Temasek has three successful companies operating asset-light, fund management, operating and investment platforms. These are CapitaLand Investment (CLI), Keppel and Mapletree Investments. While CLI and Keppel are listed, Mapletree Investments is not listed. However, Mapletree Investments is the sponsor and major unitholder of three large S-REITs and the manager and general partner (GP) of eight private funds. As at March 15, Temasek holds a 53.28% deemed interest of CLI, 21.20% deemed interest of Keppel and all of Mapletree Investments.
In February this year, CLI, which manages 30 private vehicles and six listed REITs, set itself a target of $200 billion in funds under management (FUM) by 2028. In its FY2024 annual report for the 12 months to March 31, Mapletree Investments, under its fourth five-year plan (FYP), set a target of $100 billion to $120 billion for assets under management (AUM) to be attained by 2029.
In March 2023, Keppel announced a target of $200 billion for FUM by 2030. As of April this year, Keppel has estimated its FUM to be $79 billion.
Why have these Temasek entities announced these ambitious FUM and AUM targets? Their business models aim to ensure regular, stable, annuity-type income with growth from “growth businesses”.
In 2022, Keppel divested its legacy offshore and marine assets and started to restructure as an asset manager of alternative investment products. The old CapitaLand was restructured in 2021 into a privately held development business, CapitaLand Development, with a real estate investment manager (REIM) as the listed entity, CLI.
The asset management platform model has an advantage over older capital-consuming models. They aim to be asset-light, generating relatively higher returns on equity (ROE), predictable cash flows, less volatile earnings and stable shareholder dividends.
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The model requires an ecosystem of operators, funds that hold the assets, and investors in the funds, often referred to as capital partners. More importantly, the operator and manager, shareholders, capital partners — and, in the case of REITs, the unitholders — must be aligned in their interests.
When asked about this, Keppel group CEO Loh Chin Hua says: “Our shareholders will know that our interest is aligned with the shareholders and our investors in the funds and the REITs that we run. On unitholders of our REITs or our LPs [limited partners] for the funds: As a global asset manager, we must look after their interests. If we do not look after their interests, we do not have a business.”
Interested party transactions and similar factors are unlikely to give rise to a conflict of interest. “We have strong corporate governance to deal with interested person transactions. Taking care of different stakeholders’ interests is paramount to the group,” Loh says.
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Additionally, with CLI as a REIM and Keppel as an alternatives asset manager, the duo would no longer have “lumpy” net profit figures. Before creating its new platform, Keppel had two segments from which it derived these lumpy profits. The two sectors — property development, through Keppel Land, and offshore rig-building — were subject to cycles. During the 2014 offshore slump, Keppel’s property sector supported profits. However, with the focus on sustainability, the environment and limiting emissions, oil and gas are seen as sunset industries.
The old CapitaLand, too, was subject to property cycles. Following its divestment of Australand, the reliance on China increased. For instance, in FY2020, China accounted for 41% of the group’s assets. With the restructuring, its exposure to China is lowered to 30% of AUM.
Asset management platforms earn mainly from fee-based income. A strategy based on fee income, fee-related earnings, or other types of recurring income offers stability in earnings, including net profit, predictable dividends, higher return on equity and better total shareholder returns. The management of CLI and Keppel has emphasised fee-based income from operating platforms.
Furthermore, the advantage of using third-party capital in private funds and joint ventures, including those with ownership of less than 20%, is that it sidesteps some of the volatility accompanying mark-to-market gains and losses, such as fair valuation reporting standards. The model is also less capital-intensive.
Keppel’s restructuring kills two birds with one stone
Keppel’s restructuring, starting in 2022, changed its focus from brown to green with the divestment of its legacy offshore rigs and Keppel Offshore & Marine. Secondly, the restructuring removed the conglomerate structure.
On Jan 1, Keppel changed its name to just Keppel from Keppel Corporation BN4 to “shed its conglomerate structure”. Keppel is now an alternatives asset management company with three platforms and three business segments. These are the fund management platform, investment platform and operating platform. Keppel’s three business segments of infrastructure, real estate and connectivity are nestled within the umbrella platforms.
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“In May 2023, we unveiled the next phase of our Vision 2030 transformation — to shed our conglomerate structure and become one horizontally integrated company. These are all geared towards remaking Keppel to become a leading global asset manager and operator,” Loh said in his 2024 New Year message.
For instance, connectivity cuts across all three platforms. Keppel Data Centre is the operating entity. The Keppel Data Centre Fund Series and Keppel DC REIT are part of the fund management and investment platforms. Keppel took a stake in the Bifrost Cable System, and in 2023, it secured private investors to invest alongside it. The Bifrost Cable is the first subsea fibre cable system directly connecting Singapore to the West Coast of North America via Indonesia through the Java Sea and the Celebes Sea.
Keppel’s operating platform is integrated with the fund management and investment platforms, as evidenced by how Keppel Data Centre operates and manages KDC REIT’s properties. In addition, Keppel Data Centre builds and operates new data centres, which are offered to KDC REIT when stabilised.
In 2023, as part of its restructuring, Keppel divested its legacy rig assets into an AssetCo (asset company) for $4.05 billion. The transaction was not in cash but comprised $3,929.8 million of vendor notes, $120 million of 10% Keppel perpetual securities and $0.5 million in the capital of AssetCo via the issuance of 499,000 new ordinary shares in AssetCo for $1 each. Additionally, Keppel Offshore & Marine was merged with Seatrium.
CEO Loh believes that Keppel can offer institutional investors more than financial advice. “Keppel, with the DNA of an asset manager as well as strong operating capabilities, presents an attractive proposition to our LPs,” Loh points out. “We can draw on our deep domain expertise, whether it is in the energy transition, infrastructure, connectivity or real estate solutions, to create alphas for the funds we manage.”
CapitaLand: travelling light
In 2021, CapitaLand split into two. The original CapitaLand comprised both the development and operating businesses and owned stakes in its REITs and funds. In 2021, the development business (which was China-heavy) was privatised under CapitaLand Development (CLD).
CLI, a REIM, is the listed entity. It comprises a management business and a real estate business where it owns stakes in REITs, private funds and assets which are on its balance sheet. Greenfield and brownfield projects are undertaken by its private funds or in partnership with its REITs and business trusts. This more asset-light structure allows CLI to garner higher ROEs through its fee-based businesses.
CLI’s two main recurring revenue streams are its fee-income-related business (FRB) and its real-estate investment business (REIB).
The FRB segment is subdivided into commercial management (formerly property management), lodging management (LM), fees from listed REITs, and private funds management.
In LM, CLI subsidiary The Ascott undertakes the management of properties that reside in its private funds and CapitaLand Ascott Trust HMN , as well as those owned by third parties.
In FY2023, lodging management was the largest contributor to CLI’s FRB. However, in 1QFY2024 ended March 31, commercial management overtook lodging management in terms of FRB income.
REIB comprises income for CLI’s properties held on its balance sheet, CLI’s stakes in its listed funds and the general partner stakes in its private funds.
CLI group CEO Lee Chee Koon has said that its stakes in its REITs and private funds ensure alignment with capital partners and unitholders. CLI itself benefits from distribution per unit (DPU) growth and “promotes” (which refers to performance fees) in terms of its private funds.
More recently, CLI has turned its attention to data centres. CapitaLand India is currently developing four data centres in Mumbai, Bengaluru, Chennai and Hyderabad, with a total gross power of 244MW.
CLI (including its funds, CapitaLand Ascendas REIT A17U and CapitaLand India Trust CY6U ) has 27 data centres in eight countries, with about US$4.5 billion ($6 billion) in AUM and over 800MW in gross power.
Investors return as rates peak
In its third FYP (five-year plan) in FY2024 ended March 31, Mapletree reported an AUM of $77.5 billion, of which 78% came from third parties. Its fourth FYP has an AUM target of $100 billion to $120 billion.
For its fourth FYP, Mapletree group CEO Hiew Yoon Khong says the group will continue focusing on data centres, logistics, office and student housing “through strategic investments and increased development activity”.
“The group will undertake more and structure more development projects and funds, especially in the US and Europe, in addition to our development activity in Asia, for higher returns and better-quality products,” Hiew adds.
Increasingly, interest rates are likely to move in favour of REITs soon. JP Morgan says it “continues to like CapitaLand Integrated Commercial Trust C38U (CICT)”. In addition, it has upgraded Mapletree Industrial Trust ME8U (MINT) from “neutral” to “overweight”.
“The key focus is on REITs with a sustainable earnings profile and lower risk of disappointment with a preference to avoid short-term trades. We have been recommending that investors focus on Singapore retail and data centre exposures given tight supply,” JP Morgan says in a report dated July 14.
“For MINT, the overhang from having 66% of its debt in US dollars, which has seen faster rate hikes than REITs with SG dollar debt, is lifted on earlier Fed cuts, and [there is likely to be] uplift arising from the data centre thematic which is around 55% of MINT’s AUM,” JP Morgan says.
Similarly, in a July 15 report, UOB Kay Hian points to CICT being a beneficiary of an asset enhancement initiative (AEI) at the popular IMM Building, an outlet mall. “Committed occupancy for Phase 1 and 2 of the AEI, including leases under advanced negotiations, is high at 75%,” UOB Kay Hian says. IMM Building will remain operational during the AEI, which will be carried out over four phases. Upon completion in 3Q2025, IMM will be the largest outlet mall in Singapore with 110 outlet stores. The targeted ROI is 8% on the capex of $48 million.
As the rate cycle turns, the REITs within CLI, Keppel and Mapletree may well rally as the companies themselves attempt to achieve their AUM objectives.
