                                                                              $2,006 B
                  1,000                                                                                                         49%
                                647                        927                         433                                                        Private Debt
                                             640                         679                                                                         $467 B
                                190                                                    282                                                            12%
                       0                                                              -145
                                             -432          -549
                                                                                                            Hedge Funds                                           Liquid Alts
                                                                                                               $58 B                                                $323 B
                 -1,000                                                                                         1%                                                    8%
                               2014          2015          2016         2017          1H18

                   • Global flow data shows that investors have moved into                            • Flows have not just been directed to alternatives as a
                     illiquid funds and private markets in their search for yield                       whole, but into the two most illiquid portions of the
                     and diversification                                                                alternatives space

                   • While flows into passively traded funds from 2014 to H1                          • Private equity inflows totaled $2.0 trillion between 2014
                     2018 totaled $3.8 trillion, alternative fund flows were +8%                        and H1 2018 (49%) and real estate and infrastructure
                     larger at $4.1 trillion in the corresponding period. These                         accounted for $1.2 trillion (30%)
                     figures compare to a net outflow of -$257 billion from
                     actively managed funds
                 Source left hand chart: Citi Business Advisory Services based on proprietary data subscriptions to Morningstar, eVestment, Simfund, HFR, and Preqin.
15 Right hand chart: Citi Business Advisory Services based on proprietary data subscriptions to Simfund, Preqin and HFR..
Demographic Challenges for Industry
Accelerating Baby Boomer retirements are shifting the industry to one where individuals will be
left to manage more of their own money, resulting in less robust and diverse portfolios
                   Assets Managed for Institutions Less                                                                     2017 Portfolio Allocation
                   Assets Managed for Individuals (US)                                                              U.S. Corporate & Public DB Plans vs. IRAs
     $7    $6.6T                                                                                    100%
                                                  Baby Boomer Retirements
                                                                                                                    16.9%
     $6                                                                                                                                 22.2%
                                                     $5.3T
     $5                                                                                                                                                                      Individuals limited
                                                                                                                                                                              to equity & bonds

     $4                                                                                              50%                                                      97%
                                                                                                                                                                              Cash
                                                                                                                    80.1%
                                                                                                                                        74.2%
     $3
                                                                                                                                                                              Alternatives
                                                                                   $2.1T
     $2
                                                                                                                                                                              Equities & Bonds

     $1                                                                                                  0%
            2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017                                                 Corp DB            Public DB               IRAs

     •     The bulk of professionally managed U.S. assets are                                        •        Institutional investors have shifted a significant share of
           invested on behalf of institutions that can use their                                              their portfolio into alternative investments
           more sophisticated status to access a wider array of                                      •        These alternative investments offer both an illiquidity
           illiquid and sophisticated investment options                                                      premium and the potential to access cash flows
     •     With Baby Boomers retiring and pulling their money                                                 uncorrelated to listed companies
           out of defined benefit and defined contribution plans,                                    •        Individuals are limited to such public companies in their
           there is a shift underway—by the early 2020s, more                                                 investment options and most are over-exposed to only
           of the industry’s assets are going to be managed on                                                one real asset—their home
           behalf of individuals, not institutions
     Sources: Left hand chart: Citi Business Advisory Services analysis based on proprietary data subscription to Cerrulli Associates. Right hand chart: Citi Business Advisory Services analysis
     based on proprietary data subscription to Cerulli Associates and on Willis Towers Watson Global Pension Assets Study 2017, https://www.willistowerswatson.com/en/insights/2017/01/global-
16
     pensions-asset-study-2017, proprietary subscriptions to Hedge Fund Research (HFR), Morningstar, eVestment, SimFund, and Preqin, http://investments.yale.edu/about-the-yio/
Agenda

 Improved Factor Understanding Drives New Thinking About Portfolio Construction

 Investors Demonstrate a Significant Shift to Passive Over Actively Managed Funds

 Actively Managed Funds Re-Align to High Conviction, Thematic & Alternatives

 Emerging Technologies Offer Potential to Democratize Access to Real Assets

17
Understanding the Architecture Underlying Digital Assets
Early digital assets such as Bit Coin have been greeted with widespread skepticism by many but
the architecture underlying such assets may help democratize access to alternative investments

                              Digital Assets & their Underlying Architecture
                                                                               •   New digital assets have garnered many headlines and
                                                                                   resulted in highly volatile and unregulated parallel capital
     New Products

                                                                                   markets activity
                                                                               •   Regulators are looking into establishing rules for these
                                      Cryptocurrencies      Coin Offerings         markets, but their future is uncertain
                                                                               •   The architecture that these products are built upon,
                                                                                   however, can be levered to create registered investment
                                                                                   products that may democratize access to alternatives

                                                                               •   Big Data & AI Analytics: New technologies developed
                                                                                   by Google allow for the processing of huge, unstructured
                                            Big Data & AI Analytics                data sets and the application of “smart” toolkits such as
                                                                                   machine learning and natural language processing
       Product Architecture

                                                                               •   Smart Contracts: New digital contracts code in the
                                                                                   terms of execution, link such terms to specific data-driven
                                                                                   triggers that can be monitored using Big Data & AI
                                                Smart Contracts                    analytics and allow for the self-execution of those terms
                                                                                   when a trigger is activated

                                                                               •   Distributed Ledgers: Distributed ledgers record
                                                                                   transactions but have 3 advantages over traditional
                                                                                   ledgers: 1) all interested parties can simultaneously see
                                       Blockchain / Distributed Ledgers            transactions; 2) each transaction is secured by two
                                                                                   independently verified crypto-keys; 3) the entire history of
                                                                                   each transaction is contained in each entry
       Source: Citi Business Advisory Services

18
New Shared Ownership Models for Access to Real Assets
 Tokenization might enable today’s models around crowd-investing and unitization for ownership of
 real assets to extend to a more democratized set of investors with smaller liquidity thresholds

               Carve Out Minority                       Divide Minority                     Access Natural
                Share of a Real                       Share of Asset Up                   Level of Demand by
                     Asset                           into Individual Units                Fractionalizing Unit

     • Co-investing in real assets              • Unitizing assets entails           • Tokenizing each investable unit
       features a majority asset owner            breaking up the shared               allows demand be adjusted down
       “sharing” their ownership                  investable pool into a pre-          to fractional bits that can meet
       stake with either an outside               determined number of fixed           trading interest from both large
       entity or the crowd                        pieces                               and small investors
                                                                                                         FRACTIONAL UNITS
                                                                                    TOKENS OF
                                                                                    REAL ASSET
                                                                                    OWNERSHIP

                                 MINORITY       MINORITY          UNITS OF
                                 SHARE OF       SHARE OF         REAL ASSET          IDENTICAL
                                REAL ASSET     REAL ASSET        OWNERSHIP             SMART
       MAJORTY                                                                      CONTRACTS
       SHARE OF                                                                     DESCRIBING
      REAL ASSET                                                                                     BLOCKCHAIN LEDGER
                                                                                    OWNERSHIP
                                                                                       RIGHTS
                             SEPARATE                                                                  ABILITY TO REASSEMBLE
                             CONTRACT                                                                  FRACTIONAL UNITS BACK
                            DESCRIBING                      SEPARATE STANDARDIZED                        TO ORIGINAL WHOLE
                             MINORITY                       CONTRACTS DESCRIBING
                          OWNERSHIP RIGHTS                  UNIT OWNERSHIP RIGHTS

     Source: Citi Business Advisory Services
19
Opportunity for Financial Instrument Innovation
 Survey participants in our Industry Revolution report envision new real asset models and the
 blueprint underlying cryptocurrencies to create a new investment instrument--Ownits

                                                        New Solution:

         •     Expand the “shared ownership” model to a broad set of
               real assets

         •     Make this approach affordable by dividing these assets up
               into units
                                                                                 New Liquid
         •     Create a new registered digital token using smart
               contracts that define the rights of the unit owners and embed   Ownership Units
               the contracts into the blockchain                                  (Ownits)
         •     Facilitate fractionalization and secondary liquidity

         •     Leverage existing primary and secondary market
               transmission mechanisms

     Source: Citi Business Advisory Services

20
Ownits as New Investment Vehicles
 Ownits would create the ability to have a listed ownership unit that offers the owner both financial
 and non-financial rights to the underlying asset as well as a set of utilization rights

                              Model of an Ownit

                                                  Ownits may offer a series of financial and non-
                                                  financial rights in the underlying asset:
                                                  •   Financial Rights: Total return investment,
                                                      including both cash flow participation and
                                                      long-term appreciation of the underlying
                                                      asset

                                                  •   Ownership Rights: The Ownit owner can list
                                                      Ownits on their financial statement, pass the
                                                      Ownit on to their heirs or choose to transfer
                                                      ownership to another holder

                                                  •   Utilization Rights: Ownit holders could partake
                                                      in the utilization of their asset via incentives
                                                      such as discounted rates and preferential
                                                      consideration for use or access

     Source: Citi Business Advisory Services

21
Ownits Might Be Used to Solve Many Investor Problems
 Both institutional and individual investors may find benefits through the use of real asset tokens
 that could both democratize access to new types of investments and support more localization

                                       Use Cases to Highlight Potential of New Investment Template

                                                           Pension Plan Supplements               Individual Business Owner
              Institutional Investor
                                                             Liability Shortfall via                   Finances Capital
              Frees Up Liquidity in
                                                                 Extension of                       Improvements Through
           Existing Real Asset Holding
                                                               Utilization Rights                  Shared Ownership Model

 • Problem: Institutional investor                    • Problem: Pension does not have         • Problem: Individual owner
   currently owns a real asset such as a                sufficient assets to meet their full     needs capital to expand or
   shopping mall but they need some                     liability to members                     improve their business but does
   liquidity and do not wish to sell their                                                       not want to take on additional
   entire stake and/or other investors are            • Solution: Pension might invest in        debt or partners
   against any overall asset sale                       an asset that individuals could
                                                        utilize such as a housing              • Solution: Individual could allow
 • Solution: Investor might carve out a                 community and offer members              local institutions or a pool of
   minority share of their investment and               “credits” via tokens to use the          individuals to take on a minority
   sell the right to participate in their               asset/ live in the community to          ownership in their business via a
   investment to the crowd via a                        offset owed liabilities                  tokenized offering
   tokenized offering
                                                      • Benefit: Long-term asset that          • Benefit: Incoming cash for the
 • Benefit: Incoming cash for the                       should generate income and               individual business owner and an
   institution and an ability for individuals           appreciate for pension fund and          incentivized pool of local owners
   to both own a portion of the property                utilization benefit for retired          to support their business and
   and participate in its revenue-                      pension member to offset any             exposure to a new asset and
   generation and appreciation                          benefit shortfall                        potential cash flow for investors
     Source: Citi Business Advisory Services

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