Temasek posted a respectable 5.8% return in a year of immense change for the Singaporean state-owned investor, which saw it recruit a new chief executive, Dilhan Pillay Sandrasegara, following 17 years under Ho Ching.
The US$297 billion holding company managed to offset the decline in Chinese asset values with growth in domestic equities, but views its FY2022/23 target of 5.5% growth as a massive challenge as recessionary forces build in developed markets. Returns were in line with what was to be expected given the financial market turbulence towards the end of March and compares well with other state-owned investors, given its mandate.
Temasek demonstrated its reputation as an extremely agile private equity investor in FY2021/22 with its investments reaching an all-time high of US$45 billion for the year, pushed by large transactions such as Element Materials as well as venture capital. Meanwhile, it made significant exits, totalling US$27 billion.
Speaking to Channel News Asia, Global SWF CEO Diego Lopez said, “the private equity portfolio has become very significant. If you look at investments like Element Materials this year, it was a US$7 billion transaction that is going to add to that illiquid portfolio, so this contributes to a steep reduction of liquidity which should make Temasek more cautious.”
The pace of investment is expected to slow in the year ahead as it adopts a more cautious stance in the face of market turbulence and slow growth caused by the disruption wrought by the Ukraine crisis.
Although exposure to China took a knock due to regulatory headwinds falling to 22% of AUM, it will remain important in terms of its underlying portfolio of assets. Meanwhile, we expect Temasek to tilt slightly towards inflation hedge assets such as infrastructure and private credit, although activity in venture capital will likely remain high. Much of this is carried out by its own in-house team, with a 5% growth in personnel in FY2021/22 signalling reduced reliance on external managers.
Venture capital continues to pay Temasek dividends. Its venture capital arm Vertex Holdings swung from red to black in 2021 with a US$530.8 million net profit from a US$40.4 million net loss in 2020. Revenue surged from US$0.9 million in 2020 to US$79.3 million, indicating that the subsidiary yielded significant gains in income. At the same time, the total fair value of investments grew 69.5% to US$2.01 billion, while net asset value (NAV) rose from US$181 million to US$1.6 billion. Among its exits in 2021 was Grab Holdings with an exit valuation of US$14.3 billion and a return multiple of 9x.
An area that Temasek continues to take the lead is in striving towards net zero by 2050, having slashed carbon emissions of its portfolio from 30 million tonnes of CO2 equivalent to 26 million tonnes; it is targeting 11 million tonnes by 2030. At the same time, it has pushed the sustainability agenda with impact investments, earning itself high level of respect for best practices among Asian state-owned investors. It has adopted a “a three-pronged approach”: investing in climate-aligned opportunities; enabling carbon negative solutions; and encouraging decarbonization efforts in businesses. This strategy is accompanied by the bold step of carbon pricing, to internalize the economic and social costs of carbon emissions and guide investment decisions, with an initial internal carbon price of US$42 per tCO2 – a price that is set to increase over the coming decade.
In June, Temasek launched a S$5 billion ($3.6 billion) investment platform GenZero focusing on carbon reduction and working with its Decarbonization Partners initiative with BlackRock, marking a major new development of the Singaporean state-owned investor's strategy of backing solutions to climate change. While other state-owned investors have concentrated their attention on investing in renewables infrastructure, Temasek has taken great strides in investing in cutting edge technology and solutions through a venture capital strategy. GenZero’s focus on technology-based solutions, nature-based solutions, and carbon ecosystem enablers consolidates the Singaporean state-owned investor’s approach to using venture capital to halve its portfolio's net emissions by 2030 and working towards a net-zero portfolio by 2050.
Last April, BlackRock and Temasek agreed to team up to invest in private companies that use technology to reduce carbon emissions. Decarbonization Partners aims to launch a series of late-stage venture capital and early growth private equity investment funds and agreed to commit a combined US$600 million in initial capital to invest across the funds, which would also raise money from third-party investors and be managed by staff from both partners. The first fund has a target of US$1 billion.