For Temasek Holdings, 2014 marked the biggest investment year since the global crisis in 2008, when its investments in Merrill Lynch and Barclays (just prior to the crisis) led to multi-billion-dollar losses.
Since then the company has bet heavily on China, and its investments over the last two years indicate the Singapore state-fund, which owns and manages a net portfolio of $223 billion, globally, is focussing on emerging markets as well as sectors such as technology and life sciences.
Rohit Sipahimalani, co-head, investment group; co-head, portfolio and strategy group; and head, India, at Temasek Holdings Pte Ltd, the Singapore government’s investment arm, says: the fund has carried forward its pace of investments from last year, as it believes that tail risks impacting the global economy have been fading away. One of the key decisions he takes pride in was making timely, rewarding and sizable investments in Alibaba and Facebook.
Excerpts of the interview:
Temasek had made new investments of $14 billion for the year ended March 31, 2015. The value of your portfolio was boosted by 3.7 per cent year on year, during the same period. How do you the present year – will you better these numbers?
Numbers, apart this year has been a very active year for us in term of investments. We are carrying forward from last year. Couple of years back, we felt the global economy was on a steady but slow path towards recovery and it was a right time to step up our deployments, as governments across every part of the world doing whatever it took to restore growth. We saw the tail risks fading away and that is what led us to step up our pace of investments. We have not finished this year yet – I would say it has been a very active year.
What are the broad themes that Temasek looks out for when investing?
Temasek’s investment strategy is based on four themes—growing middle-income and transforming economies which mostly relates to emerging markets; investing in companies and countries with comparable advantages; sectors such as energy, technology and life sciences; and putting money into firms that have disruptive technologies or innovative business models even in traditional industries.
These themes reflect in our investments in companies like Alibaba, Gilead Sciences, AS Watson. Our traditional focus on financials continues to be there, but is now more broad based to include insurance. Beyond that we have been active in technology, life sciences and consumer sectors. We are long term investors and that won’t change. We are seen as very very active in the last two years because our view of recovery in the global economy has played out. The one difference is that today the valuations are much higher than they were a couple of years ago.
There is no one sector – you have seen us being active in insurance lately and that is again mostly in emerging markets in terms of growing middle income populations. Our traditional focus on financials continues to be there, but it is more broad based to include insurance and other related sectors.
In your recent filings in the US indicate that you have offloaded 7.3 million shares in Alibaba Group Holding Ltd in the fourth quarter of the year and increased investments in the global pharmaceuticals maker Gilead Sciences Inc. Will quicker exits be your strategy going forward?
We are a long-term investor and we invest for the long-term – that is not going to change. We have had our holdings in Alibaba for a fairly long time, and we continue to have a sizeable holdings even now, but it is just that it is an ongoing process – investments and divestments are part of the normal course.
Temasek is one of the leading investors in the e-commerce space globally. Another hot sector is the taxi booking apps, where again you have a big investor. Are you worried about valuations of e-commerce companies?
In the tech sector globally, you could argue that the valuations of some of the deals that have been announced are quite stretched. My own view is that, and we also believe that in some of the very high growth sectors, if you pick the winner, regardless of the amount you pay now, you will make good returns on that. The challenge is to pick the winner. The same is true for e-commerce. Whether, you invested in Alibaba in 2010, 11, 12 or even 14 – at any stage you invested in, you would make a subsequent higher return now. The shift towards online retail is happening and that trend is not going away – question is, can you pick the winners? No matter what you pay today, in a ten-year horizon, the leading e-commerce player in India, whoever that is – whatever you pay today is justified.
In Grabtaxi, we are not directly invested – we are invested though (our subsidiary) Vertex Ventures. We are invested in China-based taxi app Didi Dache. Recently, China’s two leading taxi apps – the other being Kuaidi Dache, backed by Alibaba Group Holding Ltd, who had been key competitors merged. We also invested in the number two online video company sometime back, and they have merged with the number one player, that is today Youku –Tudou – it is multi-billion dollar market cap company. So if you believe online video is a theme that will succeed – you can debate at different points on the time on the valuation – but, if you are with the winner in that space, you should be fine. For the winner, the valuation will be okay, but for a lot of others, it may not be okay.
You also oversee India for Temasek. What is your India investment strategy and how do you see it when compared with your other key markets?
Today, in that context of valuations globally, India in particular is very attractive for us. Relative to the US, China and Europe, which are much bigger markets for us, we will never do as much there (in India)—but we’ve stepped up activity over the last two years. In size, most of the investments in India are smaller when compared with what we do in the US, Europe and China because of the size of the opportunities. A benefit we have is the flexibility in our investment stance—we can do public markets and private markets. In 2013, when India was melting post the taper tantrums, we saw blue-chip companies that were listed at very attractive valuations, and we said that regardless of what happens to the economy, these look very attractive. We invested quite actively in 2013 and almost entirely in the public markets. But in the last 12 months, we’ve done about 10 investments in India, and most of them have been in the private market. If you look at sectors, one is the area of financials because that is a proxy for the general overall economy, but otherwise it has been consumer, technology, healthcare and pharma. Just in the last six months, we have invested in Intas Pharmaceuticals Ltd (it acquired a 10.6% stake in the privately held pharmaceutical firm based in Ahmedabad); before that we invested in Snapdeal, we recently invested in Manthan; in the consumer side we did Bajaj Corp. Ltd and Devyani International (operator of KFC, Pizza Hut and Costa Coffee chains in India). We invested in SVB India Finance Pvt. Ltd and for hospitals, we invested in Medanta. These are not mega transactions—there are a lot of good deals and our focus has been to do the good deals. I see ourselves as unique because the private equity guys won’t do the public markets and the public market investors won’t do the other deals we do. So, even in the past, deals we have done, like buying a stake in Godrej Consumer Products Ltd—some of the deal sizes have been disclosed—they are between $100-150 million. That ends up being the sweet spot. If we find a very exciting $500 million (deal), we will love to do it—but at the same time, if we see a $50 million deal, we are happy to take that. You are an active investor in the Indian markets—last year, it was among the best performing markets.
Are Indian markets expensive at current levels? Will you continue to buy at these levels?
At the top-down level, valuations are expensive whether it is the US, Europe, China or India. From our perspective, we are very much bottom-up investors, and we will look at our themes and what is attractive to us, and we also look at value relative to growth opportunities. Many estimates say the Sensex earnings will grow between 15-18 per cent over the next two years. If that pans out, that has one implication on the current valuation, and if it grows at 25 per cent, it is a very different valuation. Yes, multiples are much higher now, and it becomes more difficult for public market investing. We made public market investments last year, but it was much fewer than what we made in 2013. If we believe that the trends are positive from a three- to five-year perspective, we are then less worried about the quarterly mark-to-market. Aggregate market valuations matter much less to us. We still find opportunities on a bottom-up basis that are attractive, which is why over the last 12 months, most of our investments are private or negotiated deals, compared with 2013 when most of our investments were in the public market.
Sticking to India, Temasek recently bought SVB India Finance Pvt. Ltd, the specialty lending arm of Silicon Valley Bank, for about $45 million. Will you now merge this with Fullerton India Credit Co. Ltd (FICCL), Temasek’s existing venture in the debt business in India?
Both are very different. If you look at Silicon Valley Bank, it looks at very early stage companies that may not necessarily even have sustainable cash flows to repay. You are looking at the background of the VCs, you are looking at the business model and their ability to raise equity to repay you – these are companies that don’t have free cash flow, and it is therefore a very different risk profile and also very different stages that the company is in. Fullerton is like an NBFC which does typical lending evaluation in terms of credit scoring for retail and small businesses. They are in different segments.
How does the relationship between Temasek and your wholly-owned venture arm – Vertex Holding – work?
It is not that every year, they get an allocation from us. We treat it like any other operating company – if we have to invest in an operating company, we would capitalise them in a certain way and then let their board decide to execute. Vertex is no different – it is capitalised in a certain way and their board decides on their long-term strategy. They recycle their capital just like we do.
In the recent Budget, the Singapore government has said it will include Temasek Holdings as a contributor to its Net Investment Returns (NIR) later this year to strengthen the country’s fiscal position – how will this impact Temasek?
It will have no impact. It is more an accounting term out there from the Singapore government, that as they look into their sources, they are allowed to take 50% of our projected Net Investment Returns – that is not a cash flow thing as we have been paying dividends to the government for many years now. Is it not that we need to pay them that – we have been paying dividends in the past and we will continue doing that.
Historically, they have always assumed that for GIC, 50% of the long-term net investment returns could be counted as a source in the Budget, and now they can do that for Temasek too. They know that in the longer term they will get it so they can account for it as part of the sources. It does not change our way of operation.