The last 12 months were not good for investors in global markets. State-owned investment company Temasek Holdings, with a portfolio of global assets, was no exception.
During the FY2023 ended March 31, Temasek reported a negative total shareholder return (TSR) of –5.07%, which is its lowest since 2016. The last times it reported negative TSRs were in 2009 and 2016 at –30% and –9% respectively. Its TSR since its inception in 1974 remained unchanged on a y-o-y basis at 14% while its 20-year and 10-year TSRs were at 9% and 6% respectively.
Partly due to the application of the new International Financial Reporting Standards (IFRS) 9, Temasek incurred a net loss of $7.3 billion for the year, explained Temasek's CFO Png Chin Yee at a briefing on July 11. This was a sharp swing from earnings of $10.6 billion reported for FY2022. The new accounting standards include unrealised mark-to-market gains or losses of sub-20% investments and after adjusting for those, its profits would have been $14.7 billion instead, versus $20.9 billion in FY2022.
Temasek’s portfolio took a hit as well, down 5.2% y-o-y to $382 billion as at March 31, which it blames on the same cocktail of persistent inflation, rate hikes and geopolitics leading to the “marked shift” in how the world does business. “The confluence of these events, not seen in decades, has raised the cost of capital and weighed on capital flows,” it adds.
When asked, chief investment officer Rohit Sipahimalani declined to say if the current year will be a better one, as markets are “difficult to predict”, and especially so given how Temasek’s portfolio is predominantly equities.
“All we can try to do is have a resilient portfolio and do better than the markets,” he says. “So, in the last year, yes, our portfolio was down by 5.2%, but MSCI [in comparison] was down by 9% while other indexes were down by 11%. If the markets remain poor, we would expect to do better than that.”
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He adds that the group is “obviously” hoping for a market recovery and that they will be investing in companies that would do well amid the market recovery.
Having said so, Temasek has noticeably put a brake on its investment activities. In FY2023, it invested $31 billion, half of the $61 billion committed in FY2022, and divested $27 billion, versus $37 billion in FY2022.
While a slowing, softer market is logically a better time to invest, Sipahimalani points out that the challenge is being able to invest at the right valuation. “In some markets like the US, valuations are still very high in public markets. In the private markets, a lot of companies raised a lot of money in 2021, [which is why] the good companies are not coming back to the market or are willing to accept lower prices to reflect the changing environment,” he explains.
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During the briefing, he points out that the S&P500, with a multiple of 19x now, is deemed very expensive. In comparison, in the decade before Covid-19, from 2010 to 2019, the average S&P multiple was 15x, he notes. “That’s something we are very conscious of as we evaluate opportunities in the US now.”
That said, Sipahimalani has observed “some cracks” in the private equity space, as some of the PE firms are obliged to exit some of their portfolio investments so as to return liquidity to their own investors instead of holding out for peak valuation.
One such example is Temasek’s investment in Stripe. When it took part in the most recent fundraising round in March, the payment processing platform was valued at US$50 billion ($66.7 billion), versus a much higher valuation of US$95 billion when an earlier round was raised in 2021.
However, such opportunities are not in abundance. Deputy CEO Chia Song Hwee adds: “On the private credit side, there seems to be a very compelling adjusted risk-return profile. As liquidity is tight in the credit market, with businesses not wanting to be diluted, in terms of shareholding, I see private credit as a viable funding option. And we are seeing an increasingly compelling proposition there.”
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New ventures, new risks
While Temasek has maintained its steady holdings in traditional industries such as financial services and transport and communications, it has been venturing forth in emerging sectors as well, for the presumed growth potential.
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Generative AI was also one of the “bright spots” that have caught Temasek’s eye, given its significant impact on productivity, reshaping industries and driving innovation. According to Chia, Temasek is spending more time in understanding AI in business-to-business (B2B) spaces instead of the business-to-consumer (B2C) space. “[The B2C space] has been dominated by big tech companies which do not offer compelling investment opportunities for us,” he explains.
For now, Temasek’s investments in AI are still relatively small, mainly via its indirect investments through specialised funds investing in the start-up space. Meanwhile, Sipahimalani adds that revenue-generating opportunities from these start-ups are still unclear as there has been a lot of hype. And with valuations going “through the roof”, Temasek prefers to be cautious by not investing directly in these opportunities. However, what is clear is that with the infrastructure around AI, there will be a lot of investments, he says.
Naturally, the conversation came to Temasek’s disastrous investment in crypto exchange FTX that failed spectacularly, forcing a complete write-off of US$275 million. While Temasek is disappointed with what happened, it maintains it had done its due diligence and that FTX was seemingly compliant with regulations. Temasek acknowledges that fraud is something difficult to protect against completely, but hopes to avoid such situations in the future.
As a result of this high-profile loss, Temasek announced pay cuts for its executives responsible, reiterates Sipahimalani. Temasek is also keeping its exposure to such early-stage investments, which presumably come with higher risks, at less than 6% of its total investments.
At the briefing, Temasek made no bones about the difficulties of the wider business and global landscape. Growth is likely to slow as tight monetary policies persist even as geopolitical tensions remain high.
Singapore, Temasek’s homeground, is not immune to the challenges. China’s reopening could provide some support, but Singapore’s economy, with a larger proportion of exports to developed markets which are facing recessionary pressures, could feel the strain.
Singapore, however, could benefit from the diversification of supply chains around the region, both in the near and medium term, as the big countries continue their stand-off.
Temasek will be maintaining a “cautious investment stance” this financial year, and banking on its strong liquidity position, be ready to step up its investments when they present themselves. “Amidst an increasingly complex and volatile backdrop, we will stay focused on investing in opportunities that align with our long-term structural trends,” says Sipahimalani.
