Temasek Tracking - Making Sense Of Risks

" It must sometimes seem to Singaporeans that the management of Temasek and GIC have an unerring ability to find every banana skin in the room and promptly slip up on it." ... Kenneth Jeyeratnam blog (2012) 

With wisdom from hindsight it is easy to critique an investment decision and where the deal has gone terribly wrong, to bollock the decision maker. Then again, how is one supposed to take stock of the never ending tales of disasters by Temasek. Or are the failures simply accentuated because successes are seldom publicised as a matter of propriety. 

This is a series of blogs that highlight Temasek's assets which have floundered or appear to be floundering. The blog Temasek Tracking - Portfolio compilation is an attempt at recording an inventory of investments. Troubled assets are highlighted with a link to a microblog on each relevant investment.

Temasek started off investing under the mantle of national development. Where the mission is national development, elements of subsidy pervades and funding agency bottomline is never impressive as it is not meant to be. An example is the ill-fated Chartered Semiconductor Mfg in 1990s where Temasek lost billions doing national service investment.

It has moved away from 'big bang deals' of the past, where it has gone in to take substantial positions and controlling stakes in companies. As a supranational entity, there will always be suspicion of non-market motives for their acquisitions. The risk of igniting political-economic ripples in the target host country is high.  Such was the case in the 2006 accquisition of Thai Prime Minister's Shin Corp. Coming at a time of corruption allegation against the PM, Thais believed Thaksin Shinawatra took massive profits from an over-priced sale, but defaulted on taxes. It caused a serious diplomatic rift and burning of Singapore flags in Bangkok and sealed the downfall of the PM.

Traditional investors follow the 60:40 principle of investment. This suggests a 60% portfolio on equities and 40% fixed income government securities. The idea is the lower but fixed return on securities will balance out the higher but more volatile returns on equities. A Schroeder's study has found that the 60:40 method has proven very successful. But the low interest rates of the past decade has meant the 40% fixed revenue is no longer sufficient to balance out the volatility of equities earnings. Temasek is no traditionalist. It has a much higher risk appetite than GIC.

Ho Ching, wife of the Prime Minister, was appointed CEO in 2004. She came with a checquered engineering background. The new CEO immediately set about modernising and re-energising Temasek into what is today a well-respected sovereign wealth fund managing a portfolio of S$306B with 800 employees and 11 global offices. There is no doubt the infrastructure of Temasek today is her legacy. But as to how much value she actually created requires much financial analysis which is not the matter for this blog.

Fair or not, many of the older generation remembers her for the very first 'big bang' deal in the acquisition of Micropolis which resulted in a loss of S$500M. She has come a long way since. Temasek has diversified geographically so it is no longer impacted solely by Singapore economy. The US is an important target but entry timed in an era of high valuation seems foreboding. In the case of China, Temasek picked up assets in their post boom era. As China's economy cools, startups flounder. Some industry experts warn 90% of many Chinese tech startups will fail. Holding the view that India is on the cusp of their economic breakout, Temasek wants to get in pre-boom. With a highly bureaucratic India, it fuels suspicion that Singapore eased up on labour mobility policies in the CECA (FTA) signed in 2005 to facilitate Temasek's entry into the sub-continent. Latin America and Africa are two regions that are also in Temasek's lenses, two regions where it has very little experience.

Temasek does not manage risk the traditional way of setting limits or targets for asset class, country, sector, theme or single name concentration. One can assume neither does it have limits for other risk parameters like liquidity, currency and interest rate sensitivities. These are time-tested risk management regimes that all central banks impose on financial institutions in their jurisdiction, as do the MAS.

Instead, it approaches risk management on some VAR or Value At Risk methodology that employs fanciful algorithms. VAR in simple terms is the amount of cash a fund may lose in a given time frame in the event of a major downturn. 

Its investment philosophy is a long term horizon and with this it is prepared to take short term negative returns in some years in expectation of higher returns in the longer term. It retains a risk appetite to take concentrated positions, in other words, 'big bang' deals are still possible.

Temasek has shredded its image of a gangling sovereign investment arm. It has left behind the comprador, brick and mortar management style and brought in Wall Street type wheelers and dealers. In a world of frothy investment dollars due to decades of easy money policies by central banks globally, the liquidity increases capital competition on the supply side. Temasek puts its funds into more high risk deals in search of higher returns. It has become more of a Venture Capitalist, seeking out the the next Alibaba, Paypal, or Amazon.

Temasek's investment is predominantly in equities, both listed and unlisted private companies. In the aftermath of the 2008 financial crisis, it suffered a bruising loss of US$5B in a somewhat panic divestment of holdings in Barclays, Merrill Lynch and Bank of America. In classic contrast of impeccable timing, Warren Buffet picked up the BOA shares and made US$2B in one year. Temasek has since moved away form putting capital into established financial institutions and turned towards projects centered on technology, logistics, media and life sciences sectors. It is also into fund of funds and running its own private equity firms. It has since spawned several private equity companies that operate on leveraged basis. Outstanding bonds aggregate S$15B at March 2020. Temasek no doubt, sees itself in the company of great money management houses like Blackrock, Vanguard Group, UBS, Fidelity, etc. In simple layman terms, the focus has veered away from seeking rock steady stocks that provide a respectable income stream and reasonable capital appreciation, and instead has gone into forward looking mode in trying to outsmart the market by identifying tomorrow's winners. It is in the nature of taking bets, although a calculated one, but nevertheless, they are bets.

The sovereign wealth fund is now a true blue VC fund, pumping seemingly unlimited money into startups that use cash-burning models.  It now regularly leads funding rounds as the startups go into their A, B, C and D series of fund raising for their seemingly unsatiable need for cash to burn. Even as the cash burns and the companies' losses have no end in sight, their valuation is put in an elevator heading for the topfloor. The unicorns, those with US$1B valuation, take centre stage, often with a flamboyant founder who gives presentations in their bermudas, soon in flip flops, and likely travels in private jets purchased with investor money. These companies never turn in a single dollar profit for years, but VCers will point to Amazon which made its first profit after a decade of losses and is now a US1 trillion company. For as long as the startups are on the books, it's all about valuation. And valuation in this case, has nothing to do with International Financial Reporting Standards. It is based on investor expectations. How these expectations are translated into the bottomline is rather foggy. 

Today, as Temasek manages a S$306B portfolio, should conservative Singaporeans look at the SWF with awe, esteem, or with a tinge of concern. Afterall, invesTment 101 cautions pensioners to place their bets on lesser risks and be satisfied with a lower but steady return. Should the nation's interest be better served for reserves to be managed more conservatively? The failures at Neptune Orient Lines and Chartered Semiconductors have demonstrated that when playing with big boys, one needs depth of knowledge in the game. Can Singapore's aristocrats thow up several more Ho Chings in the years ahead? Dilhan Pillay Sandrasegara, currently the CEO of Temasek International, is possibly being groomed to take over from Ho Ching. For all his credentials and expertise, Dilham does not have a drop of blue blood in him. As an outsider of the Singapore aristocrat family. does he have the standing to ride out political storms from billion dollar losses the way Ho Ching is able to? Unlikely.

Read: Temasek plans to make its presence felt 

Perhaps the greatest risk is the company itself and its management culture. Deals are many, varied, humongous and cover a wide spectrum of investment types. Afterall, the CEO once quipped, it's a game where players must have 'balls'. At any one time, there is probably a hundred deals at various stages of processing.  Temasek seems to be in a hurry and running on steroids. 

The Ministry of Finance is the sole shareholder of Temasek, but it cuts the fund loose to operate as a private exempt company. The independence of the company is a sensitive issue and MOF has persistently insisted the cabinet does not interfere with the operation of Temasek. The independence and sovereignty factor impedes Temasek's cross border dealings where national interest may be raised by target's domicile country. Ministerial supervision is surrendered in deference to market sensitivity.

A high level insider once explained there is no risk committee at board level. He said with reference to Temasek : “Every commercial organization of any reasonable scale, and in particular financial institutions, simply must have a dedicated risk management committee of the board that is fully independent of management. To not do so is simply playing Russian Roulette and is inexcusable in today’s volatile era and in light of the recent financial crisis ”.


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