by Ong Wee Hiang
The Need…
As the Singaporean population starts to age, and with the need to tap into our investment return, the amount of assets return on investment has been halved. Under the Net Investment Returns Contribution (NIRC) framework, the Singaporean government could spend half of the long-term investment returns generated by the Monetary Authority of Singapore, Temasek Holdings and GIC, the three entities that manage and invest the reserves. While that is conservative for the Singaporean government and will be instrumental in bringing a quality of life into our community, this increases pressure for the three pillars to perform.
The Worry…
As of March 31, 2018, there were USD 8.7 billion of Temasek Bonds outstanding, with a weighted average maturity of over 11 years. Compared to an asset of USD 235 billion, that is reasonable level of debt. While the nominal amount looks big, it is important to understand that certain industries provide a predictable cashflow, and debt usage is often logical and desirable. But in an era of easy money (or debt), we should be mindful of raising debt for the right reasons and not just to boost short term investment returns.
In recent weeks, I have been reading news of Temasek establishing a
- USD 20 billion guaranteed global medium term note program on July 25, 2018, through Temasek Financial (I)
- SGD 5 billion medium term note program on August 3, 2018, through Temasek Financial (IV)
So, did Temasek Financial (II) (III) (IV) (V) raise debt as well?
Too Much Debt?
Considering that the USD 8.7 billion amount is correct (in which Temasek has zero off-balance sheet liabilities), Temasek would have increased their debt capacity by at least 3 times. If you use the net debt number of SGD 49.7 billion (USD 36 billion) from their website, debt would have increased significantly.
While I can comprehend the reason for raising debt now (since interest rates in the United States are still low and will be rising soon), I cannot comprehend the reason for raising such a large sum of money during such a short period. With a huge amount of money raised, Temasek management would be extremely incentivized and motivated to put it to “good use”.
Due to a decade of low interest rates from the financial crisis, most assets around the world are inflated and pricey. Is Temasek then on the cusp of a decade of bad investment? For the past 10 years, Temasek has returned only 5%, and if you look back 20 years, they averaged 7%. While that is nothing to shout about, it is comparable to GIC’s return.
The Beauty of Compounding Returns
When invested and compounded over a long period of time, even a small base and a small return would have made a modest man pretty wealthy. The GIC Portfolio’s 20-year real return was 3.4%, or 5.9% per annum, in nominal USD terms. Over the 10-year period, the GIC Portfolio returned 4.6% per annum in USD nominal terms. By understanding how small a base we had come from in 1965, we should really appreciate why Einstein termed ‘compounding’ as the 8th wonder of the world.
“Compound interest is the eighth wonder of the world. He who understands it, earns it.” – Albert Einstein
Sometimes, in a haste to improve returns, we often take the route that is the easiest, and the easiest way to boost investment returns is to throw more money after assets.
Too Little Opportunity!
Leverage is the easiest way to throw more money after assets, but leverage works both ways. If you are able to generate a return on capital, leverage will boost your return. If you are on the other side, leverage will also amplify your losses. As a country who has done well for the past 53 years, we should remember to ensure that the annualized return stays above global inflation and provides us with a slightly superior purchasing power across a long period of time.
With multi-year high assets trading, both in the stock market and venture capital space, we wonder if Temasek is pushing its luck too far. While Return ON Capital is an important metric, we would argue that Return OF Capital is a more important metric in this era of inflated assets.
With the series of fundraising efforts by Temasek, we also started to witness a flurry of deal-making in the Venture Capital space.
- July 26, 2018 – Temasek leads Fitness Network ClassPass Series D investment of USD 85 million
- July 28, 2018 – Temasek leads Flywire Series D funding round of USD 100 million
- August 3, 2018 – Temasek extends USD 200 million credit facility to Rent the Runway
- August 8, 2018 – Temasek spent USD 225 million to purchase a single-digit stake in Ola from a group of early investors
With the last transaction, I can picture someone in India laughing on the way to the bank. With Ola projecting more losses in the coming year and possibly more competitors emerging in the ride hailing space,
Temasek could be in for a long and painful investment ride.
We would like to thank the author, Ong Wee Hiang, for his contribution. You can visit his blog at https://www.somapah.com/blog/temasek.