What is Temasek’s rationale for investing some 52% of its portfolio in the private markets and how does Temasek’s performance compare to that of its peers? The Edge Singapore goes behind the numbers and explores some of the biggest names in Temasek’s portfolio
Singapore-headquartered global investment firm Temasek on July 9 reported $389 billion in net portfolio value (NPV) for its investments in FY2024 ended March 31, up $7 billion from a year ago, or 1.83% higher y-o-y. However, this is below FY2022’s NPV of $403 billion.
After adjusting for mark-to-market (MTM) NPV, Temasek would have reported an NPV of $420 billion for FY2024, up $9 billion from FY2023’s MTM NPV but down from about $438 billion seen in FY2022.
In FY2024, the group made a net profit of $5.4 billion, swinging back from its $7.3 billion loss in FY2023. Temasek highlighted this MTM figure while noting that its portfolio’s share of unlisted assets has grown from about 20% in FY2004 to 52% in FY2024.
Temasek says reporting unlisted assets at MTM value would align Temasek more with its peers.
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Four models
Temasek was formed in 1974 under the Companies Act and hence is not strictly a sovereign wealth fund (SWF) in the manner that GIC or Norway’s Government Pension Fund Global are.
Nonetheless, Singaporeans benefit from the investments of GIC and Temasek, which supplement the annual Budget through the Net Investment Returns Contribution (NIRC). NIRC from Singapore’s invested reserves — capped at 50% of long-term returns — is estimated to be $23.5 billion for FY2024, contributing around 21% to a total expenditure of around $111.8 billion.
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According to Portfolio Management for Institutional Investors, a compulsory reading for the Chartered Financial Analyst (CFA) exam authored byArjan Berkelaar, Kate Misic and Peter C Stimes, pensions and SWFs can be categorised under four broad groups: the Norwegian model, the Endowment model, the Canadian model and the Liability-Driven Investing (LDI) model.
The Norwegian model is the most liquid, with a traditional 60:40 asset allocation for equities and bonds. To date, the Norwegians have resisted the temptation to invest in private equity (PE).
The Canadian and Endowment models have a fraction of PE. The model has its advantages and disadvantages. “Because PE companies aren’t subject to public market scrutiny, there is also less noise or volatility in returns over time. At the same time, this means there is limited transparency in PE investments. PE risks include illiquidity, less regulatory oversight and higher investor fees,” notes Jinny Choi, senior PE analyst at PitchBook.
As the population in the developed economies of Europe and North America ages, pension funds are increasingly turning to the LDI model with the objective of generating returns sufficient to cover liabilities.
“The LDI model focuses on maximising expected surplus return (excess return of assets over liabilities) and managing surplus volatility. Although the implementation and resultant asset allocation may vary significantly, LDI portfolios — other than for banks and insurance institutions — typically have significant exposure to long-duration fixed-income securities,” write Berkelaar, Misic and Stimes.
Temasek is not a traditional pension fund or SWF, which has to match its returns against liabilities, such as payouts to its ageing population, although Singapore’s population is ageing rapidly.
Most pension funds and SWFs are relatively liquid. The Endowment and Canadian models have a large portion of unlisted assets, around 28%, compared to the Norwegian model.
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Even then, unlike the Endowment or Canadian models, Temasek’s portion of private or unlisted assets was 52% of its portfolio in FY2024, one percentage point lower than in FY2023 and vastly higher than the average of 28% for pension funds.
Unlike developed market pension funds, which attempt to match their liabilities or payouts with their returns, Temasek takes a different approach.
“The way we look at investments, we don’t have a target for private or publicly listed assets. We look at our themes and see where the opportunities will meet the themes and our commercial returns objectives. The private-public asset mix is an outcome of our investment activity. We’ve achieved better returns on our private assets over the years [compared to listed assets],” explains Png Chin Yee, chief financial officer of Temasek International.
Refreshed charter
Sustainable living is one of four structural trends Temasek identified in 2016, alongside digitisation, the future of consumption and longer lifespans.
According to the refreshed Temasek Charter, unveiled in June, its purpose is to deliver sustainable returns over the long term as a global investor rooted in Singapore. “We have developed our T2030 strategy to build a resilient and forward-looking portfolio, with sustainability at our core,” says Temasek.
The charter has been refreshed “every few years since it was introduced in 2002”, says Temasek chairman Lim Boon Heng at the unveiling of the new Charter on June 25. “We embarked on a refresh of our charter to ensure it remains relevant to our roles and core focus.”
Chia Song Hwee, deputy CEO of Temasek International, says: “Our portfolio is never static. We always reshape it because the environment [has] always changed on us.”
For instance, the pandemic, which started in 2020, was a black swan event. On the other hand, the supply chain shifts that followed, along with the inflationary trend that accompanied it, were well-flagged and, to an extent, expected. Also, the US had cautioned that a Russian invasion of Ukraine, which took place on Feb 24, 2022, was on the cards.
However, Chia says the speed at which central banks hiked rates afterwards was unexpected. “Just take an example of interest rates. We never anticipated that interest rates would be hiked up so quickly globally. It caught many investors by surprise. Parts of our portfolio got impacted and other parts of the portfolio also benefitted,” he says.
Some of the new technologies that Temasek invested in have familiar names. These include proxies of generative AI (artificial intelligence), data centre infrastructure, advanced semiconductor technologies companies like ASML, and its existing portfolio companies, including Keppel Data Centres, Mapletree, Singapore Telecommunications Z74 and ST Telemedia.
Temasek has also invested in the development of AI-enabled applications. Its subsidiary, Aicadium, works with selected portfolio companies on AI value-creation cases to boost returns.
Unlisted names
Apart from well-known, wholly owned, unlisted names like Mapletree Investments, Singapore Power and PSA International, Temasek also invests in up-and-coming names or “early-stage companies”.
The investor says this helps “identify potential winners early, to keep abreast of the latest technologies and innovations, and to drive portfolio development efforts”.
As part of Temasek’s risk management framework, it caps its exposure to early-stage investments at 6% of its overall portfolio.
Temasek’s early-stage investments account for “under 6%” of its total portfolio, with about half through direct investments and the rest through venture capital funds.
Temasek “typically invests smaller amounts” at the initial investment to increase its stake “if the company demonstrates successful de-risking”.
“We are cognisant of these early-stage companies’ risks and challenges and accept the binary risks of investing in them. However, some of these companies also have the potential to achieve significant growth over time and deliver outsized returns,” says Temasek.
Some names in its stable of unlisted assets are asset management companies Seviora Holdings, Pavilion Capital and Vertex Holdings, which manage around $80 billion in assets, which includes third-party capital and Temasek’s own capital.
On July 15, Seviora announced it would take a minority stake in Hong Kong-headquartered private credit fund manager ADM Capital. The partnership is expected to be finalised in 4Q2024, subject to regulatory approvals.
According to Temasek, investments in PE and credit funds have enabled Temasek to “gain deeper insights” into new markets and sub-sectors of specialisation while providing co-investment opportunities. “The rest of our unlisted portfolio comprises direct investments in private companies.”
These investments include Ant Group, AS Watson, Ceva Santé Animale, Element Materials Technology, Manipal Health Enterprises, Mastronardi, Schneider Electric India and Topsoe.
Singapore stalwarts constitute 31% of the $202 billion unlisted portfolio. These include Singapore Power, Singapore Technologies Telemedia, SMRT, CapitaLand, Mapletree Investments and Mandai Wildlife Group.
These august names alone prove private companies can provide good returns. “PE tends to deliver higher returns than public markets and other asset classes and can offer investors access to companies and industries experiencing higher growth and innovation,” PitchBook’s Choi points out.
Temasek says its unlisted portfolio offers liquidity through divestments, steady dividends from mature companies and distributions from a high-quality fund portfolio.
Connie Chan, Temasek International’s head of financial services, says Temasek has achieved liquidity by publicly listing its unlisted assets.
Over the past five years, portfolio companies that went public include food delivery operators DoorDash and Zomato, software firm Intapp and biotech company Gracell Biotechnologies. US-based DoorDash was initially listed on the New York Stock Exchange before moving to Nasdaq in 2023. Zomato is listed on India’s National Stock Exchange, while China’s Gracell and the US’s Intapp are listed on Nasdaq.
Chan also notes the potential appreciation of its portfolio companies after they become public, such as the Netherlands-based payments company Adyen.
Temasek participated in Adyen’s US$250 million funding round in 2014. In 2018, the company debuted on Euronext Amsterdam at the offer price of EUR240 apiece. Its share price peaked at EUR2,766 on Aug 24, 2021, and has been up about 170% since going public.
“The amount of appreciation from the time Adyen went public to now is quite substantial,” says Chan. “So, when we look at our investments, it is not just about divesting once it becomes public. It’s also about [whether] we still see value in the company at the time and if there is a lot of appreciation that can still happen after [the IPO].”
Taking the long view
DBS Group Holdings likely ranks as one of Temasek’s star performers over the past 10 years. Since 2009, the year that current group CEO Piyush Gupta took the helm, DBS’s net profit rose from $2 billion to $10 billion in FY2023 ended December 2023.
Gupta has articulated that DBS will be able to defend that figure. Interestingly, regarding total shareholder returns (TSR), DBS has outperformed Temasek (see Chart 1).
Since 2009, DBS has been up 9.6% for price alone based on CAGR between 2009 and the end of 2023. Cumulatively, DBS’s share price is up 297%. Including dividends reinvested, DBS’s CAGR for the period would be 14.3%, and total TSR would be 646%.
According to the National Library Board Archives, in April 1968, then Minister for Finance Goh Keng Swee announced the government’s plans to form a development bank with equity participation from the public to finance Singapore’s industrialisation project.
The Development Bank of Singapore, as it was known, was tasked with supporting the manufacturing and processing industries, new industries and development projects, including urban renewal and tourism schemes.
More recently, DBS has focused on loan and deposit growth, risk management, wealth management, digitalisation, Basel IV, sustainability, net zero and other 21st-century challenges and opportunities.
According to Temasek, its 10-year returns are ahead of the Straits Times Index and MSCI China, but it underperformed the MSCI North America Index.
“Firstly, 10-, 20-year returns are our main focus. For the type of capital that we have, it is well-suited for us to take a long-term view and invest with that in mind. We are not a day trader investor. The other part [that] is important to us is building a resilient portfolio that can withstand market dislocations, and we have demonstrated the resilience of our portfolio over the years,” says Chia.
Over a 10-year period, Temasek has outperformed MSCI China but underperformed benchmarks such as MSCI ACWI and the S&P 500 Index. Over 20-year and 30-year time frames, it has been challenging to outperform the S&P 500.
The Edge Singapore’s in-house analyst Thiveyen Kathirrasan says it is difficult to outperform passive returns. That may mean local investors should have some passive investment instruments (such as the SPDR S&P 500 ETF and SPDR Gold ETF) in their portfolios as risk mitigants.
By going global, the hope is that Temasek’s four structural trends can reap similar rewards to those of DBS and its Singapore stalwarts.
Read the full cover story:
- Five firms — including SIA and Sembcorp – form the bulk of Temasek’s portfolio emissions
- Temasek-linked stocks and their valuation
- CapitaLand, Keppel and Mapletree go asset-light and take flight with an interest rate tailwind
- Seatrium shakes off its past with new contracts
- Olam: From Muddy Waters to IPO plans
- High time for telcos Singtel, StarHub and M1 to consolidate?
- Strong order books place ST Engineering in favourable light
Photos: Bloomberg
