MEGATRENDSEXECUTIVE SUMMARYRESHAPING SERVICES
The investment implications of technological disruption

Key Takeaways¡¡

The current wave of innovation impacting services
will differ significantly from previous waves thatvanquished manufacturing and retail incumbents
for several reasons:tech-savvy populations to leapfrog technology
and adopt cutting-edge innovations faster, giving
disruptors an upper hand in these markets.
¡

The media hype around some nascenttechnological innovations – like blockchain andautonomous vehicles – is often way ahead of today’s
investable reality. As these evolving technologies
mature, institutional investors should consider
tangible investment opportunities like private
blockchains and infrastructure for greener andsmarter vehicles.

Third, after observing the turmoil in the
manufacturing and retail sectors, incumbent
service firms will not be caught by surprise.
In fact, many are embracing new technologies
rather than competing with them.

¡

Upstart innovators will be among the winners of
this next wave of disruption. Especially ones thateither expand the existing market – like neobanks –or ones that transform the way we consume services
forever – like apps that monitor chronic conditions.

Technological disruption and adoption will
not proceed at the same pace in all regions.
For example, emerging markets are much lessencumbered by legacy technology infrastructure
than the US and Europe. This allows their younger,¡

Along with these upstart innovators, a select few
service incumbents will emerge from the coming
wave of disruption stronger and more efficient.
Investors will need to discern which incumbents will
emerge as winners and which will be left behind.

–First, services – especially healthcare andfinancial services – tend to be more heavily
regulated globally than manufacturing or retail.

–Second, client networks or distribution
channels for services are often controlled byincumbents and can be difficult or impossible
to build organically.

–

PGIM | RESHAPING SERVICES | EXECUTIVE SUMMARY 1

The current wave of technological disruption has finallyreached the shores of the service economy. This will represent
a major shift for investors and the global economy as services
represent over two-thirds of global GDP, three-quarters of
the workforce in developed markets, and nearly half of theworkforce in advanced emerging markets.
Advances in technologies such as cloud computing, artificial
intelligence (AI), advanced data analytics, and machinelearning (ML) are radically reshaping winners and losers
across services in both developed and emerging markets –and at an even faster pace after the COVID-19 pandemic(Table 1).
In our latest Megatrends paper, Reshaping Services: The
investment implications of technological disruption, we propose
an actionable investment agenda for institutional investors

that encompasses individual asset-class strategies as well asrecommendations on how to position portfolios for this newwave of disruption in the service sector. To do so, we draw 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 service sector and
35% of the MSCI ACWI: financial services, healthcare,and transportation and logistics. We bring a pragmaticinvestment lens to the current wave of technological change
in the service sector, recognizing that long-term investors willneed to carefully separate techno-optimist hype from on-theground investable reality.

Table 1: Three phases of technology evolution
Phase 1
MachineExamples of key 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.

PGIM | RESHAPING SERVICES | EXECUTIVE SUMMARY 2

Investment Implications by Asset Class
The report proposes a range of sector-specific investment
themes for institutional investors to consider:¡¡Financial services is undergoing a major transformation,with neobank and fintech disruptors challenging
traditional banks, insurers and wealth managers. But
the incumbents are not sitting by idly either. Together,
these trends are contributing to a range of investment
opportunities across the sector, for example:–––

Fintech platforms that embed credit within theirlarge online network and neobanks that target
underbanked populations present attractive investment
opportunities for public and private equity investors.
Insurance firms that leverage proprietary big dataand integrate AI and ML to streamline parts of theunderwriting and claims process should provide
excellent opportunities for both debt andequity investors.
Blockchain applications that solve specific real-world
problems today – like permissioned distributed
ledgers for payments and transactions – are most
likely to succeed and offer tangible opportunities for
institutional investors.

¡

Healthcare is increasingly being defined by three major
trends: virtualization, personalization and segmentation.
As these trends transform the way healthcare isadministered and delivered globally, several investment
themes emerge. Examples include:–

Emerging markets offer new opportunities and risks
for biotech and pharmaceuticals. Despite ongoingregulatory uncertainty, China can offer some attractive
growth opportunities for equity investors (Exhibit 1).

–

App-based healthcare startups that help people makebetter behavioral choices for their health throughpersonalized approaches can be compelling VC
investments.

–

The proliferation of precision medicine and otheradvances like liquid biopsy and genomics provide
enduring demand growth for lab equipment
and testing materials. This presents an excellent
opportunity for debt investors.

Transportation and logistics is another sector on the cuspof significant innovation. While some logistics firms like
DHL and Amazon employ cutting-edge technology intheir operations, overall the sector is at an early stage ofExhibit 1: China’s pharmaceutical R&D spending is growing
25%

60
50

19%

21%
20%

17%

US$ bn

40

15%
12%

30
7%

20

8%

10
0

9%

15%

13%

10%
48

11

12

14

17

2015

2016

2017

2018

R&D Spending (LHS)

21

2019

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.
PGIM | RESHAPING SERVICES | EXECUTIVE SUMMARY 3

technological disruption. With transformative innovations
like autonomous vehicles (AV) still in early stages of theirevolution, investors have a range of opportunities to draw
from, including the following:
The landscape for AV is highly fragmented with many
global partnerships vying for first-mover advantage.
Importantly, testing and trials are moving forward
at different speeds in different regions, providing
opportunities for active equity and VC investors.

––

The surge in online shopping due to COVID-19
restrictions has created tremendous new growth indemand for distribution and logistics facilities –
especially in areas like Europe where e-commerce
penetration had been lagging.

–

The less tech-forward portions of the supply
chain ecosystem provide growth opportunities forsoftware firms that optimize logistics and improvetransportation networks.

Portfolio Implications¡

Position the portfolio for service sector disruption – which will have a radically different trajectory thanmanufacturing and retail disruption: In tandem with new winning startups, disruption in services will actually
increase the dominance of a select group of technology-forward incumbents. Understanding the characteristics ofthese select winning incumbents is especially relevant for long-duration investments such as private assets and longmaturity debt.

¡

Make complementary investments in the technology infrastructure that will underpin 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 asset managers to identify the companies providing the technological backbone that will
support the coming disruption. This includes companies that provide cloud computing, fiber optic networks, data
centers, AI and ML-powered toolkits and other related “pipes and plumbing.”¡

Brace for regulatory backlash as it spills over into services: Regulatory uncertainty is common across many cuttingedge technologies (e.g., blockchain and AV) – though specifics vary significantly by region and sectors. Investors often
overlook the unsettled regulatory environment in which today’s emerging firms operate. Recent examples of “techlash”
in China, for example, caught many investors by surprise.

¡

Proactively engage your board and senior leadership on next-generation technologies: The implication of newtechnologies in services are too far-reaching to leave to tech sector analysts or back-office IT teams. CIOs can enhancetheir team’s understanding of this disruption through a range of actions including:–Identify the metrics and key performance indicators that are relevant for each asset class in identifying winningincumbents (e.g., number of data scientists, investment spend of new technologies and M&A activity levels).

–

Deepen your network and relationships with startups, VC firms and even the CTOs of forward-thinking
incumbents to keep pace with innovations and disruptive technologies.

–

Engage external managers in targeted discussions to learn how they monitor technology risks and opportunities
across their security and asset selection process.

PGIM | RESHAPING SERVICES | EXECUTIVE SUMMARY 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 specificproblems today
Incumbent banks leveraging new technology will thrive andwiden their moats
Next-generation payment systems allow tech-forward
incumbents and select new entrants to thrive
Healthcare
Emerging markets offer new opportunities and risks forbiotech and pharmaceuticals
Investing in small-cap US biotech firms requires anactive approach
Care outside of the doctor’s office, from an app

Specialized healthcare platforms
Medical devices as a service offer stable cash flows fordebt investors
Lab testing and diagnostics offer steady cash flows fordebt investors
Senior housing remains attractive for real estate investors

PGIM | RESHAPING SERVICES | EXECUTIVE SUMMARY 5

Public Equity

Public andPrivate Debt

Real Estate andInfrastructure

Venture Capital

Private Equity

Transportation and Logistics
Participating in fragmented AV landscape

Digital platforms to optimize supply chains and logistics
Europe offers new opportunities and challenges inlogistics real estate
Green technology alters the locational analysis forwarehouses in the US
Opportunities in the transition to greener andsmarter infrastructure
A very long road for EV presents ICE opportunities
for debt investors
Logistics incumbents embracing cloud technology will thrive

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