MEGATRENDSRESHAPINGSERVICES
The investment implicationsof technological disruption

WINTER 2021
For professional investors only.
All investments involve risk,
including possible loss of capital.
PGIM | RESHAPING SERVICES I

About PGIM
PGIM, the investment management business of Prudential Financial, Inc. (PFI), has a history that dates back over
145 years and through more than 30 market cycles.* Built on a foundation of strength, stability and disciplined
risk management, PGIM's more than 1,300 investment professionals are located in key financial centers aroundthe world. Our firm is comprised of seven autonomous asset management businesses, each specializing in aparticular asset class with a focused investment approach. This gives our clients diversified solutions from a
top-10 asset manager,** with global depth and scale across public and private asset classes, including fixed income,equities, real estate, and alternatives. For more information, visit www.pgim.com.

* “30 market cycles” represents PFI’s asset management expertise through PGIM, its affiliates and its predecessors.
** PGIM is the investment management business of Prudential Financial, Inc. (PFI); PFI is the 10th largest investment manager (out of 477 firms surveyed)in terms of global assets under management based on Pensions & Investments’ Top Money Managers list published on May 31, 2021. This ranking
represents global assets under management by PFI as of December 30, 2020.

II RESHAPING SERVICES | PGIMFOREWORD
Over the past century, the global economy has transitioned from being dominated by agriculture andmanufacturing to being powered primarily by services. Services now represent three-quarters of the workforce indeveloped markets and two-thirds of global GDP.1
Since World War II, services have been transformed by shifting consumer and corporate preferences, technologicalchange, and globalization. But after a 20-year period of relative stability, services are now once again at the cusp ofa major disruption.
Advances in technologies such as cloud computing, artificial intelligence and machine learning are radicallyreshaping winners and losers across the service sector in both developed and emerging markets – and at an evenfaster pace after the COVID-19 pandemic.
This technology transformation will allow new entrants to disrupt key components of the services value chain. At
the same time – and to a greater extent than in manufacturing and retail – a select group of technology-forward
incumbents will benefit from some unique features of the services sector (such as client acquisition costs andregulatory complexity) to survive, and even thrive, during the process of creative destruction ahead of us.
To understand the investment implications of this next revolution in services, we have drawn on the insights
of more than 70 investment professionals across PGIM’s fixed income, equity, real estate, private credit, andalternatives managers – as well as leading academics, technologists, industry analysts and venture investors. We
focus our investment lens on the three sectors that represent the vast majority of the services sector and 35% of the
MSCI ACWI: financial services, healthcare, and transportation and logistics.2 Our analysis reveals the hidden risks
and emerging investment opportunities in services across public and private asset classes in both developed andemerging markets.
At PGIM, we believe investors who fully recognize the multiple pathways through which technology istransforming the global services sector will be best positioned to navigate the rapidly shifting investment landscape.

David Hunt

Taimur Hyat

President and Chief Executive Officer
PGIM

Chief Operating Officer
PGIM

PGIM | RESHAPING SERVICES 1

CONTENTS

CHAPTER 1
A CENTURY OF
SERVICES
Page 3

CHAPTER 3
CHAPTER 2
FINANCIALSERVICES
The Future Is
Weightless
Page 9HEALTHCAREA New Era of
Virtualization and
Personalization
Page 17

CHAPTER 4
TRANSPORTATION& LOGISTICS
The Future Will Be
Greener and More
AutonomousPage 25

2 RESHAPING SERVICES | PGIM

CHAPTER 5
PORTFOLIOIMPLICATIONSPage 33

CHAPTER 1

A CENTURY OF SERVICES

While in many ways the service
sector is simply catching up to
the manufacturing sector, thisnext wave of innovation will be
disruptive in different ways.”

CHAPTERS

1

2

3

4

5
PGIM | RESHAPING SERVICES 3

CHAPTER 1

A CENTURY OF SERVICES
One hundred and fifty years ago, more than two-thirds of the American and British workforce was employedin agriculture, mining, and manufacturing; that share has now fallen to approximately 20% in each country(Exhibit 1).3 A similar transition has been happening over the last 50 years in middle-income emerging markets.4
For example, agriculture and manufacturing represented 88% of the Chinese workforce in 1978; by 2020 thatshare had fallen to 52%.5
Where have all these agricultural and industrial jobs
transitioned? The short answer is to services. The
service sector now represents 75% of the workforce
in developed markets, almost 50% of the workforce
in advanced emerging markets, and 30% of theworkforce in less developed emerging markets.6

power – have taken over tasks in agriculture,
manufacturing and mining that humans would havepreviously done.7
2. Rising consumer affluence following WWII led toincreased demand for healthcare, financial services,
leisure, travel, and other entertainment services(Exhibit 2). This shift in consumption towards
services is also evident in emerging markets – theshare of household expenditure dedicated to services
has doubled in South Africa and increased fivefold
in India since 1950.8

Key Drivers of the Global Shiftto Services
The transition to a services-driven global economy has
been powered by a complex web of factors, but five areparticularly worth highlighting:

3. The innovations in technology and rising affluence
noted above spurred rising demand for high-school
and college education. This, in turn, created aliterate and numerate services-oriented workforce
that could manage complex organizations, trade

1. Successive waves of technologies – tractors, massproduced automobiles, earth-moving equipment,
power tools, assembly lines, computer processing

Exhibit 1: Service jobs are growing as a share of total employment
United States

United Kingdom

100%

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%
1850

1900

1950

2000

Services

2015

0%
1850

Industry

1900

1950

2000

2015

Agriculture

Source: McKinsey Global Institute analysis; IPUMS USA 2017; US Bureau of Labor Statistics; Groningen Growth and Development Centre 10-Sector Database; Moody’s; IMPLAN;
US Bureau of Labor Statistics; FRED; Bank of England.
4 RESHAPING SERVICES | PGIM

Exhibit 2: The Service Economy Grows as Countries Become Wealthier (1965-2020)
FranceKorea
40,00050,00045,00035,0002020
GDP per Capita (current USD)

GDP per Capita (current USD)

40,00035,00030,00025,00020,00015,0002020

30,00025,00020,00015,00010,00010,000
50,00

5,000

1961

1961
0

0
45

50

55
60
65
Services as a Share of GDP

70

75

25

30

45
50
35
40
Services as a Share of GDP

55

60

Source: PGIM analysis, World Bank.

an increasing array of products and services, offer
financing and insurance, provide healthcare andadminister government services.9
4. Advancements in global supply chains, booming
trade, and the rise of multinational corporations
led to a surge in globalization with agriculturaland manufacturing jobs increasingly moving toemerging markets with comparative advantages inlabor cost or agricultural productivity. This further
spurred the transition to the service sector indeveloped markets.
5. More recently, there has been a growing“servicification” of the manufacturing sector, withmany traditional manufacturing firms housing a
growing number of service-related jobs. This isdue in part to the growth of in-house managementof logistics, supply chains and marketing.10 The
share of employees working in service-related jobs
within traditional manufacturing firms has grownfrom about 25% in 1998 to over 35% today in the
US (Exhibit 3).11 IBM is a prominent example ofthis trend: Originally a leading manufacturer of
mainframe and other computer hardware, IBM now
offers custom technology solutions for businesses andgovernments that integrate services and hardware.12
The rising share of the global workforce in services has,in turn, made it the dominant component of global

GDP and a critical driver of global growth. The service
sector now represents more than 70% of the GDP ofhigh-income countries and 55% of low- and middleincome countries. For example, the share of services in
the UK’s GDP has risen from 48% to 80% over thelast 100 years.13 Similarly, services account for nearly
half of India’s GDP today, compared to 37% in 1990.14

Exhibit 3: Embedded service jobs within manufacturingfirms are growing(% of service jobs within manufacturing firms)
40%
38%
36%
34%
32%
30%
28%
26%
24%
22%
20%
1998

2000

2002

2004

2006

2008

2010

2012

2014

2015

Source: Mercedes Delgado, Daniel Kim, and Karen Mills, 2021. “The Servicificationof the US Economy: The Role of Startups versus Incumbent Firms,” in Aaron
Chatterji, Josh Lerner, Scott Stern, and Michael J. Andrews (eds.), The Role ofInnovation and Entrepreneurship in Economic Growth. University Chicago Press,
forthcoming (available as NBER Working Paper).

PGIM | RESHAPING SERVICES 5

The Next Revolution in Services
Technological change has always played a keyrole in shaping the service sector (Table 1). The
first major wave of change – the mechanizationof agriculture and industry – didn’t directly
impact service-sector productivity but did lead toan influx of labor to services from other sectorsof the economy. In contrast, the second major
technological shift – the computerization anddigitization of the global economy – had major
implications for services. From the 1980s onwards,
automation and growing computing power meantthat routine, codifiable tasks in the service sector– such as bookkeeping, retail transactions, clericalwork, and administrative jobs – were displacedby simple computer software and performed bydesktop personal computers.

A third phase of technological change is now
coming to services – and its impact will be
profound. As advances in cloud computing,artificial intelligence (AI), machine learning (ML)and big data analytics enter the mainstream,
an array of companies in the service sector
are deploying these new technologies andtransforming (Table 2). Collectively, these
disruptive technologies are radically reshaping theway many service sector companies operate.
While in many ways the service sector is simply
catching up to the manufacturing sector, we
believe this next wave of innovation in services will
have a quite different trajectory and outcome thanin the manufacturing and retail sectors, creating
new challenges and opportunities for institutional
investors, who typically invest more than one-thirdof their public and private portfolio in services.15

Table 1: Three phases of technology evolution
Phase 1
MachineExamples ofkey enabling
technologies

Examples of key
innovations

Impact¡¡Gasoline- and electric-powered
motorsAutomation of agriculture,
construction and industry (e.g.,
tractors, cranes and bulldozers)

Phase 2ComputerPhase 3Cloud+¡

Personal computers andmainframes¡

Cloud-based computing andnetworks¡

Physical network of computers¡¡

Limited high-speed internet(mostly commercial)

Artificial intelligence andmachine learning¡

Distributed ledgers andblockchain¡

Widely available broadband and5G networks¡

Analysis of big data (e.g.,algorithms to optimize global
supply chains)¡

Edge computing done on mobile
devices¡

Automation of complex tasks that
requires human judgment (e.g.,autonomous driving and visual
recognition software)¡

Automation of administrative andbusiness support services (e.g.,
Excel spreadsheets, shared drives
for digital files)

Agriculture

High

Low

MediumIndustry

High

High

MediumServices

Low

Medium

High

Source: PGIM analysis, Erik Brynjolfsson and Andrew McAfee, “The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies,” 2016.

6 RESHAPING SERVICES | PGIM

Table 2: Select Technologies Driving Disruption in Services
What Is It?
Big Data /Prop Data¡¡

Artificial
Intelligence/
Machine Learning

Cloud Computing

Big data contains greater variety¡(e.g., structured and unstructured)and comes in greater volume and¡frequency than more traditional data¡
Proprietary data is data that iscreated and owned by an individual
entity¡Analysis of big data and proprietarydata is enabled by advanced dataprocessing capabilities¡

Artificial intelligence is the process
by which computers simulate
human processes and tasks using
algorithms

¡

¡

¡

Potential Use Cases

Machine learning is a form ofartificial intelligence wherealgorithms are built to process new
data and “learn” new tasks without
additional human intervention
Cloud computing is the deliveryof computing services – including
servers, storage, software, analytics
and intelligence – over the internet
Offers greater computer processing
capacity, economies of scale andflexible resources¡

Underwriting insurance risk withminimal human involvement¡

Data security concerns¡

Data privacy regulations

Price optimization via comparisons¡Operational efficiency of internal
processes (e.g., loan processing bylenders)

Data silos that limit usefulness
across systems¡

Correlations without a theory ofunderlying causal relationships¡

Data security concerns¡

Data privacy regulations¡

Spurious correlations oroverfitting of data¡

Bias in AI (e.g., race or gender)¡

Compliance issues around storing
sensitive personal data¡
Storing and analyzing customer data
in a structured and unstructured¡
formatIntegrating cloud-based systems
with legacy and proprietary

Prioritization of large volumes ofdata or images (e.g., MRIs, job
applications)¡

Detection of fraud or unusual
activities in financial accounts¡

Optimization of network routes forlogistics planning¡

Enabling millions to access online
video content stored online via
platforms¡¡

Disruptive technologies are radicallyreshaping the way many service
sector companies operate.

We’ll Get There When We Get There:
Tech Inertia in Services
While it is always difficult to predict the timing
and pace of technological change, our base caseis that disruption in the service sector will be an
evolution rather than a revolution. The breathlessmedia accounts around today’s cutting-edge

Challenges and Hurdles

Efficient rollout of new platforms
and data-centered services can bedone very quickly and at low cost¡

Operational risks around relying onthird-party vendors for essential
services
Security on the cloud, especially forenterprise use cases

technologies like blockchain, AI, autonomousvehicles and drones typically exceed the near-term
opportunity set in services. Entrenched interests,
sticky client bases, slow adoption and legacy
processes can often delay the pace of real-worldchange and the return potential for investors.
In the 1990s, for example, the internet consisted
primarily of email accounts and search engines. It
took a decade or more of developing infrastructure(e.g., faster and wireless internet, standard
protocols such as HTTPS, internet access inemerging markets) to unleash its full potential
across the global economy. In many ways, today’sinnovative technologies are in a similar place,driven by four key factors.
PGIM | RESHAPING SERVICES 7

First, the technologies themselves are still
evolving. The infrastructure around distributed
ledgers, for example, is in its infancy; standardized
protocols are in flux and the mining ecosystem isstill being configured. Considerable advances inbasic operational metrics (i.e., transaction speeds
and energy usage) will need to occur before
blockchain can be a serious threat to existing
financial powerhouses.

These new technologies present
immense legal and regulatory
challenges that need to be resolved.
Second, these new technologies present immense
legal and regulatory challenges that need to beresolved. For example, accessing big data can bethorny due to personal data privacy and security.
Machine learning and AI algorithms raise serious
concerns around bias and causal explanatory
power. The regulatory environment around publicblockchains is also quite murky.
Third, many services continue to suffer from “techinertia,” particularly those with strong regulatory
oversight such as financial services and healthcare.
Regulators are cautious about the risks of newtechnologies and often require time to develop
the in-house expertise to evaluate and approve
new technologies.
Fourth, historical path dependency slows down
the pace of disruption in services, especially insectors with a vast existing infrastructure alreadyin place such as transportation and logistics. For
example, there is enough global infrastructure inplace today to provide gasoline to every corner ofthe world to fuel internal combustion engines. The
global network of oil wells, pipelines, refineries,
oil tankers and other delivery vehicles will not be
replaced easily, meaning electric vehicles will havean uphill climb.
In summary, the next wave of technologicalchange has arrived at the shores of the service
sector and will likely revolutionize many services.
8 RESHAPING SERVICES | PGIM

But investors will need to be vigilant in separating
hype from reality, with many of the most
attractive near-term opportunities focused on theapplication of new technologies to solve specific,
tangible problems today.

Scope and Structure of This Report
To understand how the next wave of technology
will transform the service sector, this reportfocuses on tech-driven disruption in three of thelargest components of the service sector: financial
services, healthcare, and transportation andlogistics. Together, these three industries accountfor a quarter or more of most countries’ GDP and
35% of global equity market cap.16
Importantly, the story of tech adoption in each ofthese industries is often complex and defies simple
characterization. Some areas of financial services
like mobile payment platforms have forgedahead with digitization, while others remain
bogged down by cumbersome mainframes andlegacy systems. Likewise, innovation in medical
therapeutics (gene editing) and pharmaceuticals(mRNA vaccines) is apparent, but the delivery
and administration of healthcare services in many
countries often feels archaic. Lastly, while logistics
firms like DHL, Amazon and UPS are leaders
in robotics and automation, freight hauling haslargely lagged.17 Indeed, the specific dynamics of
disruption are unique to each sector as well.

Across the next four chapters, this report
guides investors through this shifting
investment landscape in services. Using theframework above to understand the key
innovations driving disruption in services,
Chapters 2 through 4 outline the resulting
investment themes in the financial services,
healthcare, and transportation and logistics
sectors, respectively. Chapter 5 concludes bydiscussing the portfolio-wide implicationsof the reshaping of the service sector, withan agenda of potential actions for CIOs
to consider.

CHAPTER 2

FINANCIAL SERVICES

In many ways, traditional financial
services firms in developed markets
are ripe for disruption.”

CHAPTERS

1

2

3

4

5
PGIM | RESHAPING SERVICES 9

CHAPTER 2

FINANCIAL SERVICES: THE FUTURE IS WEIGHTLESS
In many ways, traditional financial services firms in developed markets – including banking, payments,
insurance, and wealth and asset management – are ripe for disruption. Many are buried under cumbersome
legacy technology platforms and often reliant on high-fee transactions conducted exclusively in brick-andmortar branches.
But will digital companies like Venmo, Alipay andPaytm be able to build brand recognition and tap
into a global affluent clientele? Or will incumbents
acquire existing fintech firms and their technology
to modernize their businesses, or at least build giantmoats around them? Or instead, will disruptors infinancial services expand the accessible market for
financial offerings, reaching customer segmentsthat were previously underserved by banks andinsurance companies?
We believe five technology trends across the key businesslines in financial services will be particularly relevant:
¡
¡
¡
¡
¡

The rise of neobanks and fintech platforms
AI and big data drive smart underwriting
Unexpected winners of robo-advising
The power of the private blockchain
The transformative power of tokenization

The Future State of Financial Services
The rise of neobanks and fintech platforms
There are two interrelated trends that are reshapingbanking and payments: the rise of neobanks andfintech payment platforms. The last few years haveseen a global boom in neobanks – banks with nobranches that only exist in the cloud and online.
Neobanks like Nubank in Brazil, N26 in Europe, andChime in the US have several distinct advantages overtraditional banks.
First, they are held to a different set of regulatory
standards. Traditional banks are subject to more

10 RESHAPING SERVICES | PGIM

stringent capital and liquidity requirements and facetighter limits on interchange fees – the transaction
fees they can charge merchants.18 Neobanks have beenable to take advantage of this regulatory asymmetry.
Second, neobanks are almost completely “weightless”
and don’t have the physical overhead – namely, legacy
mainframe systems and brick-and-mortar branches –of traditional banks.19 With no mainframes, branches
or paper statements, their cost of customer acquisitionand distribution is considerably lower. With much
lower overhead and regulation, neobanks are
expanding the consumer banking market and reaching
previously disengaged and underbanked populations
in ways not economically feasible for traditional banks.
Third, neobanks are digitally savvy and often partnerwith other online platforms to embed their products
right where the need for that financial solution arises– such as offering a credit card when customers makean online reservation at a hotel or overdraft protection
when their balance drops precariously low. This kindof embedded finance is a key aspect of the fintech
business model.
Point of sale (POS) payment platforms like Lightspeed
and Square are essential for small businesses. These
payment platforms may not have the same volumeof transactions as traditional players, but they arehighly disruptive. Digital payment platforms like
Adyen process, validate and make payments for large
enterprises like Nike and Netflix and are displacing
commercial banks. By diverting a range of retailtransactions away from banks and payment systems
like Mastercard and Visa, these fintech platforms haveclearly disrupted payments. With a growing number

of businesses making payments to their suppliers
through these platforms, they have essentially createdan expanding payment ecosystem that is independentof traditional incumbents.
These payment platforms are also increasingly
embedding credit to service small businesses more
effectively. They are leveraging their unique visibility
into daily cash flow and inventory churn and are
beginning to extend financing to small businesses forinventory and supply chain management either on
their own or through their partners. In doing so, they
can generate additional revenue streams from theircurrent commercial clients.
This kind of small-scale credit has not been attractive
to traditional banks, creating a significant financing
gap for small businesses in the US (Exhibit 4).
Through their use of embedded credit, fintechs havethe potential to partially fill this financing gap.
But what about incumbent banks? Some are rapidly
falling behind, while others are adapting to newtechnology and enhancing their efficiency andcustomer acquisition. Zelle is a digital payment
app owned by a group of US banks that allows free
payments between their accounts. Also, HSBC hasleveraged cloud-native AI with Temenos and boosted
its credit card customer acquisition rate.

Insurance: AI and big data drive smart
underwriting
Technology has powered a range of innovationsin insurance as well. Perhaps the most striking is
the ability of tech-forward insurers to harness the
combined power of big (and often proprietary)data and AI to reinvent underwriting and claims
management for the cloud era. This kind of datacentered service reduces the cost of underwriting newcustomers and managing claims and is a key element
to achieving scale and profitability in an increasingly
commoditized business.
Auto insurers like Root, for instance, are using
telematics apps on drivers’ mobile phones to record
driving habits, offer discounts and adjudicate claims.
Similarly, leading life insurers are now leveraging AI
to underwrite policies, helping them achieve better
operational efficiency. The results of a questionnaire– as well as widely available information (such as

Exhibit 4: Most small businesses in the US face ashortfall in financing(% of small firms requesting financing, 2016-2020 average)

22%
45%

33%

All of their Requested Financing
Some of their Requested Financing
None of their Requested Financing
Source: Small Business Credit Survey: 2021 Report on Employer Firms, US Federal
Reserve Banks, 2021.

driving records) – are used as an input into an AIpowered algorithm that determines underwriting andpricing. The algorithm leverages big data – namely, theproprietary database of millions of prior applicants –to come up with timely evaluations for underwriting
and pricing that are supported by actual data. Thiseliminates the need for costly and cumbersome blood
tests or medical exams in some cases and drives thecost of underwriting simple, small-scale policies lower.
The next evolution in life insurance is likely theincreased use of data from wearables (e.g., Apple Watch,
Fitbit, Garmin, Oura). By incorporating the steadystream of data from these devices, life insurers can movefrom static underwriting to a more iterative process
where risk is constantly being re-evaluated. For example,
customers with demonstrated and consistent healthy
behaviors can be offered a rebate on their premiums.
Leading property and casualty (P&C) insurers arealso employing cloud-enabled AI and big data toenhance their climate modeling and risk evaluation.
With the likelihood of tipping points around climate
PGIM | RESHAPING SERVICES 11

change, models need to be more predictive, rather thanhistorically probabilistic – and these new technologies
have allowed insurers to better predict the frequency of
extreme weather events.
In addition to transforming underwriting and risk
management, these technologies are reshaping claims
management, both lowering the cost of claims andincreasing the ease of use for customers. For example,
Lemonade can settle an auto claim in seconds based on
photographs from a cell phone rather than the costly,
time-consuming process of sending insurance adjustors
into the field. Going forward, the combination of“high tech and high touch” is likely to be a winning
formula in life insurance. An omnichannel approachallows customers seeking claims to speak to a humanwhile simplifying many of the documentation andvalidation steps along the way through automation.
P&C insurers are also applying cloud-based technology
to their proprietary big data. Large firms like Chubb
are using AI to glean relevant insight from their vast setof historical underwriting and claims data. They thenuse this insight to become smarter in setting terms andconditions of coverage and in managing claims when
they do occur.

Wealth management: Unexpected winners fromrobo-advising
Conventional wisdom continues to hail robo-advisors
as a revolution transforming wealth management theway ETFs transformed traditional asset management.
In reality, robo-advisors don’t incorporate true AI,
machine learning or sophisticated asset allocation,
instead relying on fairly standard asset allocation,
streamlined rebalancing and excellent front-end digitalinterfaces. But without a solid source of customer
acquisition, they have failed to threaten traditional
wealth managers, let alone drive them into extinction.
Potential disruptors in the space – like Betterment,
Personal Capital, FutureAdvisor and Wealthfront –could not effectively leverage their early advantage.
While they offered customers attractive digitalinterfaces, they lacked access to distribution networks
and found it hard to scale up to a profitable business.
Instead, incumbent wealth management firms either
acquired (e.g., BlackRock acquired FutureAdvisor,
Empower acquired Personal Capital and JPMorgan
12 RESHAPING SERVICES | PGIM

acquired Nutmeg) or built (e.g., Vanguard, Schwab)
their own robo-advisors, targeting mass affluent
customers, who couldn’t be profitably served by theirtraditional wealth management arms, and younger
customers, who are more accustomed to digital-firstinteractions. As a result, instead of being disrupted
by robo-advising, wealth managers have successfully
integrated the technological enhancements offeredby challenger robo-advisor startups into theirown businesses. Successful incumbents have usedtechnology to streamline operations like portfolio
construction and rebalancing, and create better digitalinterfaces for customers. Indeed, what began withthe potential of a tumultuous revolution in wealthmanagement fizzled out as tech-savvy incumbents
captured all the innovative elements of the roboadvisor offering.

Embedded credit in the fintech
ecosystem offers another compellinginvestment opportunity
The power of the private blockchain
At its very core, blockchain is a system for recordingtransactions in a database that collects informationin groups, also known as “blocks.” Once a block isfilled according to a predefined storage capacity, it isadded onto the previous block, creating a chain of data
known as a “blockchain.” Importantly, a blockchain
can be categorized by whether it is open to the public
or if it is only open to permissioned users (Table 3).
The best-known blockchain versions – those used
for crypto-assets like Bitcoin and Ethereum – tend
to be public. This type of blockchain was originallyenvisioned to eliminate intermediaries and remove
the need for trust within transactions. While thisarchitecture has created a range of investable assets, it
has also led to concerns around anti-money laundering(AML) and environmental, social and governance(ESG) issues. These concerns, along with the uncertain
regulatory environment around public blockchains,
and the difficulty in scaling some of them, limit their
attractiveness for institutional users.

Table 3: Public vs. private blockchain
Public Blockchain

Private Blockchain

Features¡¡

Open access to join, read and write
Participants remain anonymous¡¡

Only permissioned participants can join, read and write
Participants are easily identifiable

Scalability

¡

Low

¡

High

¡
¡

Public cryptocurrencies like Bitcoin and Ethereum
Decentralized Finance (DeFi) and Non-Fungible
Tokens (NFTs)¡

Use Case

Financial transactions between permissioned
corporations and banks

Most applications of blockchain by financial
institutions, however, are in the form of private (orpermissioned) blockchains. While these still require
central authorities or intermediaries to authenticate
users, they can reduce transaction complexity,
increase ease of authentication (e.g., property titles),enhance transparency and improve fraud controls forparticipating institutions. Private blockchains canalso reduce transaction costs, as they eliminate manyof the administrative expenses of record keeping andtransaction reconciliation. Private blockchains tend to
be more easily scalable and will likely have the largest
impact on firms and investors in the near term.20 For
example, JPMorgan is using private, permissioned
distributed ledger technology to facilitate near realtime money movement across the globe.*

The transformative power of tokenization
While it still faces significant hurdles today, thetokenization of financial assets has the potential totransform financial services, and is an area investors in
the financial services space will want to monitor closely.
In some ways analogous to securitization, tokenization
essentially creates an immutable digital representationof a real-world asset which can then be settled andcleared on a distributed ledger and traded in wholeor fractional parts. Tokenized financial and real assets
recorded on a blockchain would disrupt virtually all
aspects of investing – from back-office functions likeclearing and settlement, to how assets are custodied,accounted for and serviced, to even how they arebought and sold. However, this use of blockchain

remains at a nascent stage and some significant
challenges still need to be resolved.
First, the lack of clear regulatory, legal and tax
guidelines around tokenized assets leads to compliance
uncertainties. Second, while distributed ledger
technology is already being employed by banks
on a limited basis in their operations and in repo
transactions, it needs to be further refined to work
across other asset classes and at efficient scale underreal-world conditions. Lastly, market participants,
investors and regulators need to build trust in these
new systems and adapt their internal processes to them.
If all (or most) financial assets were digitized andaccounted for on distributed ledgers, it would
drastically reduce frictional costs from transacting andservicing them. Tokenization could also significantly
alter the landscape for private assets like infrastructure,real estate, and private equity. By digitizing theprivately held shares of their portfolio companies,
PE firms, for instance, could see a tremendous dropin transaction costs alongside a boost to liquidity
and price discovery. Tokenizing could open more
possibilities for fractional ownership of private andreal assets. This would have front-office implications
for portfolio construction and would widen the poolof potential investors by making these assets moreaccessible to smaller institutional investors.
Tokenization offers substantial benefits on theoperational side as well. A fully digitized financial
asset landscape would significantly reduce clearing andsettlement costs. It could also eliminate title searches*Distributed ledgers are digital systems for recording data and transactions across several locations or multiple parties to generate a single source of truth, eliminating theneed for reconciliation and validation. The terms blockchain and distributed ledger are often used interchangeably by investors, but it’s best to think of blockchain as one typeof distributed ledger.
PGIM | RESHAPING SERVICES 13

and valuation checks for real estate or mortgagetransactions. While fully tokenized financial markets
are a long way off, tokenization might even be able
to automate dividend payments to shareholders andinterest payments to bondholders and significantly
reduce the cost of custody and servicing of assets.

Investment Implications
Global equity opportunities in the expanding
fintech ecosystem
Neobanks present attractive opportunities for bothpublic and private equity investors around theworld. Their business model entails offering basic
banking services to underbanked populations or
those disengaged from traditional banks (for example,
Millennial or Gen Z workers) and then upsellingthem other services like debit cards, credit cards andoverdraft protection. By linking fees with services
customers have explicitly opted in to, neobanks areable to overcome consumers’ strong resistance to fees.
This model has gained traction in most parts of theworld: for example, Monzo and Starling in Europe,
WeBank in Asia and Dave in the US. As a young
customer base matures, it will have greater needfor higher margin services. Emerging markets like
India, Brazil and China tend to have larger unbanked
populations and growth potential for this kind of
business model.21
Looking forward, neobanks are beginning to evolvein one of two ways. Many are starting to take a highly
segmented approach for broadly underbanked ordisengaged communities. A neobank with a focus ona niche community or affinity group with common
needs can customize marketing and services anddeliver more efficient client acquisition – albeit in anarrow segment of the market. VC-funded neobanks
in the US provide some good examples: Daylight andSuperbia focus on the LGBTQ community, while
NewBank in New York and Fair in Texas aim for local
immigrant populations.
Alternatively, major retailers are beginning to explore
their own neobanking services, leveraging theirlarge customer base and distribution network to
rapidly scale. Walmart soon plans to launch Hazel
by Walmart, a fintech platform that offers customers
14 RESHAPING SERVICES | PGIM

everything from credit cards to portfolio analysis tovirtual currency transaction processing services.22
Of course, neobanks present some significant risks forinvestors as well. Some of the regulatory advantages
neobanks benefit from are due to their small size andare unlikely to be a permanent feature. Additionally,
regulators in some countries are treating neobankswith a light touch because they serve underbanked
populations and expand the market for financial
services. However, this gentler treatment is by nomeans assured going forward. Finally, given theirhighly targeted and segmented customer base, theirability to continue acquiring new customers and scale
up is limited.
Furthermore, with less regulatory oversight, it ispossible neobanks are prone to greater operationaland control risks. For example, UK authorities
recently initiated investigations into anti-money
laundering controls at Monzo, a prominent neobank.23
Furthermore, many neobanks are so new they have notexperienced a cyclical downturn and have, therefore,
not proven their staying power through a fulleconomic cycle.
The proliferation of cloud technology has also opened
other channels for financing that were previously
considered too small-scale to warrant interest fromincumbent commercial banks. These new pathways
create opportunities for venture capital investors. For
example, online platforms like Pipe.com, Capchase
and Clearco provide marketplaces for small businesses
to monetize recurring revenue streams or accountpayables. Once again, these cloud-based fintech
platforms target underbanked segments of theeconomy and expand the market for financial services.
Embedded credit in the fintech ecosystem offers
another compelling investment opportunity in VC
and PE. An example of this is the constellation of
global companies that offer online consumers interestfree financing as they are completing their purchase,
known as “pay-later” services. Firms like Afterpay inAustralia, Affirm in the US and Klarna in Sweden prearrange a discount or fee with online sellers and get
paid back for the full price by buyers in installments.
In many cases, they are even partnering with major
retailers to offer customers fully integrated pay-laterplans – including Affirm’s recent partnership with

Amazon. Installment payment schemes are quite
common in many parts of the world and appeal toyounger generations who may be wary of traditional
credit cards. For example, pay-later already accounts
for 23% of online transactions in Sweden and almost
20% in Germany.24 Essentially, the “fee” for this POS
financing is paid for by the seller. In this way, online
retailers can provide customer financing through anintermediary embedded in the online purchase process.

Insurance firms that integrate advanced data
analytics will succeed
With AI, big data and cloud computing enabling
life insurers to automate large segments of theunderwriting process, early movers will be able tocapture market share, build scale and have more
resilient businesses. Those property and casualty
insurers who embrace cloud technology in their risk
management and underwriting will be winners as well.
While sizable tech budgets are a common featureacross the insurance industry, debt and equity investors
should focus on a few key characteristics to determine
how effectively insurers deploy cloud technology. First,
access to a sizable pool of relevant data is a necessary
element for leveraging the cloud. The proprietarydatabases of the largest life insurers, for instance, givethem a head start in this respect. Second, having theright talent. A data science team that is experienced
and has a record of accomplishment in their area
is vital. Third, investors should assess the extent of
AI-enabled underwriting within the organizationand how well they do it. Examining the range of
insurance underwriting that is linked to cloud-enabledalgorithms as well as the throughput rate – that is,what percentage of their total new business is handled
this way – can be useful indicators for how well an
insurance firm leverages new technology.

Focus on targeted blockchain applications thatsolve specific problems today
Blockchain and distributed ledgers provide a rangeof early-stage opportunities for PE and VC investors.
While there is considerable hype around blockchain asa broad-ranging transformative force across financial
services, the ventures most likely to perform well

are those that apply this technology to solve specificproblems. A good example of this is Figure, which isstreamlining mortgage origination and securitization.
With more than $5 billion in mortgages underwritten,
securitized, and serviced on its distributed ledger
platform, there are efficiency and transparency
gains for all players in the mortgage origination andsecuritization process. Figure recently merged withmortgage originator Homebridge to scale its platform.25

For the most part, largecommercial banks are notcompeting with neobanks forthe same customer segments.

Incumbent banks leveraging new technology
will thrive and widen their moats
Despite the growth of neobanks and payment
platforms across the fintech ecosystem, “old-school”
incumbent banks will not be easily displaced.
Indeed, incumbent banks that leverage cutting-edge
technology to streamline their operations or build new
digital business lines may be especially attractive fordebt investors.
For the most part, large commercial banks are notcompeting with neobanks for the same customer
segments. Neobanks are making gains mostly among
underbanked and disengaged customers that large
incumbent banks are unable to profitably serve.
Furthermore, lending to less-than-prime consumers
and businesses comes with heavy capital charges forhighly regulated incumbent banks and scrutiny fromfair lending advocates. Consequently, in the US andEurope, large banks have mostly ceded this segmentof the market. In the US, for example, large consumerbanks like Citi, Bank of America and JPMorgan
dominate the steadier prime consumer and business
lending segments and are less likely to be directly
impacted by neobanks.
Within the traditional banking sector, debt investors
should focus on banks that invest most effectively intechnology to reduce costs and increase efficiency.

PGIM | RESHAPING SERVICES 15

Exhibit 5: Cash continues to dominate in most EMs, but this is evolving(Cash as a share of total payments volume)

Emerging Markets

Indonesia

96

India

89

BrazilDeveloped Markets

99

41

Japan

79

54

United States

51

28

United Kingdom

55

23
0

20

100

86

74

China

100

40
2010

60

80

100

120

2020(F)

Source: McKinsey & Company, “The 2020 McKinsey Global Payments Report,” October 2020.

Key metrics like software depreciation rates and thefrequency of tech write-downs are good ways to identify
those banks that leverage technology to modernize
operations effectively. In Europe, for example, BBVA
and Banco Santander integrate technology into theiroperations very effectively. Additionally, debt investors
should look for incumbent banks that are able to source
technology-driven distribution opportunities to accessnew customer bases. ING Bank’s partnership with small
business lender Kabbage is one example.

Next generation payment systems allow
tech-forward incumbents and select new
entrants to thrive
Though digital payments are growing in both number
and volume, incumbent payment systems still haveroom to grow. Visa and Mastercard are examples
of incumbents that are embracing technology andshifting their services to meet a more digital world.
Emerging markets are at a stage of their development
where they are evolving away from cash payments –which still account for roughly 90% of payments incountries such as India and Mexico – and adopting
other forms of payment (Exhibit 5). Mobile payment
platforms enable EM consumers to leapfrog the plastic
card phase of payment evolution and go from paper
payments directly to digital. The recent proliferation
16 RESHAPING SERVICES | PGIM

The proliferation of cloudtechnology has also opened otherchannels for financing that werepreviously considered too smallscale to warrant interest fromincumbent commercial banks.

of mobile payment platforms like AliPay, WePay andMercadoPago has dampened growth opportunities for
Mastercard and Visa in emerging markets, but there is
still room for them to grow.
In developed markets, Mastercard and Visa are
evolving right along with consumers who are ditchingplastic cards in favor of contactless payments frommobile devices. They are also leveraging blockchain
and tokenization themselves in business-to-businesspayments. For example, when a consumer books ahotel room through a travel website like Hotels.com,
Mastercard will issue a one-time token to the hotel,
which has all the instructions for digital payment fromthe website to the hotel when the consumer checks in.
This eliminates the need to share personal data acrossplatforms, significantly increasing customer data privacy.

CHAPTER 3

HEALTHCARE

Advances are being made tocater to a new generation oftech-savvy consumers who
no longer accept the archaic
medical systems of the past.”

CHAPTERS

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2

3

4

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PGIM | RESHAPING SERVICES 17

CHAPTER 3

HEALTHCARE: A NEW ERA OF VIRTUALIZATION
AND PERSONALIZATION
While cutting-edge innovations in therapeutics such as gene editing and mRNA vaccines are revolutionizing
medical treatments and pharmaceuticals, healthcare services – namely, the delivery and administration of care
– remains one of the sectors with the lowest degree of technology utilization.26 Yet, advances are being madeto cater to a new generation of tech-savvy consumers who no longer accept the archaic medical systems of thepast. This is leading to a major shift in how healthcare is delivered and administered globally. Three key themes
are emerging for the healthcare system of the future.

Future State of Healthcare
Virtualization
Increasingly, healthcare is being pushed out of
hospitals and into clinics and homes. While thistrend was certainly advanced by the lockdowns andoverloaded hospital systems during COVID-19,
underlying digital technologies have enabled it for
years before. The plethora of new telehealth platforms,
for instance, now give patients access to urgent care ormental health advice services from the comfort of theirhomes. At its peak in April 2020, telemedicine was
responsible for roughly 40% of all ambulatory visits inAustralia and the US – and 77% in Canada.27 While
this usage has come down off its peak, it is likely topermanently remain far above pre-pandemic levels.
These platforms are also being deployed to monitor
chronic conditions as well as provide physical therapy.
This trend towards lower-care settings has also beenenabled by remote, internet-enabled monitoring
devices, which give patients and their doctors
continuous access to health metrics and data.
These devices are now being used by more than 20
million patients in the US alone and have proven to
significantly reduce hospital re-admission rates andincrease patient satisfaction.28

18 RESHAPING SERVICES | PGIM

Personalization
Simple blood tests at an annual physical have been thebasis of healthcare for decades. Today, new wearables
and advances in genetic sequencing have led to thecreation of a much more personalized kind of medicalcare. New smartwatches, bracelets and rings track
heart rate, exercise levels and sleep patterns, providing
patients and doctors with a broader perspective on wellbeing. Furthermore, the advances in low-cost genetic
sequencing are empowering patients and doctors
to make more personalized decisions about theirhealthcare. Direct-to-consumer (DTC) genetic testing
kits from companies such as 23andMe, for example,
started as a way for people to track their ancestral roots.
Today they are becoming key inputs into healthcare
decisions. US authorities allow 23andMe to test for
genetic illnesses like Parkinson’s, Alzheimer’s, and celiac
disease.29 Armed with this type of genetic data, nearly
30% of consumers who undergo DTC genetic testing
share their reports with healthcare providers.30
Similarly, companies such as US-based Veritas Genetics
give consumers the ability to map their entire genome
on a smartphone app. The app then provides carerecommendations for people predisposed to certain
diseases.31 And with new gene therapies being used
to address chronic health risks such as cardiovascularExhibit 6: China’s pharmaceutical R&D spending is growing
25%

60
50

19%

21%
20%

17%

US$ bn

40

15%
12%

30
20

7%

8%

10
0

9%

15%

13%

10%
48

11

12

14

17

2015

2016

2017

2018

21

2019

R&D Spending (LHS)

25

2020

30

2021(F)

41

35

10%

5%

2022(F)

2023(F)

2024(F)0%% of Global R&D Spending (RHS)

Source: Jefferies, Frost & Sullivan.

disease, this form of personalized medicine is set to
revolutionize healthcare. Additionally, personalized
wellness programs like Vitality combine technology,
data and incentives to inspire healthy habits and otherpositive changes in individuals.

Segmentation
There is no real possibility of a winner-take-all, global
market for healthcare. Given the fragmented andinherently localized nature of the industry, it is simply
not feasible. This is driven in large part by the vastdifferences in how healthcare is regulated, delivered
and paid for from country to country.
Successful healthcare innovators are instead finding
relevant niches to disrupt. Increasingly, firms arefocusing on transforming a narrow segment of thehealthcare market, often with great success. They are
adept at creating individualized journeys for people.
For example, apps such as Selfapy or Bluecall are being
used to expand mental health services in Europe.
Meanwhile, specialized apps that target patients withchronic illnesses such as diabetes (e.g., Omada Healthin the US) and pulmonary diseases (e.g., COPD

Co-Pilot in Europe) have been clinically provento improve patient outcomes.32 Given the uniquechallenges patients face based on their geographic
location, individual lifestyle and health risks, the trend
towards increased segmentation and specialization
within healthcare is very likely to grow.

Increasingly, healthcare firms
are focusing on transforming anarrow segment of the market.

Investment Implications
Emerging markets offer new opportunities andrisks for biotech and pharmaceuticals
While the US is often considered the key market
for healthcare innovation, burgeoning markets suchas China and India offer excellent opportunities as

PGIM | RESHAPING SERVICES 19

well.33 China is a particularly intriguing market that
presents growth opportunities for equity investors. It
is the world’s second-largest healthcare market andremains one of the fastest-growing ones globally, withgrowth rates three times that of the US (Exhibit 6).34
With China’s aging population and accelerating rateof diagnosis, the government has instituted various
reforms to encourage innovation in the healthcare
sector. Notably, the Chinese government has recently
instituted a more formal reimbursement process
and started paying for more novel drug treatments,
creating commercial opportunities for both Chineseand foreign healthcare firms. In 2019, Chinese
pharmaceutical companies filed over 200 requests
for clinical trials, more than double the filings in
2014.35 One result of the surge in drug research is
Chinese authorities approving 12 novel drugs in2019 – up from just two in 2015.36 With the Chinese
government still spending less than half of what the
US government does as a share of GDP on healthcare,
there is still significant growth potential in the sector.

most promising treatments in the world come from
Chinese firms like Innovent, I-Mab, BeiGene and Zai
Lab, while companies such as Hygeia are providing
innovative and targeted radiation therapy treatments
to Chinese cancer patients.

One growing area for Chinese healthcare is oncology.
With over 4.3 million new diagnoses annually, cancer
is a rising challenge in China.37 In response, China’s
market around oncology biotech and treatments
has been growing at double-digit rates. Some of theInvesting in small-cap US biotech firms
requires active management

Though the underlying fundamentals are strong in
the Chinese healthcare sector, investors must remainaware of the unique risks as well. Specifically, issues
around intellectual property and government policy
remain prominent and can create headwinds for evenestablished companies. For example, China’s volumebased procurement program has led to an average 60%
reduction in pricing for some generic pharmaceuticals
and medical devices.38 These risks are especiallyelevated for private equity and private debt investors,
who are not afforded the same type of investor
protections as those operating in public markets. It
is crucial for investors to have extensive in-country
knowledge and experience before entering the Chinese
healthcare market.

Biotech companies have been leading the charge
towards more personalized medicine. Yet, with over

Exhibit 7: The share of biotech IPOs is increasing, but profitability is decreasing
60%
50%
40%
30%
20%
10%
0%

1985

1990

1995
Share of Total IPOs

Source: Jay Ritter, data as of June 21, 2021.
20 RESHAPING SERVICES | PGIM

2000

2005

2010

% Profitable (5-year rolling average)

2015

2020

700 publicly listed biotech firms in the US alone
and a rapidly evolving scientific landscape, investingin biotech stocks requires a thoughtful targeted
investment approach (Exhibit 7). With such a large
investment universe, it might seem that a passive
index approach would be the best investment strategy.
However, maintaining a nimble, dynamic approach
to US biotech stocks is key. Given the inherent
turbulence around early-stage biotech firms due toregulatory approvals, clinical trials and constantly
changing scientific data, an index approach is likely
to leave investors holding the bag when most ofthese firms inevitably fail. Instead, a thoughtfully
curated, active investment approach that constantly
monitors new developments and adjusts the portfolio
accordingly is much more beneficial.
One notable development around biotech investinghas been the changing landscape for clinical trials.
Investors used to need solid phase II clinical trial
results from hundreds of patients to even consider
investing in a biotech firm. Yet, advances in our
understanding of diseases and human genetics areallowing investors to make decisions based on thebiomarkers of just one or two patients. Once again, theconstantly evolving methodology around clinical trials
demands an active investment approach in this area.

A thoughtfully curated, active
investment approach that
constantly monitors new
developments in biotech firms andadjusts the portfolio accordingly ismuch more beneficial.
Care from an app, outside of the doctor’s office
Health outcomes are often considered to be tied
to the quality of care a patient receives from theirdoctors. Up until recently, the healthcare industry
has ignored the significantly greater portion of time
people spend outside of the clinic. There is now a

growing recognition that health outcomes are driven inlarge part by the countless number of small, everyday
choices made outside of a doctor’s office or hospital.
Driven by this idea, many healthcare startups havebegun offering platforms that help people makebetter behavioral choices for their health throughpersonalized approaches. These platforms offer
attractive investment opportunities for public andprivate equity investors.
This model is particularly promising for people
managing chronic conditions such as diabetes, heartdisease, rheumatoid arthritis or fibromyalgia. Livongo,
for example, offers an app-based platform for diabetes
management. Through a combination of connectedglucose meters, real-time feedback, personalized healthcoaching and custom alerts, the app is helping patients
effectively manage their diabetes.39 Given the abilityof these personalized out-of-clinic care providers to
reduce healthcare costs, this trend will likely continue
to thrive. Investors should consider venture capitalfunds that invest in these types of applications.

Specialized healthcare platforms provide
VC and PE opportunities
The segmentation of the healthcare market hascreated new space for platforms that address specificneeds such as women’s healthcare or mental health.
These platforms help patients navigate the complex
healthcare system and offer holistic approaches fornarrow healthcare segments. Increasingly, as healthcare
systems transition from a fee-for-service model toan outcome-oriented, value-based care model, theseplatforms are especially attractive to employersponsored benefits programs in the US. A growing
number of companies recognize these specialized
health platforms can improve employee healthoutcomes and reduce insurance expenses, while leading
to enhanced employee retention as well.
The women’s health sector is one that has tremendous
potential to grow. Shifts in cultural and societal
norms as well as demographics are resulting in women
having children later in life and being more open to
discussing fertility, maternity and menopause. Cleo isa platform that offers personalized support for families

PGIM | RESHAPING SERVICES 21

through individual coaching, programs for pregnancy
risk screening and a benefits marketplace for services
such as childcare, fertility, education and nutrition
services. Maven, meanwhile, offers employees endto-end family planning services ranging from fertility
programs to adoption support to surrogacy programs.
Both companies have proven to reduce overall family
medical expenses and improve parents’ return to work
ratios following the birth of a child.40 Investors with
VC and PE allocations might want to look for funds
that have exposure to these specialized employersponsored health platforms.

Medical devices as a service offer stable cash
flows for debt investors
Medical devices are an important catalyst for change
across the healthcare industry, especially as healthcare
becomes more digitized. Increasingly they are serving
as platforms for health monitoring services as well.
Companies that are integrating software-driven
services into their devices are particularly attractive
to debt investors given the subscription-based cash
flows stemming from these devices. BioTelemetry,a subsidiary of European device maker Philips,
offers patients annual subscriptions for its cardiac
home monitoring services, for example. While still a
relatively small portion of total revenue, this service
provides Philips with a substantially more stable sourceof revenue than pure equipment sales.
Furthermore, large US equipment makers such as
Stryker, Zimmer and Medtronic have been able to

22 RESHAPING SERVICES | PGIM

secure their market positions via acquisitions andregulatory barriers. In most countries, it is a long andexpensive process to get medical devices approvedby regulators. Even after approval, the fragmented
nature of the healthcare system means it is very
difficult to find distribution channels outside of thepre-established, relationship-based ones. As a result,incumbent medical device makers are fairly insulated
from external disruption and can easily acquire newdevices or software, given their scale and distribution
network. These dynamics protecting their cash flows
make the incumbent medical device makers attractive
debt investments.

Companies that are
integrating software-driven
services into their devices
are particularly attractive
to debt investors.

Lab testing and diagnostics offer steady cash
flows for debt investors
As personalized medicine continues to grow, thetesting and diagnostic equipment necessary for thistransformation will also thrive. The proliferation of

Exhibit 8: Senior housing continuing care retirement communities

HIGH

RISK OF TECH DISRUPTION

LOW
Adult Communities

Independent Living

Assisted Living

Skilled Nursing

Hospital¡ Total self-support¡ Homes or condos¡ Senior apartments¡ Recent retirees¡ Relatively good
health¡ Meals,
housekeeping,laundry¡ Transportation andsocial activities¡ Cottage/Active
adult¡ Need assistancewith activities ofdaily life
¡ Meals,
housekeeping,laundry¡ Transportation andsocial activities¡ Memory care
¡ Residential-based
setting¡ Little self-support¡ Medical careavailable¡ Rehabilitative
therapy¡ Later-stage dementia¡ Little self-support¡ 24-hour medicalcare required

LOW

INTENSITY OF CARE

HIGH

Source: PGIM Real Estate.

precision medicine and other biotech advances suchas liquid biopsy, spatial genomics and proteomics
provides enduring demand growth for equipment
and materials like testing consumables, laboratory
machines, assays and reagents. This market offers
attractive investment opportunities for debt investors.
In the US, firms like Thermo Fisher, Agilent, Illumina
and Danaher are leaders. In Europe, HoffmannLa Roche, bioMerieux and Qiagen are the large
players in this space. Given their scale, distribution
relationships and the regulatory barriers around theirproducts, these large incumbents should be able tomaintain their market position and acquire new,potentially disruptive, products. Debt issued by thesefirms can be attractive to fixed income investors.

Senior housing remains attractive for realestate investors
Aging developed market populations create acompelling source of demand for senior housing today
and in the future. This is especially the case in the US
where the senior population is poised to increase 45%

by 2030 – from 23 million in 2020 to 34 million –as the post-war baby-boomer generation reach their80s.41 This category of real estate is also less correlatedwith the business cycle than other segments. Whilevirtualized and personalized healthcare technologies
such as remote monitoring and telehealth are allowing
people to receive care at home, they do not herald theend of the investment opportunity in senior housing.
In fact, professionally run senior housing facilities will
likely be early adopters and have better access to healthtech than most seniors would in their own home.
These innovative technologies can offer better levels ofcare and also help streamline operations and improve
profitability in a very operationally intensive business.
Senior housing facilities can be categorized along aspectrum of care. Low-care settings include adultcommunities and independent living. Options forhigh-care settings include assisted living and skilled
nursing facilities and hospitals (Exhibit 8).
Technologies such as remote monitoring devices,
telehealth solutions and smart-home appliances aremaking it easier for people to not only age outside
PGIM | RESHAPING SERVICES 23

These innovative technologies canoffer better levels of care and also
help streamline operations andimprove profitability in a very
operationally intensive business.

of intensive care facilities, but also recover at home
after acute injuries or medical procedures.42 Higher
care settings like skilled nursing facilities will likely
be exposed to tech disruption as fewer people require
intensive care for long periods of time.
However, lower care settings that provide attractive
lifestyle options are unlikely to see demand decline
any time soon. This is driven by a few key factors.
First, technology is allowing residents who might have

24 RESHAPING SERVICES | PGIM

needed highly skilled nursing care in the past to bewell cared for in less intensive care settings like assisted
and independent living facilities. Second, assisted andindependent living arrangements offer residents morethan just medical care. There is a strong social element
to these communities, which cannot be replicated bytechnology. Lastly, there is a strong human element topatient care, which is nearly impossible to replace with
automation and robots.
Though the pandemic has given pause to recent
growth in the industry, the long-term demographics
driving demand for senior housing persist. Whilestrong opportunities exist in the US, other markets
with similar aging demographics like the UK, Japanand Australia should see more attractive opportunities
as the sector matures there. Going forward, emerging
markets may also present opportunities for investors as
the retirement populations increase in Latin America
and China with fewer familial caregivers.

CHAPTER 4

TRANSPORTATION & LOGISTICS

While logistics firms like DHL
and Amazon employ cutting-edge
technology and automation in
their operations, overall, the sector
is at an early stage of disruption.”

CHAPTERS

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PGIM | RESHAPING SERVICES 25

CHAPTER 4

TRANSPORTATION & LOGISTICS: THE FUTURE WILL BE
GREENER AND MORE AUTONOMOUS
Transportation and logistics broadly refers to the movement of people and goods and includes passenger
transport, trucking, freight, supply chains, distribution and warehousing. While logistics firms like DHL andAmazon employ cutting-edge technology and automation in their operations, overall, the sector is at an earlystage of disruption. While highly transformative innovations like autonomous vehicles (AV) are on the horizon
for transportation and promise to be a major part of the future, they are having little impact today as AV
technology is in a trial phase.
In logistics, optimization and efficiency are the current
focus and those firms that are quick to digitize theirprocesses, leverage telematics devices and embrace
renewable energy sources and cloud-enabled data
analysis will gain an advantage and position themselves
for enduring success.

The Future State of Transportationand Logistics
Automobiles will be greener – and ultimately
autonomous
The technology for electric vehicles (EV) exists today
and will certainly be a growing part of the automotive
landscape going forward. Indeed, EV sales in many
parts of the world are growing rapidly. For example,
nearly a million EVs were sold in China in the firsthalf of 2021 – more than doubling in size from a

Adoption of EV and AV will not
evolve in the same way or at thesame pace in all parts of the world.

Exhibit 9: Despite growth in annual sales, EVs will likely represent a small share of total cars in 2030
EV cars as a share of total stock of cars

EV sales as a share of total annual car sales
12%

13%

34%

36%

20% 19%
6%
5%

16%

5%
10%

0%

0%

2015

0%

1%

1%

2%

2020

6%

2%
1%

2025(F)

2030(F)

US

Source: Global EV Data Explorer, International Energy Agency, 2021.
26 RESHAPING SERVICES | PGIM

1%

1%

2015

Europe

China

8%

2%

2020

2025(F)

2030(F)similar period in 2019.43 In Europe the total market
share of EV is increasing sharply – albeit from amodest base. EV market share in Germany has grownfrom under 4% in June 2020 to nearly 11% in
September 2021. The UK has also shown a significant
rise in the share of EV over the same period, up from
4.7% to over 8%.44
However, growth of EV will be uneven across different
countries. Because of this, EV will not be displacing
the global stock of internal combustion engines (ICE)for several decades. The global aggregate data makethis point clear: In 2020, more than 95% of total newcars sold globally were powered by ICE (Exhibit 9).
Even across the EU where carbon emission goals andother policies have boosted demand, only 1 in 10 new
cars sold in 2020 were powered by electricity.
Despite the sharp growth of EV in some countries,
the tremendous stock of ICE vehicles already in place
will have a long sunset. Even under the International
Energy Agency’s (IEA) optimistic scenario, two out of
three new cars sold in 2030 will still be ICE vehicles.
In 2050, when EVs are projected to make up 60% of
annual new car sales, the majority of vehicles on theroad will still be fueled by gasoline.45
With the proliferation of AV, individuals will findit less cost-effective to own their own car and the
ride-sharing model currently disrupting taxis will beubiquitous. Corporate business models focused solely
on manufacturing autos or ride-sharing platforms will
be challenged in an AV-dominant world. The futurebusiness model for automotive transport will likely
revolve around providing fleets of autonomous ridesharing vehicles. Auto manufacturers and ride-sharing
platforms will need to team up to achieve this – andpromising partnerships are already forming.
Of course, the utility and cost-efficiency of AV or EV
will not replace personal ownership of an ICE vehicle
for all people in all places for several reasons. First,
outside of major population centers ride-sharing isoften not in great supply and may require a lengthy
wait. Consumers in rural areas may opt for theconvenience of owning their own car. Second, it will
be hard to replace the primal appeal of owning anddriving your own car. Automobiles have a prominentplace in US culture, for example. Owning and driving
the newest, fastest model of sports car or truck andfeeling the rumbling of an ICE engine brings an
irreplaceable joy to many Americans.
Importantly, adoption of EV and AV will not evolvein the same way or at the same pace in all parts of
the world. Autonomous trucking is likely to emerge
first in the US, which depends on long-haul trucking
for distribution and transport of goods and where
drivers make up roughly 40% of trucking costs.46

Exhibit 10: Freight tonnage has increased faster than employment in the US
160
150
140
130
120
110
100
90
80

2000

2005
2010
Long Distance General Freight Trucking Employment Index

2015
Truck Tonnage Index

2020

Source: FRED, data accessed July 2021.
PGIM | RESHAPING SERVICES 27

Labor shortages also loom large for the industry andautonomous trucking could help freight trucking keep
pace with the tremendous demand (Exhibit 10).47
But other parts of the world are much more likely
to lead the way when it comes to both electricand autonomous cars. European governments are
increasingly taking measures to push EV adoption
and their environmental commitments are reducing
reliance on gasoline-powered cars and vans.48
Meanwhile, in China, there are a growing number ofurban roads designated for AV testing and fleets ofautonomous robo-taxis are already roaming the streetsof Beijing. These are poised to disrupt local taxi andminivan transport.49

The new and ongoing demandfor online deliveries has spawned
interest in logistics and warehouses
in places where online penetration
had been exceptionally low.

Global shift to online shopping yields
greener logistics
The pandemic has driven a surge in online shoppingthat is not likely to fully recede. Importantly, itsurged in regions that had been previously resistant.
Central and Eastern Europe, for example, saw retaile-commerce grow by almost 30% in 2020, China
by 28% and Western Europe by 26%.50 Even as thelimitations of the pandemic ease, this tech adoption by
consumers will remain. The new and ongoing demandfor online deliveries has spawned interest in logistics
and warehouses in places where online penetration had
been exceptionally low – like Spain and Greece.
The logistics industry will continue to leverage AI, ML
and other technologies to be even more efficient – andalso more green. Technology to move goods alongfrom sprawling distribution centers located far from28 RESHAPING SERVICES | PGIM

city centers to smaller last-mile warehouses near cities
is rapidly evolving and altering location dynamics
of warehouses. Additionally, operations of thesewarehouses are increasingly integrating solar, hydrogenand other green energy sources.51 Solar panels on roofs
provide power for the highly automated distribution
centers where hydrogen fuel-cell powered forklifts
and electric trucks operate through the night toreplenish stock in last-mile warehouses for tomorrow’ssame-day delivery.

Investment Implications
Fragmented landscape for autonomousvehicles provides equity opportunities
The autonomous vehicle space provides a wealth ofopportunities for global equity investors. The industry
is in the very early stages of developing and testing thetechnology. Consequently, many partnerships between
auto manufacturers and tech firms have been formed
and there are likely to be some first-mover advantages.
The landscape is evolving quickly, and it remains
unclear which partnerships may produce a mass
marketable autonomous platform first.
Despite the uncertainty, there are some characteristics
of autonomous platforms and partnerships that
equity investors should look out for. First, on the auto
manufacturer side, there needs to be sufficient capitaland commitment to support the lengthy processes oftesting, regulatory approvals and production capability
to mass produce successful models. On this front,
the larger automakers can leverage their size andregulatory experience.
Second, rigorous and thorough testing under all kindsof circumstances is required. Countries like China thatare supportive of AV testing on their roads and smart
infrastructure will have an advantage.52 In fact, testingof robo-taxis and other vehicles is already underway
in multiple densely trafficked cities like Beijing,
Guangzhou and Wuhan.53
Third, when it comes to the hardware associated with
AV – all the cameras as well as the myriad of sensors –reducing size and weight is critical. Furthermore,
integrating these inputs seamlessly with the operations

of the car are vital to make the best real-time decisions
and ensure the safest rides.
Fourth, the algorithm that interprets all the input fromcameras and sensors needs to be able to process all thisdata quickly and efficiently. For example, the firstgeneration AV algorithm used between 500 and 800
watts of power and required considerable ventilationand cooling. The most advanced AV algorithms today
run much more efficiently, using less than 50 watts ofpower, and requiring far less cooling.54
Based on these criteria, in the autonomous car
and robo-taxi space, Chinese AV firms DeepRoute(partnered with Dong Feng), Pony (partnered with
Toyota) and WeRide (partnered with Nissan) are
examples of potential front-runners and are in the
midst of testing autonomous platforms.
In the autonomous trucking space, Aurora’s
partnership with Volvo is currently testing in North
America. Meanwhile, Daimler’s partnership withWaymo and Navistar’s partnership with TuSimple
appear to be promising as well. Investors should also
be aware that developments in autonomous trucking
will have implications for logistics and warehouses.

Digital platforms to optimize supply chains,logistics and transport
While some parts of the logistics and delivery
ecosystem like UPS, DHL and FedEx are very techsavvy, adoption of technology has been inconsistent.
The less tech-forward portions of the logistics andsupply chain sector provide a growth opportunity
for software firms and investors alike. Cloud-based
platforms to digitize supply chains provide many
possibilities for freight forwarders, customs brokers,
and other logistics players to increase efficiency.
For public equity investors, leading players like
Canada’s Descartes Systems Group can be attractive
growth opportunities. Descartes offers a supply
chain management platform that optimizes logistics,
operations and shipping routes as well as connects thedifferent parts of the chain using real-time messaging
and data.
In private equity, British tech firm Connexin
specializes in the Internet-of-Things and offers an
integrated transport and logistics platform for trucking
and warehouses. They provide both the hardware –telematics devices and sensors – used to generate data
as well as the software to integrate and analyze it for
optimization of fleets, routes and warehouses.
Software platforms can offer attractive opportunities
for debt investors as well. Their subscription models
and essential function in businesses make for steadyand reliable cash flows during all phases of theeconomic cycle. Software platforms for transportationand logistics offer some of the best examples. Spanish
software maker Amadeus provides an operational
platform for managing both airports and airlines.
It can optimize runway and gate usage for airport
operations as well as flight schedules, re-bookings andupgrades for airlines. The Convoy shipper platform isanother example in logistics. It offers a digital freight
network where tens of thousands of independent
freight haulers in the US can find partial or full loads
for their trucks.

Europe offers new opportunities andchallenges in logistics real estateWith relatively low e-commerce penetration comparedto other regions, Europe has lagged in online
shopping. However, the pandemic has allowed it tocatch up quickly. The surge in online shopping due to
COVID-19 restrictions created tremendous growth indemand for distribution and logistics facilities. Thishas directly led to an increase in demand for remote
distribution centers outside major cities like Berlin,
Madrid, Paris, and Brussels, as well as smaller last-mile
warehouses closer to population centers.55
Aside from rising rental prices on existing facilities,
there is considerable room for new development as
well. In the UK, land outside big cities like London
and Manchester that is close to major motorway
junctions has become especially coveted as demand forsame-day delivery soars.
However, European regulation and infrastructure alsopresent some unique challenges for investors. European
motorways and urban streets are generally narrower
than other parts of the world and may not be able toeasily support the volume of electric scooters, vans andtrucks needed to sustain more e-commerce deliveries.
Also, policy initiatives that are designed to makesocieties greener and more socially responsible may
have some unintended consequences for e-commerce
PGIM | RESHAPING SERVICES 29

and the logistics space broadly. For example, local
efforts across the EU to reduce city traffic – likecongestion pricing and low emission zones – aregrowing.56 This poses a risk to delivery vehicles.
Additionally, efforts in Germany to support sustainablesupply chains will take effect in 2023 and its rippling
impact up and down value chains remains very
unclear.57 With more scrutiny of global sourcing,closer-to-home sourcing of goods and materials will
gain prominence and may shift demand for logistics
and warehouses from import facilities to local
manufacturing hubs.

Policy initiatives that aredesigned to make societies
greener and more socially
responsible may have unintended
consequences for e-commerce andthe logistics space broadly.
Green technology alters the locational analysis
for warehouses in the US
In mature markets like the US, technology is altering
the locational analysis for distribution centers. These
are the sprawling, more remotely located facilities that
replenish the stock of smaller last-mile warehouses
closer to major cities. For example, autonomous
trucking with an efficient transfer hub model or
multiple trucks linked together to reduce drag may
make it economically and logistically feasible to locate
distribution centers further from last-mile facilities.58
Other dynamics are also nudging distribution
centers further away from urban centers. In thepast, distribution centers needed access to major
metropolitan areas and large electricity grids tomeet their demand for ample labor and power. The
proliferation of automation within the facilities
augments labor and may diminish the need foraccess to large labor pools. Furthermore, renewableenergy from solar panels on their expansive roofs andhydrogen fuel cells in major machinery play a growingrole in powering distribution centers today. As a result

30 RESHAPING SERVICES | PGIM

of distribution centers becoming greener, proximity toa major power grid is less critical, though many choose
to remain close to sell excess power to the grid andrepurchase power as needs change.

Opportunities in the transition to greener andsmarter infrastructure
Given new government-funded infrastructure plansin the US and Europe, it is important to recognize
the investment opportunities around the transition
to smart, green infrastructure. Rest stops and gas
stations along major roadways have long been
attractive infrastructure investments, for example.
Going forward, investors will need to be mindful of
the transition to EV. There will be a lengthy transition
period where motorists will have a need for both EV
charging as well as gasoline at highway rest stops.
Investors can look at debt of highway service providers,like Autobahn Tank & Rast in Germany, who are
tuned into the needs of local motorists and can switch
the balance between refueling and recharging as local
demand warrants.
Other examples lie in municipal infrastructure.
As technology is increasingly being employed tomake cities smarter, investors can find attractive
opportunities in both the manufacturers of thesesystems as well as the public-private partnershipsthat enable smart cities. Chicago Parking Meters, forexample, is a public-private partnership that operates
street parking in parts of the city. Their user app has
a predictive parking feature that leverages proprietarydata and AI to help users find empty parking spaces
today or in the future. They also use camera-enabled
AI to determine whether cars are in compliance withlocal parking regulations and can issue tickets based onthat information.59

A very long road for EV presents ICE
opportunities for debt investors
Electric vehicles are clearly part of the future, but it
is also clear internal combustion engines will havea very long sunset. While auto manufacturers arebeing pushed by government emissions regulations
to develop EV, not all consumers will opt for themgiven they are often more expensive than comparable

ICE vehicles. The unpleasant reality is global auto
manufacturers will be selling at least as many ICE as
EV vehicles for the next 10 years – or more. It is clear
gasoline-fueled autos will play a prominent role in the
global landscape for decades to come – and perhaps
even longer in places like the US. It is also clear thebusinesses and infrastructure that support it (e.g.,parts makers, gas stations, etc.) will still be relevant
and sources of reliable cash flows, even if their revenue
growth slows. For debt investors, there is a compellinginvestment case to be made for auto parts distributors
and retailers like NAPA in the US, which may bepriced for more imminent obsolescence.

Logistics incumbents embracing cloudtechnology will thrive
While US trucking is likely to be disrupted byautonomous trucks and consolidate significantly,
trucking companies that embrace new technologies
and leverage the efficiency gains from it will most
likely be part of the future. This type of tech-forward
firm can offer resilient cash flows to debt investors.

US trucking company Old Dominion provides agood example. It is investing heavily in technology
to modernize its operations and reduce risk. The
company utilizes telematics devices on its entire fleet totrack and record basic data about each and every truckin the field, including speed, acceleration, and braking.
The firm leverages this proprietary data using cloudbased analytic tools to optimize operations of vehicles,
drivers, and routes.

Chapters 2-4 examined the significant
investment opportunities and risks for
specific asset classes (Table 4). CIOs alsoneed to consider some of the hidden risks
and implications of disruption across asset
classes. The next chapter provides actionable
recommendations to help CIOs navigate thetumultuous aspects of technology disruption
in services across their entire portfolio.

Table 4: Investment Implications Summary
Public Equity

Public andPrivate Debt

Real Estate andInfrastructure

Venture Capital

Private Equity

Financial Services
Global opportunities in the expanding
fintech ecosystem (e.g., neobanks, payment
and other platforms)
Insurance firms that integrate advanced
data analytics will succeed
Focus on targeted blockchain applications
that solve specific problems today
Incumbent banks leveraging new technology
will thrive and widen their moats
Next generation payment systems allow
tech-forward incumbents and select new
entrants to thrive

PGIM | RESHAPING SERVICES 31

Public Equity
Healthcare
Emerging markets offer new opportunities
and risks for biotech and pharmaceuticals
Investing in small-cap US biotech firms
requires an active approach
Care outside of the doctor’s office, froman appSpecialized healthcare platforms
Medical devices as a service offer stable
cash flows for debt investors
Lab testing and diagnostics offer steadycash flows for debt investors
Senior housing remains attractive for realestate investors
Transportation and Logistics
Participating in fragmented AV landscape
Digital platforms to optimize supply chainsand logistics
Europe offers new opportunities andchallenges in logistics real estate
Green technology alters the locational
analysis for warehouses in the US
Opportunities in the transition to greener
and smarter infrastructure
A very long road for EV presents ICE
opportunities for debt investors
Logistics incumbents embracing cloudtechnology will thrive

32 RESHAPING SERVICES | PGIM

Public andPrivate Debt

Real Estate andInfrastructure

Venture Capital

Private Equity

CHAPTER 5

PORTFOLIO IMPLICATIONS

While there will be new winners,
disruption in services will
actually increase the dominanceof a small group of technologyforward incumbents.”

CHAPTERS

1

2

3

4

5
PGIM | RESHAPING SERVICES 33

CHAPTER 5

PORTFOLIO IMPLICATIONS
The current wave of technological change in the service sector raises critical issues for CIOs thinking of
long-term implications across their entire portfolio, beyond the specific asset class and regional investment
opportunities and risks discussed so far. We believe CIOs should evaluate four actions to capture the upside andmitigate the risks of disruptive technologies in the service sector.

1. Position the portfolio for service
sector disruption – which will havea radically different trajectory thanmanufacturing and retail disruption
Disruption in manufacturing (Tesla, 3-D printing,
iPhones) and retail (Amazon) became a significant
headwind for – and at times made obsolete – a longtail of incumbents that were caught flat-footed
as new entrants took market share and asintermediaries (e.g., shopping malls, wholesalers)
became increasingly redundant.60
While there will be new winners, disruption in services
will actually increase the dominance of a small group oftechnology-forward incumbents rather than leave thetrail of destruction seen in retail and manufacturing,for several reasons:¡Technological change in services has lagged
manufacturing and retail, so service sector
incumbents have seen the writing on the wall.
They are acutely aware of the “adapt or die”
imperative that tech innovation presents. Winningincumbents will not be complacent.

¡Two of the largest service sectors – financial
services and healthcare – are heavily regulated inmost countries. This slows the pace of change
given the power of industry lobbyists as well as thetendency for regulators to be gradualists, aiming
to avoid binary disruptions. This has, for example,
dampened the enthusiasm of North American
tech giants from aggressively entering these34 RESHAPING SERVICES | PGIM

sectors compared to pursuing opportunities in lessregulated parts of the economy (e.g., car-sharing).
¡

When it comes to services, distribution networks
and access to customers are critical for successful
firms. Disruptive tech firms have discovered
gaining access to customers and counterparties has
been much harder than anticipated. For example,
early robo-advisors found it extremely difficult toaccess wealth management clients and distribution
platforms. In healthcare, innovative biotech firms
are unable to access the networks of doctors andhospitals they need. As a result, many cuttingedge tech firms opt to be acquired by incumbents
rather than going it alone and challenging
their dominance.

Consequently, the technology imperative will “barbell”
the services sector. Those incumbents who embrace
new technology and the new business models theypresent will successfully make the leap into the digitaland cloud era – even as other legacy service companies
are left behind. And the number of disruptive newentrants will be higher in those sectors where theregulatory and customer acquisition barriers to entry
are less daunting, such as consumer and small businessdigital payments.
For CIOs assessing “obsolescence risk” in their services
portfolio (i.e., identifying winners and losers among
existing, established services companies) there are threecharacteristics to potentially consider. This is especiallyrelevant for long duration investments such as private
assets and long-maturity debt that are most vulnerable
to obsolescence risk:¡¡Incumbents with sufficient scale to fully leverage
the current wave of new technologies. The
Goliaths will overpower the Davids. Service sector
companies with the operating scale and revenue
base to buy or build expensive next-generation
technologies will triumph over smaller services
companies that won’t be able to make the criticalminimum technology investments to succeed.
Robo-advisors like Betterment are an example
of potential disruptors in wealth managementthat lacked the distribution platform to build asustainable business model themselves. Instead,large incumbent firms like Schwab in the US
and Aion Bank in Belgium replicated or acquired
digitally savvy customer platforms and leveraged
them successfully.61 US freight trucking firm
Old Dominion provides another example. It’s
not waiting to be disrupted by tech platforms
tomorrow. Instead, it is utilizing telematics devices
and AI to streamline freight operations and reducerisk today.
Incumbents supplementing in-housedevelopment with strategic tech acquisitions.
Investing programmatically in technology startups(and sometimes more mature technology firms)
allows firms to access the cutting-edge technology
and human capital needed to transform theirbusinesses. By participating at an early stage,
incumbents can help shape the technology tobest meet their needs and expand their offerings.
Examples of this include ING Bank’s partnershipwith small business lender Kabbage and medical
device maker Philips’ acquisition of BioTelemetry.62¡

Incumbents willing to forego legacy systems toembrace disruptive technology early. Forwardthinking incumbents are willing to move on fromtheir legacy systems and embrace new technology
before it disrupts their industry. Leaping to newtechnologies and writing off legacy systems canbe a costly proposition, but it also may mean the
difference between survival and extinction.
Netflix provides a useful illustration of a company
cannibalizing its own legacy business – unlike
Blockbuster. Netflix quickly adapted from shipping
physical DVDs to streaming video online andhas been able to leverage that first moveradvantage. JPMorgan's experimenting withblockchain for clearing and settlement systems
is another example of an incumbent aggressively
embracing new tech paradigms despite its heavy
investments in legacy systems.

2. Make complementary investmentsin the technology infrastructure
underpinning the next wave of service
sector disruption
In addition to actively evaluating leaders, laggards
and new entrants in individual service sectors, CIOs
will also want their in-house investment teams andasset managers to identify the companies providing
the backbone to the coming wave of disruption inservices. This includes the companies that provide
cloud computing, fiber optic networks, data centers,
AI- and ML-powered toolkits, underlying technology

Table 5: Complementary Opportunities in Global Tech Infrastructure
Cloud computing

Public Equities examples: Alibaba, Microsoft, NTT, Amazon, Google

Data centers, especially hyperscale data centers(Exhibit 11)

PE and Real Estate examples: Equinix and Digital Realty

Cybersecurity, including edge and cloud security

Public Debt and Leveraged Loans examples: Ping ID, Sentinel One, FireEye

Fiber optic network and telecom infrastructure
for a cloud-enabled world

Private Equity examples: Firstlight Fiber, China Telecom, CityFibre
Public Equities examples: American Tower, Cellnex, SBA Communications

Fiber optic component makers

Public Equities examples: Furukawa Electric, Huber+Suhner AG, Prysmian GroupPGIM | RESHAPING SERVICES 35

platforms, and the related “pipes and plumbing” tointegrate these technologies into the service sector
ecosystem. We believe long-term active investors canfind many attractive investment opportunities acrossmultiple asset classes (Table 5).

base – underbanked and disengaged consumers.
Furthermore, regulators may justify a light touch onthese players so long as they broaden access to financial
services. But that tolerance is not assured going
forward and can easily shift.
Even technologies explicitly designed to operate
outside the reach of monetary authorities – mostnotably bitcoin and the associated decentralized
infrastructure and exchanges – raise numerous legal,
ESG, and regulatory challenges that are increasingly
being surfaced.

3. Brace for regulatory backlash as it
spills over into services
Regulatory uncertainty is common across many of the
new technologies discussed earlier – though specificfocus areas vary significantly by region and sector.
Investors often overlook the unsettled regulatoryenvironment in which today’s emerging tech firms
operate. Recent examples of “techlash” in China,
for example, caught many investors by surpriseand knocked tens of billions of dollars frommarket valuations.63

In China, it is unclear whether the regulatory
pushback on payments platforms and ridesharing
apps may fundamentally alter the way technology
companies evolve and are financed. Additionally, therecent regulatory turbulence may impact how rapidly
new technology is adopted by consumers and firms
going forward.

In financial services, neobanks and fintech payment
platforms find loopholes to extend credit to consumers
and small businesses without being subject to the same
stringent capital and liquidity standards as mainstream
banks. This regulatory asymmetry is a key element of
their business strategy, but as the neobanks grow, someof their regulatory burden will become more like largecommercial banks. It may no longer be economically
viable for neobanks to target their main customer

With transportation, development of autonomous
driving systems is dependent on ample testing in realworld conditions. Government rules and regulations
around such testing can affect the timing arounddeveloping robust systems. Chinese authorities, forexample, have been supportive of AV testing as they
view it as a key technology for their economy. An
accident during AV testing in Arizona, where an
autonomous car struck and killed a pedestrian, led to

Exhibit 11: Hyperscale Global Data Center Energy Demand (TWh)
194

200

10
18

201

70
93

69

166

69
61

2010
Traditional

Source: International Energy Agency, data accessed June 2021.
36 RESHAPING SERVICES | PGIM

2019
Cloud (non-hyperscale)392022(F)
Hyperscalea suspension of testing even though an investigation
showed the human passenger responsible formonitoring the car was at fault.64
Investors will want to ensure technology-driven
regulatory risks are explicitly captured in theirinvestment framework when looking at services
opportunities powered by new technologies. CIOs
should have explicit discussions with their asset
managers around investments in next-generation
disruptive service providers to ensure the investment
thesis isn’t undermined by antitrust legislation, theextension of data privacy laws into current “grey” areas,or the updating of light or outdated regulations. And
institutional investors making investments in-housewill want to directly monitor both policymakers
and the lobbying organizations representing various
service sectors to understand how their investment will
perform given the different regulatory scenarios.

Many cutting-edge tech firms opt
to be acquired by incumbents
rather than going it alone andchallenging their dominance.

4. Proactively engage your board andsenior leadership on next generation
technologies
The implications of the current wave of newtechnologies in services are too far-reaching toleave technology just to the tech sector analysts or
the back-office IT team. Technological change is
no longer confined to the formal “IT” sector – it isdisrupting key components of the services value chain.
CIOs can enhance their team’s understanding aroundtechnological disruption through a range ofactions including:¡Engaging external asset managers in targetedsessions to learn how they monitor technology
risks and opportunities across their security andasset selection process.

¡

Identify the metrics and key performanceindicators that may be relevant for each asset

class in identifying winning incumbents that are
successfully making the technology transition(e.g., seniority of chief data officer, number of data
scientists, investment spend on new technologies,
technology M&A activity levels).
¡

Convene in-house sector specialists across fixedincome and equities – both public and private –to debate the impact of the current wave of
new technologies (e.g., cloud, AI/ML, big data,
distributed ledgers) on each of their current service
sector holdings.

¡

Leverage their technology and middle/back-officevendor relationships to engage with the technology
thought leaders at these firms (e.g., technology
experts at their current key accounting, custody,
administration, enterprise software, cloud, andother vendors).

¡

Arrange a virtual or physical off-site for board andsenior investment leaders – for example, in Silicon
Valley, Shanghai, Tel Aviv, Berlin or Bangalore.
In this way, institutional investors can “mark tomarket” the current technology advances and theirinvestment implications in a series of conversations
with startups, venture capitalists and even the
CTOs of forward-thinking incumbents.
The current wave of technological change
has jumped from manufacturing and retail
into the heart of the service sector. Big
data and its analysis, machine learning andartificial intelligence, cloud computing andthe immense processing power that comeswith it will reshape global services. A few new
firms will no doubt revolutionize some tired
corners of the service sector. Meanwhile, somescaled tech-forward incumbents will increase
their dominance and render the remaining
legacy services players increasingly irrelevant.
At PGIM, we believe long-term investors will
want to be ahead of this transformational phasein the services industry by actively positioning
their portfolios to capture the investment
opportunities, and mitigate the risks, fromthis impending wave of technology-driven
disruption in services.

PGIM | RESHAPING SERVICES 37

Acknowledgments
PGIM gratefully acknowledges the contributions by the following individuals:
Alex Blostein, Managing Director, Equity Research – Capital Markets: Asset Managers, Brokers, Exchanges,
Trust Banks, Goldman Sachs
Dr. Mercedes Delgado, Associate Professor, Copenhagen Business School
Seth Ginns, Managing Partner and Head of Liquid Investments, CoinFund
Chris Hallam, Executive Director, Global Equity Research – European Aerospace & Defence, Goldman Sachs
Dr. Chang-Tai Hsieh, Phyllis and Irwin Winkelried Professor of Economics and PCL Faculty Scholar, Chicago
Booth School of Business
Dr. Jeremy D. Lack, Partner, Athyrium
Grace Liu, Managing Director & Global Partner, Fosun RZ Capital
Ioana Niculcea, Head of FinTech Advisory, Citi
Otto Pohl, Founder and Principal, Core Communications LLC
Jay Wang, Director, Fosun RZ Capital

PGIM Contributors
Cheryl Akawie, PGIM Fixed Income

Roben Dunkin, PGIM

Lauren Alpeyrie, PGIM Real Estate

Ian Ellis, PFI

Naveen Argarwal, PFI

Edward Farley, PGIM Fixed Income

Alexander Babulevich, PGIM Fixed Income

Sebastiano Ferrante, PGIM Real Estate

Henry Balbirer, PGIM Fixed Income

Manoj Govindan, PFI

Mark Baribeau, Jennison Associates

Billy Greer, PGIM Private Capital

Keith Bexell, PFI

Katy Griffin, PGIM Fixed Income

Steve Blazejewski, PGIM Real Estate

Ramneek Gupta, PruVen Capital

Al Caesar, PFI

Elizabeth Halpin, PGIM Fixed Income

Ed Campbell, PGIM Quantitative Solutions

Dr. Peter Hayes, PGIM Real Estate

Michael Cardi, PGIM Fixed Income

Alex Herbert, PGIM Fixed Income

Yanru Chen, PGIM Fixed Income

Daniel Hermansson, PFI

Victoria Cheng, PruVen Capital

Gary Horbacz, PGIM Fixed Income

Brannon Cook, Jennison Associates

David Hunt, PGIMCharles Crowe, PGIM Real Estate

Robert Huntsman, PFIJohn Di Paolo, PGIM Fixed Income

Dr. Taimur Hyat, PGIM

38 RESHAPING SERVICES | PGIMJames Hyde, PGIM Fixed Income

Abe Pothireddy, PGIM

Nikola Ivanov, PGIM Fixed Income

Dave Power, PGIM Real Estate

David Jiang, PGIM Fixed Income

Dave Quackenbush, PGIM Private Capital

Wilhelm Johannis, PGIM Fixed Income

Indy Reddy, PGIM Investments

Josh Jordan, PGIM Fixed Income

John Sarokhan, PGIM Real Estate

Jake Kemeny, PGIM Fixed Income

Anindya Sengupta, PFI

Ed Keon, PGIM Quantitative Solutions

Sara Shank, PGIM Real Estate

Christina Kim, PGIM Private Capital

Dr. Nathan Sheets, PGIM Fixed Income

Owuraka Koney, Jennison Associates

Todd Shriber, PFI

Albert Kwok, Jennison Associates

Travis Skelly, PruVen Capital

Alexander Latter, PGIM Fixed Income

Daryl Skinner, PGIM Private CapitalMorgan Laughlin, PGIM Real Estate

Dr. Gavin Smith, PGIM Quantitative Solutions

Allyson Laurence, PFI

Robin Snyder, PGIM Fixed Income

Tim Lyons, PFI

Tatiana Spineanu, PGIM Fixed Income

John Maxwell, PGIM Fixed Income

Pinto Suri, PGIM Fixed Income

Lee Menifee, PGIM Real Estate

Steven Tanz, PGIM Fixed Income

Sara Moreno, Jennison Associates

Amol Tembe, PFI

Naveed Mukhtar, PGIM Fixed Income

Mark Thurgood, PGIM Fixed Income

Patrick Myers, PGIM Fixed Income

Andrew Tucker, Jennison Associates

Debra Netschert, Jennison Associates

Mark Vande Hey, PGIM Real Estate

Cuong Nguyen, PGIM Real Estate

Jocelyn de Verdelon, PGIM Real Estate

Steve Oliveira, PGIM Real Estate

John Vibert, PGIM Fixed Income

Juan Otero, PGIM Fixed Income

Henri Vuong, PGIM Real EstateBill Pappas, PGIM Private Capital

Dr. Noah Weisberger, PGIM IAS

Dr. Harsh Parikh, PGIM IAS

Kelly Whitman, PGIM Real Estate

Greg Peters, PGIM Fixed Income

Principal Authors
Shehriyar Antia, PGIM Thematic Research
David Klausner, PGIM Thematic Research

PGIM | RESHAPING SERVICES 39

Endnotes
1. World Bank Databank, accessed July 13, 2021.
2. PGIM analysis based on data from MSCI, as of 6/28/2021.
3. Lund, Susan and Manyika, James, “Five lessons from history on AI, automation, and employment,” McKinsey & Company, November
28, 2017, <https://www.mckinsey.com/featured-insights/future-of-work/five-lessons-from-history-on-ai-automation-and-employment>;
Bank of England, data accessed July 14, 2021, <https://www.bankofengland.co.uk/statistics/research-datasets>.
4. Rodrick, Dani, “Premature deindustrialization,” Journal of Economic Growth, vol 21(1), pages 1-33, 2016, <https://www.nber.org/
papers/w20935>
5. Liping, Zhang and Evenett, Simon J., “The Growth of China’s Services Sector and Associated Trade: Complementarities between
Structural Change and Sustainability,” International Institute for Sustainable Development, July 2010, <https://www.iisd.org/system/
files/publications/sts_4_growth_china_services_sector.pdf>; “Distribution of the workforce across economic sectors in China from2010 to 2020,” Statista, accessed September 7, 2021, <https://www.statista.com/statistics/270327/distribution-of-the-workforce-acrosseconomic-sectors-in-china/>
6. World Bank Databank, accessed June 8, 2021. For this paper, services are defined as including wholesale and retail trade and restaurants
and hotels; transport, storage, and communications; financing, insurance, real estate, and business services; and community, social,
and personal services. Unless otherwise stated, service-oriented jobs embedded in manufacturing firms are included in the
manufacturing sector.
7. Autor, David, “Why Are There Still So Many Jobs? The History and Future of Workplace Automation,” Journal of Economic Perspectives– Volume 29, Number 3 – Summer 2015 – Pages 3-30, <https://economics.mit.edu/files/11563>
8. United Nations Statistics Division, data accessed July 7, 2021, <http://data.un.org/Data.aspx>
9. Autor, David, “Why Are There Still So Many Jobs? The History and Future of Workplace Automation,” Journal of Economic Perspectives– Volume 29, Number 3 – Summer 2015 – Pages 3-30, <https://economics.mit.edu/files/11563>
10. Lodefalk, Magnus, “Tear down the trade-policy silos! Or how the servicification of manufacturing makes divides in trade policymaking
irrelevant,” Vox EU, January 16, 2015, <https://voxeu.org/article/servicification-manufacturing-and-trade-policy>
11. Delgado, Mercedes, Kim, J. Daniel and Mills, Karen, “The Servicification of the U.S. Economy: The Role of Startups versus
Incumbent Firms,” National Bureau of Economic Research, January 26, 2021, <https://www.nber.org/system/files/chapters/c14379/
c14379.pdf>
12. Ibid.
13. Bank of England, data accessed June 28, 2021, <https://www.bankofengland.co.uk/statistics/research-datasets>
14. World Bank Databank, accessed June 15, 2021.
15. PGIM analysis based on 6/30/2021 portfolios of Calpers, NGPF and CIC. Services share of a typical institutional investor portfolio islower than services share of GDP because portfolios also include real estate, infrastructure and sovereign bonds.
16. PGIM analysis based on OECD data on value added and its components by activity, ISIC rev4. Countries used in the analysis include
the European Union, United States, Japan, Canada, Australia, Korea, Mexico and Turkey. PGIM analysis based on data from MSCI, asof 6/28/2021.
17. Manyika, James, et al., “Digital America: A Tale of the Haves and Have-Mores,” McKinsey Global Institute, December 2015,<https://www.mckinsey.com/~/media/mckinsey/industries/technology%20media%20and%20telecommunications/high%20tech/
our%20insights/digital%20america%20a%20tale%20of%20the%20haves%20and%20have%20mores/mgi%20digital%20america_
executive%20summary_december%202015.pdf>
18. Hrushka, Anna, “What’s in store for challenger banks in 2021,” Banking Dive, January 25, 2021, <https://www.bankingdive.com/
news/challenger-banks-outlook-2021/593872/>
19. “The Future Means Business,” PGIM, October 2019, <https://www.pgim.com/megatrends/future-means-business>
20. Carson, Brant, et al., “Blockchain beyond the hype: What is the strategic business value?” McKinsey & Company, June 19, 2018,<https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/blockchain-beyond-the-hype-what-is-the-strategicbusiness-value>
21. World Bank Global Findex 2017, data accessed June 27, 2021, <https://globalfindex.worldbank.org>
22. “Walmart files for trademark for fintech unit: 'Hazel by Walmart',” Bloomberg, April 7, 2021, <https://www.bloomberg.com/news/
articles/2021-04-07/walmart-files-for-trademark-for-fintech-unit-hazel-by-walmart>
23. “Monzo bank in money laundering rules investigation,” BBC News, July 31, 2021, <https://www.bbc.com/news/business-58033700>
24. Siegel Bernard, Tara, “Consumers and Companies Are Buying In on Paying Later,” The New York Times, September 3, 2021, <https://www.nytimes.com/2021/09/03/your-money/buy-now-pay-later-afterpay-affirm-amazon-square.html?auth=login-email&login=email>40 RESHAPING SERVICES | PGIM

25. “Figure Announces Merger With Top Mortgage Lender Homebridge Financial Services,” Figure, August 3, 2021, <https://www.figure.
com/blog/figure-announces-merger-with-top-mortgage-lender-homebridge-financial-services>; Chiglinsky, Katherine, “Cagney’s Figure
Agrees to Merger with Lender Homebridge,” Bloomberg, August 3, 2021, <https://www.bloomberg.com/news/articles/2021-08-03/
cagney-s-figure-agrees-to-merge-with-mortgage-lender-homebridge>
26. “Twenty-five years of digitization: Ten insights into how to play it right,” McKinsey Global Institute, Prepared for the Digital EnterpriseShow 21-23 May, Madrid, May 2019, <https://www.mckinsey.com/~/media/mckinsey/business%20functions/mckinsey%20digital/
our%20insights/twenty-five%20years%20of%20digitization%20ten%20insights%20into%20how%20to%20play%20it%20right/
mgi-briefing-note-twenty-five-years-of-digitization-may-2019.ashx>
27. Mehrotra A, Bhatia RS, Snoswell CL, “Paying for Telemedicine After the Pandemic,” JAMA, 325(5):431–432, 2021, <https://jamanetwork.com/journals/jama/article-abstract/2775723>. Note: Canada figures represent Ontario.
28. Dolan, Shelagh, “The technology, devices, and benefits of remote patient monitoring in the healthcare industry,” Business Insider, July28, 2021, <https://www.businessinsider.com/remote-patient-monitoring-industry-explained>
29. Boddy, Jessica, “FDA Approves Marketing of Consumer Genetic Tests For Some Conditions,” NPR, April 7, 2017, <https://www.npr.
org/sections/health-shots/2017/04/07/522897473/fda-approves-marketing-of-consumer-genetic-tests-for-some-conditions>30. “23andMe for Healthcare Professionals,” 23andMe, <https://medical.23andme.com/>
31. Buhr, Sarah, “For less than $1,000 you can now pull up your entire genome on your smartphone,” Tech Crunch, March 8, 2016,<https://techcrunch.com/2016/03/08/you-can-now-pull-up-your-entire-genome-for-under-1000-on-your-smartphone/>
32. Landor, Laura, “How Apps Can Help Manage Chronic Diseases,” The Wall Street Journal and the American Medical Association,<https://partners.wsj.com/ama/charting-change/apps-can-help-manage-chronic-diseases/>
33. Nogrady, Bianca, “How Indian biotech is driving innovation,” Nature, December 12, 2018, <https://www.nature.com/articles/d41586018-07671-9>
34. “Extracting Growth Alpha in Emerging Markets,” Jennison Associates, October 2020, <https://cdn.pficdn.com/cms/jennison/sites/
default/files/2020-10/Extracting%20Growth%20Alpha%20in%20Emerging%20Markets.pdf>
35. Moreno, Sara, “Chinese Healthcare: Growth Abounds,” Jennison Associates, February 10, 2021, <https://www.jennison.com/brochure/chinese-healthcare-growth-abounds>
36. Wang, Xu and Diao, Yuanyuan, “New Drug Approvals in China in 2019,” Global Forum, May 2020, <https://globalforum.diaglobal.
org/issue/may-2020/new-drug-approvals-in-china-in-2019/>
37. Moreno, Sara, “Chinese Healthcare: Growth Abounds,” Jennison Associates, February 10, 2021, <https://www.jennison.com/brochure/chinese-healthcare-growth-abounds>
38. Xie, Grace and Fern Woo, Li, “How to cope with the Volume-based Procurement policy on high-value medical device?” KPMG, May
2021, <https://assets.kpmg/content/dam/kpmg/cn/pdf/en/2021/05/how-to-cope-with-the-volume-based-procurement-policy-on-highvalue-medical-device.pdf>
39. Jennings, Katie, “Venture Firm Behind Livongo Launches $150 Million Consumer Health Fund,” Forbes, May 18, 2021,<https://www.forbes.com/sites/katiejennings/2021/05/18/venture-firm-behind-livongo-launches-150-million-consumer-healthfund/?sh=433ad7547bc2>
40. “Modern care for modern families,” Maven, <https://www.mavenclinic.com/for-employers>; Cleo, <https://hicleo.com/for-employers/>
41. “A Silver Lining: The Investment Implications of an Aging World,” PGIM, November 2016, <https://www.pgim.com/megatrends/
longevity>. World Population Prospects 2019, United Nations. Seniors are defined as those aged 75+.
42. Ibid.
43. “Electric Vehicle Sales Review Q3,” Strategy&, Q3 2021, <https://www.strategyand.pwc.com/nl/en/industries/automotive/electricvehicle-sales-review-2021-q3.html>
44. Ibid.
45. Plumer, Brad, Popovich, Nadja, and Migliozzi, Blacki, “Electric Cars are Coming. How Long Until They Rule the Road?” New YorkTimes, March 10, 2021, <https://www.nytimes.com/interactive/2021/03/10/climate/electric-vehicle-fleet-turnover.html>
46. Based on interview with PGIM investment professional.
47. Williams, Nathan and Murray, Dan, “An Analysis of the Operational Costs of Trucking: 2020 Update,” American Transport ResearchInstitute, November 2020, <https://truckingresearch.org/wp-content/uploads/2020/11/ATRI-Operational-Costs-of-Trucking-2020.pdf>
48. Ambrose, Jillian, “UK plans to bring forward ban on fossil fuel vehicles to 2030,” The Guardian, September 21, 2020, <https://www.
theguardian.com/environment/2020/sep/21/uk-plans-to-bring-forward-ban-on-fossil-fuel-vehicles-to-2030>
49. Pan, Che, “Baidu will offer first paid robotaxi service in China next month, letting people hail rides without drivers,” South China
Morning Post, April 29, 2021, <https://www.scmp.com/tech/big-tech/article/3131617/baidu-will-offer-first-paid-robotaxi-service-chinanext-month-letting>

PGIM | RESHAPING SERVICES 41

50. Keenan, Michael, “Global Ecommerce Explained: Stats and Trends to Watch in 2021,” Shopify, May 13, 2021, <https://www.shopify.
com/enterprise/global-ecommerce-statistics>
51. Rulison, Larry, “Plug Power plays huge role helping Amazon and Walmart supply America during COVID-19 crisis,” Times Union,
May 7, 2020, <https://www.timesunion.com/business/article/Plug-Power-playing-huge-role-in-helping-Amazon-15254512.php>
52. Tabeta, Shunsuke, “China intends for self-driving cars to propel smart megacity,” Nikkei Asia, May 20, 2018, <https://asia.nikkei.com/
Economy/China-intends-for-self-driving-cars-to-propel-smart-megacity>
53. Jian, Yang, “China Opens up to AVs,” Automotive News, December 20, 2020, <https://www.autonews.com/shift/china-opens-avs>
54. Based on interview with Fosun RZ Capital.
55. “After the Great Lockdown: New Business Realities and the Implications for Investors,” PGIM, May 2020, <https://www.pgim.com/
megatrends/after-the-great-lockdown>
56. Tirone, Jonathan, “Congestion Pricing, the Route More Cities Are Taking,” Bloomberg, October 1, 2020, <https://www.bloomberg.
com/news/articles/2020-10-01/congestion-pricing-the-route-more-cities-are-taking-quicktake?sref=OXBg9m2M>
57. Howells, Richard, “Germany Raises The Bar For Supply Chain Traceability and Sustainability,” Forbes, July 1, 2021, <https://www.
forbes.com/sites/sap/2021/07/01/germany-raises-the-bar-for-supply-chain-traceability-and-sustainability/?sh=25eeab654e4e>58. Zarif, Rasheq, et al., “Autonomous Trucks Lead the Way,” Deloitte, February 17, 2021, <https://www2.deloitte.com/us/en/insights/
focus/future-of-mobility/autonomous-trucks-lead-the-way.html>
59. “Sensen Networks,” Enterprise IOT Insights, April 2020, <https://i0.wp.com/enterpriseiotinsights.com/wp-content/uploads/2020/04/
Sensen-Networks.jpg?fit=1280%2C720&ssl=1>
60. “The Technology Frontier: Investment Implications of Disruptive Change,” PGIM, Fall 2018, <https://www.pgim.com/megatrends/
technology-frontier>
61. Smith, Oliver, “Belgium’s Aion Bank has acquired London robo-advisor ETFmatic,” AltFi, March 10, 2021, <https://www.altfi.com/
article/7686_belgiums-aion-bank-has-acquired-london-robo-advisor-etfmatic>; Janowski, Davis, “Schwab Acquires Motif Investing
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62. Orchard, Marianne, "Teaming up for instant lending with Kabbage & ING," Medium, February 5, 2018, <https://medium.com/
gingertech/teaming-up-for-instant-lending-with-kabbage-ing-91f87718028>; "Philips completes the acquisition of BioTelemetry, Inc.,"
Philips, February 9, 2021, <https://www.philips.com/a-w/about/news/archive/standard/news/press/2021/20210209-philips-completesthe-acquisition-of-biotelemetry-inc.html>
63. “China’s Techlash Gains Steam. Again,” The Economist, July 28, 2021, <https://www.economist.com/business/2021/07/28/chinastechlash-gains-steam-again>
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com/2020/09/18/cars/uber-vasquez-charged/index.html>

42 RESHAPING SERVICES | PGIM

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PGIM’S MEGATREND SERIESHow today’s shifting global landscape will affect the investments of tomorrow

Weathering Climate Change
Climate change is no longer a hypothetical risk. It is already transforming the global
economy, reshaping markets and altering the investment landscape. In this paper, we
propose an actionable climate change agenda that addresses both hidden portfolio
vulnerabilities and potential opportunities in the transition to a lower-carbon world.
Learn more at pgim.com/climate

After the Great Lockdown
The pandemic has forced businesses to adapt in ways that will lead to lasting changes
in consumer behavior and corporate business models. Now is the time to focus on themassive disruption that lies ahead so we’re best positioned for when the Great Lockdown
has passed.
Learn more at pgim.com/lockdown

The Future Means Business
Disruptive forces have led to the emergence of three new business models that areradically changing the investment calculus for institutional investors. Here we explore theinvestment implications of these transformative new corporate models.
Learn more at pgim.com/futurefirm

The Technology Frontier
We are living in an era of unprecedented technological change. At PGIM, we believe
the implications for investors will be profound, radically transforming investment
opportunities across asset classes and geographies.
Learn more at pgim.com/tech

The End of Sovereignty?
Never before in history have people, information and capital moved across borders at the
speed, frequency and volume we see today. In this white paper, we take a closer look at theescalating tussle between globalization and nationalism, the implications this could havefor global financial markets, and how long-term investors may best position themselvesto navigate these uncertain times.
44 RESHAPING SERVICES | PGIM

Emerging Markets at the Crossroads
A radical shift in the forces shaping emerging market growth will require investors to takea different investment approach from what may have worked in the past. Increasingly,
discovering investment opportunities will be rooted in the ability to capture alpha fromthe new growth drivers, rather than in chasing the beta of the broad universe.

A Silver Lining
The unprecedented aging of the global population creates increased opportunities insenior housing, multifamily condos, biotech, and the emerging silvertech industry.
Institutional investors should consider how this megatrend could affect their portfolios,
given the trend’s evolving impact on consumer spending and far-reaching effects on
emerging nations, home to two-thirds of the world’s elderly.

Longevity and Liabilities
The rise in global life expectancy has implications for pension plan liabilities that are notfully appreciated. As new mortality tables demonstrate, longevity risk to pension liabilities
could increase dramatically over the next two to three decades. This report examines thechallenge and the available risk mitigation strategies.

The Wealth of Cities
Never in history has the pace of urbanization been so rapid: 60 to 70 million people
moving to cities every year for the next few decades. To help institutional investors benefit
from this “prime time” of urbanization, we identified a range of specific investment ideas
across the major investable themes of this opportune megatrend.

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PGIM | RESHAPING SERVICES 46ཻқࣆߴͤ ຌࣁྋͺธࠅ 6(& ͹ౌ࿧౦ࣁ‫ޒ‬໲ճऀͲ͍Ζ 3*,0 ΢ϱέ͗ࡠ੔ͪ͢΍͹Ͳͤɽͤ ຌࣁྋͺ৚ๅ఑‫ڛ‬Ν໪దͳͪ͢΍͹Ͳ͍Εɼಝఈ͹ۜ༧ঐ඾͹‫ש‬༢຤ͺ൤ജΝ໪దͳͪ͢΍͹Ͳͺ͍ΕΉͦΞɽΉͪɼຌࣁྋͶ‫͠ࡎى‬Η಼ͪ༲౵Ͷͯ͏ͱͺࠕ‫ޛ‬รߍ͠ΗΖ͞ͳ΍͍ΕΉͤɽͤ ‫͠ࡎى‬Ηͱ͏Ζࢤ৖ಊ޴౵ͺ‫Ͳ఼࣎ݳ‬͹‫ݡ‬մͲ͍Εɼ͞ΗΔͺࠕ‫ޛ‬รߍͤΖ͞ͳ΍͍ΕΉͤɽΉͪɼͨ͹݃Վ͹ࣰ֮੓Νන໎ͤΖ΍͹Ͳͺ͵͚ɼগཔ͹ࢤ৖‫ڧ؂‬͹รಊ౵ΝฯৄͤΖ΍͹Ͳ΍͍ΕΉͦΞɽͤ ຌࣁྋͶ‫͠ࡎى‬Ηͱ͏Ζࢤ৖‫ؖ‬࿊υʖν‫;ٶ‬৚ๅ౵ͺ৶བͲ͘Ζͳ൓இ֦ͪ͢झ৚ๅ‫͖ݱ‬Δ೘घͪ͢΍͹Ͳͤ͗ɼͨ͹৚ๅ͹ਜ਼֮੓ɼࣰ֮੓Ͷͯ͏ͱ౲ऀ͗ฯৄͤΖ΍͹Ͳͺ͍ΕΉͦΞɽͤ գ‫ڊ‬͹ӣ༽ࣰ੹ͺචͥ͢΍গཔ͹ӣ༽੔Վ౵ΝฯৄͤΖ΍͹Ͳͺ͍ΕΉͦΞɽͤ ຌࣁྋͺ๑ແɼճ‫ܯ‬ɼ੭ແ৏͹Πχώ΢η͍Ζ͏ͺ౦ࣁਬও౵Νߨ͑ͪΌͶࡠ੔͠Ηͪ΍͹Ͳͺ͍ΕΉͦΞɽͤ ౲ऀͶΓΖࣆ઴টଡ଼͵͢Ͷɼຌࣁྋ͹Ҳ෨Ήͪͺસ෨Ν෵੣ͤΖ͞ͳͺ‫͕͚ݐ‬இΕ஗͢Ήͤɽ※ 本資料内で取り上げられた資産クラス、個別セクター等はあくまで例示目的であり、推奨ならびにこれらにかかる将来性を明示・暗示的に示唆するものではありません。
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