Alvin Foo Economics Correspondent

Economic recovery spurs Temasek, GIC's plans

Investments have been snapped up at a rapid clip this year. What is the reason for the vigorous appetite?

Rarely has a fortnight gone by this year without sovereign wealth fund GIC or Singapore investment firm Temasek Holdings capturing headlines for their involvement in a new business deal.

Both have been noticeably active around the globe in recent months, stepping up the pace of mergers and acquisitions on the heels of new offices in Europe and South America.

In the first five months of the year alone, the two investment companies have struck 45 deals in all with a total value of US$10.9 billion (S$13.65 billion), Ms Victoria Barbary, director of the Institutional Investor's Sovereign Wealth Centre, told The Straits Times.

This is already two-thirds of the combined US$15.7 billion they spent in the whole of last year, which itself accounted for about a third of direct investments by state investors globally, data from the London-based entity shows.

Some of the more notable deals include Temasek buying a 25 per cent stake in the retail arm of billionaire Li Ka Shing's Hutchison Whampoa for HK$44 billion (S$7.1 billion) in March. That same month, a Temasek unit made a takeover offer for Olam International that valued the commodity trader at S$5.3 billion.

In January, the GIC was part of a group that bought the Time Warner headquarters in New York for US$1.3 billion. That was shortly after its late December purchase of a large stake in a mega office complex in London for a reported £1.7 billion (S$3.6 billion)), in what is believed to be its biggest property foray in Europe.

Experts attribute the flurry of activity to the pair seizing opportunities amid a firmer global economic recovery, and, in the case of GIC, taking a more active approach to investing.

Capturing opportunities

ANALYSTS who track both firms closely say their investments this year are likely to exceed last year's total.

Part of the reason is that the global economy is on a firmer footing this year.

The return to sustainable growth in the United States, and Europe's emergence from recession, have provided key drivers for Temasek and GIC to ramp up their investments in 2014, said CIMB regional economist Song Seng Wun.

"They are striking when the iron is starting to warm up rather than when it's hot," he added.

"They are taking advantage of opportunities in recovering economies, as they now have more clarity on the earnings front."

There is also the prospect of competition heating up in the sovereign investment space.

Earlier this month, Saudi Arabian media reported that an influential advisory body to the government will discuss a proposal to establish a sovereign wealth fund to invest some of the country's mammoth oil earnings.

Market watchers noted that the size of Saudi Arabia's foreign reserves suggests this new sovereign wealth fund (SWF) could become one of the world's largest.

Japan's US$1.26 trillion pension fund - the world's largest - is also reportedly considering reforms to shift its investments away from low-yielding Japanese government bonds towards riskier, higher-return investments like stocks.

That would make it more like an SWF and increase competition for investments in the space.

Currently, the world's largest SWF is Norway's government pension fund with US$878 billion, according to the US-based Sovereign Wealth Fund Institute. GIC occupies eighth spot with estimated assets of US$320 billion, while Temasek is ninth with US$173.3 billion.

Active on the ground

ONE factor allowing Temasek and GIC to identify and seize investment opportunities more quickly is their recently expanded ground presence overseas.

In April, GIC opened an office in Sao Paulo, Brazil, signifying the rising importance of Latin America to its investment portfolio. That was also its 10th office worldwide, adding to those in key financial capitals such as London, New York, Tokyo and Shanghai.

Just a month later, GIC led a round of investment totalling US$170 million in Netshoes, a Brazilian online retailer of sporting goods.

Meanwhile in March, Temasek set up its European office in London to help with its forays into the continent, the Middle East and Africa. The following month, Temasek was part of a consortium investing €1.28 billion (S$2.17 billion) in an insurance unit of one of the world's largest banks, Holland's ING.

"When you have more people on the ground, you are likely to see more stuff coming through your door," said CIMB's Mr Song. "That gives them faster and more access to opportunities and potential deals."

Temasek and GIC are "active direct SWF investors", said Sovereign Wealth Fund Institute president Michael Maduell. "Direct investments are what we call those which bypass external fund managers or funds," he explained.

He said the two rank just below Norway's government pension fund, which invests its hundreds of billions directly, but added that Temasek and GIC tend to take larger stakes in companies and assets.

New investment paths

IN GIC'S case, part of the ramped-up pace could be due to its new investment framework implemented in April last year.

The framework is meant to give GIC more flexibility to achieve sustainable long-term returns in the post-global financial crisis world. It offers GIC's management room to adopt active investment strategies aimed at adding value to its policy portfolio, for instance.

Observers familiar with GIC note that the investment team under Mr Lim Chow Kiat, who took over as chief investment officer last year, has been doing more to enhance returns, such as proactively sourcing and originating deals.

"They are more prepared to depart from conventional ways to enhance returns by, say, anchoring deals rather than taking more risk," said APS Asset Management founder and chief investment officer Wong Kok Hoi.

"They have gone as far as structuring the deal and take the lead to anchor the deal. In other words, they not only cherry pick deals but also act as their own investment bankers."

Mr Wong, a veteran fund manager who used to work at GIC, does not think that the company is investing at a quicker pace.

He added: "I only get the sense that they are thinking of ingenious ways to improve returns."

As for Temasek, the firm seems mostly to be sticking with its big bets on middle-class consumers in emerging markets, said Ms Barbary, who noted that Temasek has been investing heavily in the technology, e-commerce, health care and energy sectors.

The investment firm believes that the consumer retail sector is a good proxy to growing middle- income populations and transforming economies. This was clearly demonstrated in its US$5.7 billion March mega-deal for 24.95 per cent of AS Watson - the health and beauty stores group.

But Temasek has also been making some interesting moves outside its traditional focus of investing in large listed companies. Its holdings of private firms have been rising, and it has also branched out into other forms of investment.

In April, it launched a new investment vehicle for other institutions - with the eventual goal of offering its much-coveted bonds to retail investors - to co-invest alongside Temasek in private equity funds.

Last month, it partnered with home-grown Dymon Asia Capital to start a venture investing in new hedge funds. Temasek committed an initial US$500 million (S$625 million) to the venture, to be managed by Dymon.

What is clear is that both investment firms are evolving to rise to the challenges of a post-crisis world, in terms of their investments as well as their global footprint. It will be interesting to see where they go from here.