SINGAPORE (BLOOMBERG) - As the world's most acquisitive sovereign wealth fund turns 40, it has never had so much money to manage - nor faced more challenges trying to manage it.

Two investment pillars that have helped fuel growth for Singapore's GIC - China and bonds - are under siege from inflation, geopolitics and regulatory crackdowns. The national budget meanwhile requires ever more revenue, putting pressure on GIC to deliver robust returns, prompting one of the biggest asset pivots in its history.

"Our expectation going forward is that the challenges are big and varied and there aren't a lot of historical precedents," said chief executive Lim Chow Kiat, a GIC veteran of 28 years, in a rare interview. "The last time we had a serious inflation problem I was just born."

GIC was founded in 1981 to help manage the excess reserves for a fledgling 16-year-old country. Launched with a handful of local staff, borrowed office equipment and three fund managers from United States firms, it has since grown into a quiet giant in global finance.

Even by the secretive standards of sovereign wealth funds, GIC stands apart for its riches and discretion. It does not release annual returns and will not say how much it manages, though estimates from data providers put it as high as US$744 billion ($999.6 billion). New rules passed in Parliament could raise that to almost US$900 billion, making it the third-largest fund of its kind after Norway and China.

With that size comes enhanced challenges of maintaining returns and finding new assets to back, while funding Singapore's government. Since 2018, investment gains from GIC, the central bank and state investor Temasek have been the single biggest contributor to the national budget.

While some peers are used as rainy day funds, GIC is integral to the city-state as an aging population, rising healthcare costs and low tax rates threaten to strain finances. GIC has posted a 6.8 per cent nominal gain each year over the past two decades, on par with several of its peers, according to Global SWF, a research firm. Long-term returns were boosted by a massive 38 per cent jump in the fiscal year that ended last March, Global SWF said.

"The important thing for GIC is to maintain steady investment returns," said Mr Lim, the former group president who helped shape its current strategy.

China has been a key part of GIC's growth. It made an early decision to invest there when much of the world was holding back, starting in the 1980s when former prime minister and inaugural GIC chair Lee Kuan Yew predicted China would thrive as its economy opened up.

"It was he who sort of alerted us and said 'the rise of China is irreversible,'" said Mr Ng Kok Song, who stepped down as chief investment officer in 2013. Pushing into China's undeveloped markets was a tough ask. GIC scoured the country, backing everything from Shanghai office blocks and agricultural banks to toilet and washing machine makers. The investments turned what started as a Western-centric fund into a diversified portfolio, with Asia now representing 34 per cent of holdings, matching the US.

Bets on technology giants like Alibaba Group and Xiaomi before they went public generated huge windfalls, though gains from China are now under threat on several fronts amid a prolonged stand-off with the US.

"Certainly it's a concern - if bifurcation is to happen, that will affect global investors because it makes it much harder for you to have that freedom to just pick and choose," said Mr Lim, 51, from GIC's 37th-floor office in the business district.

Risks are also rising within China. GIC was a major investor in Luckin Coffee, before selling down its stake ahead of an accounting scandal that gutted its share price. Last year, Singapore acknowledged that GIC and Temasek suffered losses after Beijing cracked down on the online education space. GIC was also an early investor in Ant Group, the fintech giant that was forced to scrap its US$35 billion listing amid a crackdown on that sector.

Mr Lim, an avid jogger who has been head of GIC for five years, remains bullish on China. He sees it as a source of growth and a counter-cyclical hedge to other markets. GIC will likely buy more sovereign bonds, and has not been scared off by the recent defaults at China Evergrande Group and other property developers.

"We believe they have enough central bank balance sheet, and within their system they have enough levers to make sure that things do not spiral out of control," Mr Lim said. "They have the will to continue with reforms and opening up and that will provide future growth."

Beyond China, inflation could have a big impact on GIC's returns. Nominal bonds and cash made up 39 per cent of its portfolio as at March, with inflation-linked notes representing another 6 per cent.

Mr Lim said future returns "are likely to be lower", casting doubt on the 60/40 stock-bond portfolio that has been a pension fund mainstay for years.

"If we feel that inflation is going to be a real sticky problem, then of course you have to start shifting your portfolio toward more inflation-protected assets," said Mr Lim, describing nominal bonds as the most vulnerable.

"Within stocks, if you can find companies which have pricing power that will help," along with commodities.

Another potential growth driver for GIC is the environmental, social and governance (ESG) space. An internal ESG investment pool created in 2020 now has "billions of dollars" at its disposal, according to Ms Liew Tzu Mi, head of fixed income and sustainability.

In recent years, it has struck deals in areas like blue hydrogen and solar farm builders. GIC backs polluters as long as they have a plan to become more sustainable. In recent years, it bought into natural gas pipelines, while holding a major stake in China Petroleum & Chemical.

Unlike Temasek, GIC has not set a 2050 net zero goal, arguing it would affect its ability to invest in countries like China and India that have later targets. To help juice returns, the fund is also turning to private equity, almost doubling its allocation to 15 per cent since 2013.

Global SWF estimates GIC deployed US$34.5 billion in 110 deals last year - its busiest ever - led by logistics and other real estate. That made it the top spending state-owned investor for the fourth straight year, ahead of second-place Canada Pension Plan Investment Board.

The Global SWF data combines sovereign wealth and public pension funds in their rankings. "I would expect every year to continue to build on what we've been able to do," said Mr Eric Wilmes, who heads North American direct investments from San Francisco. "This isn't a one-year trend or 18-month trend."

GIC's surging assets are both a strength and a problem. It means the fund has to strike bigger deals to maintain growth, and those can be hard to find. Many of its investment partners are also expanding, potentially shrinking its allocations on transactions.

"GIC may be growing too much and by growing too much, it may be losing flexibility as an organisation," said Mr Diego Lopez, managing director of Global SWF. "Is it better to split the investment units into pockets?"

The shift to private equity highlights one of GIC's conundrums - a sovereign fund in a country of just 5.5 million people must attract global talent to scout out deals. Of the more than 1,800 staff as of March, almost half were foreigners, up from about a third in 2016.

Unlike many banks and private equity firms, GIC is known for its modesty and public-service ethos. Showing up to the office in a sports car attracts unwanted attention from colleagues, several current and former employees said, asking not to be identified. Mr Lim's predecessor was known to take the subway to work.

GIC's salaries and bonuses are generally commensurate with private peers, though the system for carry -- a kind of profit sharing with private equity investors -- tends to be more complex to calculate, people with knowledge of the matter said.

"It's easier to attract Singaporeans - you can infuse them with a sense of meaning," said Mr Ng. "The test of it is, are you able to attract non-Singaporeans?"

GIC also faces a challenge in global brand awareness. While anyone who has worked in finance would know the fund, it is not a household name in other circles, making it harder to crack deals in rising areas like biotechnology or agriculture. To counter that, GIC leverages its reputation as a reliable institutional partner, investing increasingly earlier in funding rounds and staying beyond the initial public offering without making big demands or joining activist moves along the way.

"GIC is a long-term investor," Mr Lim said. "That from day one has been something we emphasise - we keep to that part."

Support for GIC was on display last November as some of the world's leading financiers filed past lines of heavily armed guards into the Ritz-Carlton Hotel to celebrate the fund's 40th birthday.

Between the courses and a performance by Singapore's Purple Symphony, executives from Silver Lake Management, PAG and Bank of New York Mellon heaped praise on GIC as Prime Minister Lee Hsien Loong looked on.

"Everybody who's anybody knows who GIC is and they always get first call on interesting ideas," said Pacific Investment Management vice-chairman John Studzinski. "They really are regarded as role models among sovereign funds."