Singapore Hedge Fund

Alternative asset management in Singapore

Singapore's sovereign wealth fund's $1.6 billion Profit on Citigroup

Looks like the buy and hold strategy worked out for Singapore’s sovereign wealth fund, after it notched a $1.6 billion profit on a partial sale of its Citigroup Inc. (NYSE:C) stake. The Government of Singapore Investment Corp., or GIC reduced its holding of Citi to 5% from 9%, exchanging its $6.88 billion of convertible preferred stock for Citigroup common stock, it said in a statement. The conversion price was $3.25 per share.

In addition to the sale, GIC can boast of a $1.6 billion paper profit on its remaining stake, according to Bloomberg.

Although Citigroup itself remains mired in toxic assets, GIC’s investment in the bank has fared far better than the investments of other sovereign wealth funds in the financial sector.

A different Singapore wealth fund, Temasek Holdings Pte., took a hit on the sale of its stakes in Bank of America Corp. (NYSE:BAC) and Barclays plc (NYSE:BCS). The Singapore government-controlled entity was Merrill Lynch & Co.’s largest shareholder with a 7.5% stake at the time it was purchased by BofA. Temasek had put $5 billion into Merrill at $48 a share between December and February, but a reset payment and additional $900 million averaged out the fund’s buy-in price to only $23.11 a share, based on Bloomberg calculations from exchange filings. Bank of America’s original stock offer came in at $29 a share, giving Temasek a $1.5 billion profit, but the markets weren’t kind to the stocks of either BofA or Merrill, which continued to fall before the deal closed, leaving Temasek’s investment in the loss column.

For its part, China’s sovereign wealth fund China Investment Corp. hasn’t been swayed by its investments in Blackstone Group LP (NYSE:BX) and Morgan Stanley (NYSE:MS) still being under water. The fund is doubling down on private equity, hedge funds and fund-of-funds investments in hopes of capitalizing in 2008’s drop in valuations. In spite of the fund’s $297.5 billion portfolio losing 2.1% in 2008, CIC said that it plans on investing $6 billion in hedge funds by the end of 2009.

In June, CIC put $500 million into a Blackstone hedge fund unit and bought another $1.2 billion of Morgan Stanley’s stock. The fund had famously paid $3 billion for a 9.9% stake in Blackstone right before the private equity firm’s 2007 IPO, only to see the value of its stake get crushed when the credit crisis set in and large LBO activity ground to a halt. CIC later increased its stake to 12.5%. Shares of Blackstone closed at $14.89 on Friday, off more than 50% from their IPO price of $31. Morgan Stanley currently trades at $32.53, topping the $28 to $31 range it saw in June. – From the deal

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Sovereign Funds back in business?

The sovereign-wealth funds are stirring. After going quiet as markets crashed and some high-profile investments in U.S. financial companies went awry, the huge pools of capital are back doing deals.

China Investment Corp. is planning a $500 million investment in Blackstone hedge funds and took part in Morgan Stanley’s recent rights issue. The Qatar Investment Authority is considering an investment in Porsche. And with the oil price back above $70, cash is flowing back into Middle East funds.

[foreign affair]

The moves come at a time when significant new investments by SWFs — with between $2 trillion and $3 trillion under management according to the IMF — have been thin on the ground. Figures from Dealogic put the value of cross-border equity investments by SWFs so far this year at $21.1 billion. But that is flattered by the $12.5 billion conversion of Citigroup preferred shares held by Singapore’s GIC and the Kuwait Investment Authority into common stock. Last year, total investments were $46.9 billion, and they reached $55 billion in 2007.

But as SWFs regain their risk appetites — no doubt helped by successful deals such as the recent profit Abu Dhabi’s International Petroleum Corp. recently made selling most of its $5.6 billion stake in Barclays Bank — they could be somewhat different investors. Some face serious criticism at home for losses made, especially on Western financial institutions during the crash. In China, for example, many wonder why CIC doesn’t spend its cash supporting the country’s own companies more.

Those who have had dealings with CIC say it is likely to focus more on investing in resource sector and alternative energy companies. Abu Dhabi’s IPIC, after selling out of Barclays, says it is pursuing “hydrocarbon-related” opportunities. Singapore’s Temasek, meanwhile, already has been reorienting its portfolio more toward investments in Asia and Singapore itself.

It seems probable funds will try to invest both closer to home, and in industries that fit more neatly with their own countries’ policy objectives. When they venture overseas, they are also likely to have learned from their mistakes and to be savvier in structuring deals.

But as SWFs get more confident, foreign investments are likely to remain vital. First, capital constrained Western companies need deep-pocketed investors, so political opposition to SWF deals could be more muted than before. That is particularly true if funds are smarter in positioning their investments as strategic partnerships.

In addition, despite protestations that some SWFs want to focus on Asian opportunities, or investments closer to home, there aren’t enough big opportunities to soak up all the cash. Large, liquid Western markets are likely to regain their allure.


Jean Viry-Babel
senior partner
VBK partners

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Temasek Holdings Investment Performance and Transparency

On 8 June, I wrote in the Straits Times, a newspaper in Singapore that Temasek Holdings should not shy away from risk despite recent losses. Here is the article:

“Temasek’s track record has come under fire of late for a couple of false steps, notably its investments in Merrill and Barclays. These false steps are unfortunate, but so too is a general criticism of Temasek.

Temasek should not shy away from taking risk, particularly now. The last 30 years have seen steady growth in economies and wealth. The democratization of risk through the rise of derivatives, the growth of capital employed in active management across markets, in arbitrage and relative value as well as traditional investing, the widening and deepening of markets, have all contributed to a gradual reduction in continuous risk. Unfortunately this has also stored up gap risk. In the period of calm preceding 2008, however, the risk reward characteristics of investment in general were deteriorating as more capital chased fewer opportunities manifesting in higher correlation between seemingly unrelated investments, the need for more leverage to eke out decreasing levels of return, lower volatility across almost all markets. Risk levels became higher as risk perception became lower. Risk is highest in calm waters. Once the iceberg is sighted and collided with, risk is apparent and is converted from risk to damage.

The Fall of 2008 was such an iceberg. Markets are no longer as risky; they are damaged. For arbitrage and relative value investments, there is no better environment than damaged markets. Investors will be well compensated for policing of spreads, for bringing efficiency and price discovery back to markets. Equities may be cheap or expensive, but given the systemic de-risking of 2008, there are clearly relative value opportunities. Mergers and acquisitions have been more active than expected as companies seek strategic acquisitions, fire sales, consolidations. Bond markets have seen a recovery in issuance and take up has been healthy. Equity recapitalizations have been strong in emerging markets. All these are signs of a global economy healing itself.

The timing of the disposals of Barclays and BoA may have been unfortunate, but in the new world order, financial institutions are likely to be regulated as utilities with lower returns on equity.

The financial crisis represents a step change in the world order where the profligacy of the developed world is exposed and paid for over a period of decades, while the value creation and maturity of emerging markets raise productivity, economic growth and standards of living. Emerging markets are the source of demand and the source of supply of natural resources, whereas service economies in the developed world appear to be sidelined in the value chain. Perhaps there is some method behind Temasek’s new choice of CIO after all.”

The response to the article, from what I guess was mostly be a Singaporean audience, was mostly negative. Most Singaporeans are suspicious of Temasek’s track record and apparent lack of transparency. In many ways, Temasek’s main problem is a public relations one rather than a material one. While I neither defend nor criticize Temasek, I thought I would take a closer look at the objections to address my own questions about the organization.

While Temasek is known for its apparent lack of transparency regarding financial results and the precise details of its investments, the Temasek website provides some information. It provides quite a lot of information actually. But first, Temasek is 100% owned by the Ministry of Finance and is required to report only to its shareholders. One can of course argue that such responsibility should pass through to the citizens of Singapore as well, but that is another discussion.

In 2005,however , Temasek issued Yankee bonds which are a USD public bond issue regulated under the US Securities Act of 1933. Under the Act, these bonds are subject to certain standards and conditions including creditworthiness and reporting standards. Temasek received a AAA rating from Standard and Poor’s and Moody’s in December 2008. Temasek’s group financials are now available on their website dating back to 2004 in some detail.

I cannot comment about the management quality of Temasek. The website provides some investment performance information indicating a circa 18% annualized return on equity since inception. In the absence of volatility or other risk measures, it is difficult to comment on the quality of those returns.

The period of poor performance which is most in the public eye is 2008 where Temasek reported that for the period March to November 2008, the value of its portfolio declined by some 31% from 185 billion SGD to 127 billion SGD. This is a large loss, but the MSCI World equity index fell some 38% in the same period.

Using a rough and ready calculation, Temasek’s NAV increased by roughly 54% from Mar 2004 to Nov 2008. The absence of precisely comparable data means that I am using book value for the March 2004 valuation and market value for the November 2008 valuation. This is conservative I believe given the economic cycle. In contrast, in the same period, the HFRI Hedge Fund Index gained 15%, emerging market bonds (EMBI) gained 15%, global bonds (the old Lehman Agg) gained 19% and the MSCI World Equity Index made a total return of -4.22% with dividends reinvested. Note that the Temasek portfolio is slightly levered at between 0.9 to 1.4 X equity.

It is not a bad performance for an effectively long only private equity, strategic investment mandate.

From Bryan Goh

Jean Viry-Babel
senior partner
VBK partners

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