Temasek’s eyewatering 24.5% one-year return in FY2020/21 came on the back of record investment of S$49 billion (up 50%) with divestment reaching S$39 billion. The Singaporean state-owned investor’s net asset value reached S$381 billion (US$283 billion). The robust performance followed a disappointing year, when Temasek was hit by tumbling public equities and reported a -2.3% return. The result is particularly impressive given that the SOI faced the effects of the recession in Singapore, which represents 24% of its portfolio. Global SWF takes a deep dive into its strategy and performance and scrutinizes its transaction activity over recent years.

Robust Returns, Despite Higher Risk Exposure

Strong growth in the investor’s activity amid a year of turbulence and uncertainty demonstrates its confidence in finding opportunities in a crisis. And the strategy appears to be paying off. Long-term returns are respectable with a 10-year average annual return of 7% and over 20 years 8%. Annualized returns from 1974, when Temasek was established, stand at 14%.

Temasek’s robust one-year return is comparable to peers that also closed their financial year at end-March: Japan’s GPIF (25.2%), Canada’s CPP (20.4%) and PSP (18.4%), and the US’s NYSCRF (33.6%). Yet, compared to these funds, Temasek is a strategic investor that may have not benefited as much from the rally of US stocks among others.

Public Equities: Riding the Tech Wave

In terms of sector exposure, Temasek’s portfolio witnessed an increase in the proportion of assets in life sciences and agrifood, financial services, and transportation and industrials, while consumer and real estate investments declined and TMT saw no change.

The sectoral tilting was seen in both private and public markets. In public markets, we note that it had amassed a portfolio of US stocks worth US$25.5 billion by end-March, almost double as much as the same time in 2020 and nearly 10% up on end-Q420.

Growth in the final quarter of its financial year was related to a 22.5% increase in TMT stocks to US$8.23 billion, representing 32% of the portfolio – slightly reversing a trend seen over 2020 when the sector went from 48% to 29%. It also reported 7.4% growth in financial sector stocks to US$12 billion – the biggest sector in its US equities portfolio at 47% of total shares, up from 29% at end-March 2020.

In terms of individual counters, over Q121 the value of its holding in Lumen Technology rose 37% to US$1.3 billion, while the value of its Mastercard holding grew 20% to just over US$1 billion. It also took a stake Roblox, a video games company, worth US$900 million.

VC: Eyes on the Future Prize

The increase in the financial sector and life sciences in its private market portfolio is led by its venture capital strategy, with a shift towards fintech, e-commerce, biotech and agritech – the sectors that are thriving in the wake of the pandemic.

While VC remains a small slice of fund’s overall portfolio, allocations provide Temasek with exposure to market disruptors with high growth potential. Temasek remains by far the biggest investor in venture capital among state-owned investors. According to Global SWF’s database, it has deployed a total of US$12.3 billion in start-ups and VC funds around the world since inception – US$2.3 billion so far this calendar year.

Global SWF’s historical data has charted an increase in the volume and total value of VC deals and shows that the Singaporean state-owned investor is increasingly focused on earlier funding rounds. Series A to C rounds have gone from 36% of total VC investment in 2019 to 69% in the year to date.

VC targets ranged from Chinese EdTech startup Yuanfudao with 400 million users to German biotech company BioNTech which subsequently developed the world-leading Covid-19 vaccine. With an eye on the needs of the densely populated city state, Temasek extended its portfolio into urban farming by forging a JV with Leaps by Bayer and in Israel’s Rivulis Irrigation. This year has seen the same pace and profile of VC investment, from seed funding in Singaporean plant-based food startup NextGen to late stage investment in US-based cloud app security firm Snyk.

Domestic Economy Remains a Central Strategy

Temasek stepped in to assist its larger domestic portfolio companies as they struggled with the impact of the pandemic on transportation sectors, as well as supporting them in the longer term energy transition. It supported national flag carrier Singapore Airlines’ capital raising. Additionally, it has invested in Sembcorp Marine as it demerges from Sembcorp Industries.

Yet, its venture capital efforts in the domestic economy are attracting the most attention. Global SWF data shows that in the first half of this year to date, Temasek has deployed more capital into the city-state’s tech sectors than in any previous full-year. An estimated US$500 million of venture capital has been released into the economy by the investor, ranging from early stage to pre-IPO rounds.

The strategy chimes with the Singaporean government's bid to boost sectors like e-commerce and food tech. A notable highlight is its involvement in a US$4 billion private investment in public equity (PIPE) transaction for ride-hailing app Grab which was also backed by Abu Dhabi sovereign wealth fund Mubadala, among an array of global investors. The Singaporean firm is set to be valued at approximately US$40 billion and go public on NASDAQ by the year-end, following a merger with the SPAC Altimeter Capital. It will be the largest ever US equity offering to take place in Southeast Asia, and the largest SPAC merger in history. By backing the superapp, Temasek helps nurture and bolster the role of home-grown tech companies in the global economy.

The investor is always on the lookout for the next big thing emerging from Singapore’s entrepreneurial milieu, including seed funding in Singaporean plant-based food startup NextGen, backing Big Ideas Ventures’ New Protein Fund 1 as it strives to develop alternatives to meatm and a joint venture deal with Nanofilm Technologies to create Sydrogen Energy, which will market parts used in the production of fuel cells and electrolyser systems in hydrogen production.

One of the exciting aspects of Temasek’s strategy, which is likely to be increasingly the norm in the state-owned investor universe, is the development of its own Singapore-based in-house startups, such as Affinidi, a travel pass software developer, and Istari, a cybersecurity company. Temasek’s drive to support domestic VC is accompanied by the government’s bid to support local startups via SG Equity, which supports startups involved in biopharmaceuticals, medtech, advanced manufacturing and agri-food tech.

Committed to China, Despite Regulatory Actions

Temasek should benefit from China’s recovery, which has started earlier than developed economies. However, the high exposure to China is not without risks. It has invested heavily in ride-hailing app Didi Global and fintech giant Ant Group, which are targets of an official regulatory crackdown. The Chinese authorities are putting large domestic tech companies that raise money from overseas listings under heavy scrutiny, which threatens the listing of companies into which Temasek has ploughed hundreds of millions of dollars.

In the past fortnight, the Cyberspace Administration of China has demanded mobile app stores remove a range of apps operated by Didi Global, which allegedly illegally collect users’ data. The series of regulatory actions began after Didi began publicly trading on the New York Stock Exchange on 30 June. It initially raised US$4.4 billion on floatation, but the regulatory actions have hit the share price hard, wiping over US$20 billion of the company’s value.

Fintech giant Ant has yielded to tighter regulations, which will make it a financial holding company placed under overseen by China’s central bank. Ant came under regulatory assault as the Chinese authorities sought to rein in Jack Ma’s business empire, beginning with the suspension of its IPO in November which had been expected to raise US$34 billion. Ma had earned the wrath of the regulators after he launched his own verbal assault on them ahead of the planned listing in Hong Kong and Shanghai.

Regulatory action against monopolistic behaviour and threats to data and cybersecurity are not going to go away. Temasek should expect a rough ride until compliance issues are settled and the authorities feel the fintech sector is under control, but it remains undeterred and optimistic.

IPO Success Outside China

Besides, Temasek has plenty of other private equity assets heading towards listing, many of which are not vulnerable to regulatory action. Recent IPOs of Temasek-backed companies include Kuaishou which has soared above its February IPO valuation, doubling the value of the Singaporean SOI's investment within the space of a year. Temasek was also a VC backer of “pandemic winner” DoorDash, which also saw its value soar after going public.

Upcoming IPOs include stakes in Singaporean ride-hailing app Grab (which is cited as having a potential US$40 billion valuation at IPO), British life sciences company Oxford Nanopore (US$3.44 billion) and US payments firm FlyWire (US$3 billion). VC investments in emerging markets are also set to go public imminently with India featuring prominently: online insurance platform Policybazaar (US$3.5 billion) healthtech unicorn, Pharmeasy owner API Holdings (US$1.5 billion), restaurant delivery service Zomato (US$1.1 billion) and autos e-commerce platform CarTrade (US$270 million).

In Indonesia, a merger of Indonesia's ride-hailing and payments firm Gojek and e-commerce leader Tokopedia – both of which have won Temasek’s backing - will create a regional tech giant with a potential value of US$2 billion.

Despite the lack of China-style intervention in other markets, there are still significant risks alongside the potential rewards, especially when engaged in venture capital investment in loss-making startups with big ticket valuations. The number and size of funding rounds have yielded massive capital injection, which has in some cases diluted stakes – and if private equity funding rounds or IPOs don’t match expectations, there is a danger that asset values come under attrition.

Temasek has already had its fingers burnt with Indian ride-hailing app Ola, with its stake diluted as it has opted out of funding rounds. The app’s value has fallen from over US$4 billion when Temasek invested US$225 million in Q3 2018 to US$3 billion in a Q1 2021 estimate, amid the attrition of the pandemic.

Temasek’s forward-looking approach to investment has enabled it to stay one step ahead of most state-owned investors, but it is aware that this strategy carries risks - and its performance and tenacious strategy demonstrates an assiduous approach to investment.