financial Giant makes waves

Miller, M. (2008). Temasek Rising. The Deal. Retrieved 31st March 2008 from http://www.thedeal.com/servlet/Satellite?pagename=NYT&c=TDDArticle&cid=1202101593995

Two years ago, hundreds of thousands of Thais took to the streets after Prime Minister Thaksin Shinawatra and his family sold a controlling stake in Shin Corp., the country's biggest mobile telecommunications conglomerate. It was a sweetheart deal that generated Thaksin almost $2 billion tax-free and revealed just how insensitive he was to perceptions of corruption-fueled wealth. In the chaotic aftermath of the scandal, elections were hastily called. The Thai military eventually stepped in. Thaksin was deposed and remains in exile.

Shin's acquirer was Temasek Holdings Ltd., a decades-old, Singaporean sovereign wealth fund, which found itself the object of Thai fury as well. Demonstrators called the move "economic imperialism," hurled anti-Singapore invectives and burned effigies of both Singapore's prime minister and his wife, who, coincidentally or not, heads the fund.

The degree of anger shocked not only Temasek, but a nonplused Singapore government as well. Neither should have been particularly surprised. Particularly in Asia, Temasek has become synonymous with "Singapore Inc.," a potent, increasingly muscular and, to its critics, heavy-handed business force. It is "the most aggressive corporate expansionist in this region," one Malaysian commentator says. Others fear that Temasek, in its investment decisions, does the government's bidding and serves as a kind of latter-day Trojan horse. "There is that fear," admits the India-based research director for an investment bank. Temasek has been increasingly active in India over the past two years.

While Temasek's charge is profitability and insuring that Singapore's wealth continues to grow, its recent spreading of its investment riches does represent a kind of "soft diplomacy," says a Singaporean lawyer and unabashed fan of the fund, who casts the process as a positive. "We're a small country, a rich country. We always need allies."

From its roots as a financial backer of Singaporean companies, Temasek has in recent years moved aggressively, first within Southeast Asia, then Asia as a whole and finally to the West. It has acquired stakes in critical industries such as telecommunications and in companies that are household names, most recently Merrill Lynch & Co. As the more than $100 billion fund expands outward with its increasingly robust checkbook, it discovers that investment decisions can have serious, sometimes dramatic and occasionally unforeseen regional and geopolitical implications.

"We've got to take various factors into account such as whether the company or the activity is iconic for that country, whether it will arouse all kinds of emotional sentiments," Temasek chairman Suppiah Dhanabalan told the local Straits Times newspaper in November, finally admitting the fund has an image problem and might have to curb its aggressiveness. Dhanabalan, one of the country's senior statesmen, suggested Temasek would rethink a strategy of controlling stakes offshore and instead seek local partners.

Thailand isn't the only place Temasek has encountered resistance. An Indonesian commission ruled in November that Temasek violated Indonesian monopolies regulations because it owns majority stakes in the country's two main telecommunications companies-it doesn't, actually-and must sell one of its holdings. Temasek said it would appeal the decision.

Then, in early January, shareholders in China Eastern Airlines Corp. Ltd. nixed the sale of a 24% stake to Temasek and the airline it controls, Singapore Airlines Ltd. The rejection came after Air China Ltd., China Eastern's bigger competitor, strong-armed investors and promised to submit a better bid. That bid has yet to materialize.

With assets that now total anywhere from $2 trillion to $3 trillion and are forecast by some to reach $12 trillion by 2015, sovereign wealth funds generally have gotten increasingly potent. Temasek's recent setbacks reflect a broader wariness of sovereign wealth funds, an increasing vigilance-from Washington to New Delhi-over their impact and a greater sensitivity to their histories and strategies. "Sovereign wealth funds are beginning to understand they're on the radar screens and have to behave accordingly," says Edwin Truman, a senior fellow at the Peterson Institute for International Economics and a former assistant secretary of the treasury.
What is a sovereign wealth fund? A Citigroup Inc. study calls them, "government-created investment vehicles usually funded by commodity export revenues or the transfer of assets directly from official foreign-exchange reserves." Citi further categorizes the funds and puts Temasek into sovereign savings funds-government investment corporations, with "longer-term wealth creation and policy objectives" as its goal. This contrasts with sovereign stabilization funds, which are intended to provide budgetary relief when commodity prices fall.

A key moment in this mounting tide of suspicion of sovereign wealth funds was the political firestorm that erupted in Washington after a subsidiary of DP World acquired Peninsular and Oriental Steam Navigation Co., a venerable British company that ran operations at four U.S. ports, in 2006. (DP World beat out PSA International Pte. Ltd., a Temasek subsidiary, for P&O.) While it's debatable whether state-owned DP World is, strictly speaking, a sovereign wealth fund, it served as a proxy for the supposed dangers from Mideast funds, enriched by oil and gas wealth. In the end, DP World had to sell the U.S. ports operations. "Concerns provoked by the incident mirror concerns over SWFs [sovereign wealth funds] purchasing business interests that had formerly been the domain of private companies," the Council on Foreign Relations wrote in a recent policy briefing.

American attention is not focused only on funds in the Gulf States, but also on a newly constituted Chinese sovereign wealth fund. That fund is modeled after Temasek, widely credited with pioneering a holding company brand of sovereign fund. Other countries are less discriminating and cast a jaundiced eye on just about every fund out there. They fear everything from backdoor takeovers by foreign governments of critical industries to another form of the well-heeled corporate raider.

French President Nicolas Sarkozy, for example, last month lashed out at what he called "extremely aggressive sovereign funds which only follow economic logic," adding, "France must protect and give [French industries] the means to develop and defend themselves." And organizations from the International Monetary Fund to the G8 countries are demanding that sovereign wealth funds adhere to some sort of accepted standard of transparency.
That makes Temasek instructive for another reason. Granted, it isn't exactly a model of corporate forthrightness; its media relations department didn't respond to requests for comment on this story. But it is more open than most sovereign wealth funds, the result of a decision four years ago to issue an annual report and seek a bond rating from credit agencies. Truman modeled 32 sovereign wealth funds in transparency. He ranks Temasek 10th. Remove marginal funds from the rankings, including those from Timor-Leste, São Tomé and Azerbaijan, and its rank shoots up. Temasek, in fact, is more transparent than any other major Asian and Mideast fund.

So it's easier to track Temasek and glean its investment strategy than it is other sovereign wealth funds. For example, the Government of Singapore Investment Corp. Pte. Ltd., or GIC, is the country's other sovereign wealth fund, this one primed with foreign exchange reserves. It is so close-mouthed that it won't even say what its assets under management total other than that they are "well above $100 billion." (Morgan Stanley estimated its true value at $330 billion.) It had never even announced an investment until it put more than $10 billion into UBS in December. "They're very, very secretive," the Singaporean lawyer says.

Still, it's harder to hide these days. Over the past few months, sovereign wealth funds such as GIC have shored up the balance sheets of some of the biggest names in global financial services. Temasek has been an integral part of this exercise. In late December, Temasek plowed $5 billion in Merrill Lynch. That followed a $2 billion investment in Barclays plc that Temasek made in July. In addition, Temasek has been steadily increasing its stake in Standard Chartered plc over the past two years. The Singaporeans now own 19.03% of Standard Chartered, the London-based bank that focuses heavily on Asia. That stake is now valued at £4.3 billion ($8.4 billion).
Temasek doesn't completely mirror its sovereign wealth fund brothers and sisters. It fashions itself as an investment house. It's actually a cross between an operating holding company, a pension fund and a private equity shop. "Most sovereign wealth funds do not take controlling stakes; Temasek does," says Truman. "Most sovereign wealth funds are passive investors. ... Temasek has been strategic."

It's also getting more complex in its operations, despite a staff of only about 250 as of March 2007. Last fiscal year, for example, Temasek bundled private equity and venture capital funds from its portfolio into a special purpose vehicle that it sold. It launched what it called "Asia's first infrastructure business trust." In December, Temasek announced it was collaborating with Fang Fenglei, chairman of Goldman, Sachs & Co.'s China securities joint venture, to establish a private equity fund. Temasek agreed to provide $1 billion of a $2 billion fund.

An American investment banker who was based for years in Singapore describes the difference between Temasek and GIC: "Temasek was more development-oriented, while GIC was run like an asset management company." GIC made news when it led the $12.5 billion investment in Citigroup last month and forked over almost $7 billion. But the fund still is overwhelmingly a passive investor in treasury bills and equity. GIC "is much more a pure fund investor; all it's interested in doing is making a financial return," says another source. "Temasek is the super holding company of the government."

Temasek, and by extension the Singapore government, has been criticized over the years for its very presence. The argument goes that having such a well-heeled government insider stacks the deck, stifling the private sector and entrepreneurialism. The days when it was necessary for the government to support these businesses are long gone.

Yet its financial success is incontestable, especially in recent years. The value of its portfolio more than doubled in a four-year period ended March 31, 2007. Its "aggregate investment value" reached S$164 billion ($116 billion) for the last fiscal year, a 27% gain. As Standard & Poor's explains, this translates into the market value for listed companies and the book value for unlisted ones, which last fiscal year amounted to 18% of the total. (Standard & Poor's points out that asset values of unlisted companies could easily exceed book values.) Its shareholder returns gained 25% last fiscal year. Its profit tipped S$13 billion.

Last fiscal year, according to its report, Temasek invested "almost S$16 billion and "monetized over S$5 billion."

Named after the ancient city upon which Singapore now rises, Temasek was founded as a state-owned holding company in 1974, nine years after Singapore separated from Malaysia and declared independence. Reflecting a government that was fixated on self-sufficiency and jump-starting development, Singapore's Finance Ministry had underwritten companies it considered critical to the growth and well-being of the 4 million-strong island city-state: Singapore Airlines Ltd., the shipyards, the port, Singapore Telecommunications Ltd., power generation, the Development Bank of Singapore. Some termed this "state capitalism." By moving 36 companies into an autonomous entity, the government could bring a more market-driven discipline, it proclaimed, and help mute criticism. In the words of Temasek itself, investments could be managed by the fund "on a sound commercial basis, as distinct from the government's public-interest role of policy-making and market regulations." The government valued these initial investments at S$350 million.

The Finance Ministry is still Temasek's single shareholder.