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GIC still sees gems in tech sector despite stretched valuations

Fund has found firms with substantial technology capabilities that trade at 'old economy' valuations

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There may be some stretched valuations in the technology space that remain of concern to GIC, but the state investor in Singapore still sees opportunities in the segment, and in particular, in the emerging markets, said its top executive.

Singapore

THERE may be some stretched valuations in the technology space that remain of concern to GIC, but the state investor in Singapore still sees opportunities in the segment, and in particular, in the emerging markets, said its top executive.

Speaking at a Bloomberg forum on Thursday, GIC chief executive officer Lim Chow Kiat said the fund is "very positive" on the outlook for technology investments in Southeast Asia, with markets such as Indonesia becoming more vibrant as players from China, the US, and more recently Europe, enter the fray as well.

Mr Lim pointed out that technology disruptions can have a more powerful effect in emerging markets than the current market turmoil that has engulfed these economies.

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"There are even more unmet needs and undiscovered needs. In fact, their populations tend to be younger, and they take to technology in some ways faster and better. So a well-funded disruptor has many leap-frogging opportunities," said Mr Lim.

An example has been the growth of micro business credit in developing countries, as technology has allowed small business owners to get access to loans to expand their enterprises, he noted. E-commerce has also flourished.

In sieving out opportunities, GIC has reviewed investments by diving into the actual technological capabilities of each company, eschewing the traditional classifications of a business, but also applying the discipline of looking at cashflow prospects, balance-sheet strength, and competitive standing.

"We have found traditional companies with substantial technology capabilities trading at 'old economy' valuations," said Mr Lim. "They are good investments and we keep looking for more of them."

Mr Lim noted that the bigger winners in technology may not be the first movers, but the fast followers - the one that commercialise and execute their way to success.

GIC also looks at the leadership provided by the entrepreneurs driving each technology business. For one thing, these entrepreneurs may bring success by putting their own long-term capital into the firm, thus lowering the investment risk, said Mr Lim. These entrepreneurs may also be able to scale up the business by joining with bigger platforms in time.

Mr Lim said well-run "ecosystem" businesses should form the core of investment portfolios. Such businesses are driven by factors such as cross-selling, scale, and the use of rich data.

"They create a powerful network effect, producing high and sustainable returns on capital, much like an 'investor surplus'," said Mr Lim. "With great power comes great scrutiny. Management of these ecosystems need to manage the societal sensitivities. Those who can do this well should form the core of our investment portfolios."

Winners in this new economy will be those that provide customisation to keep customers captive, and have a "relentless focus on customer value", added Mr Lim.

While GIC sees more potential pickings in the emerging markets, it is still keeping tabs on developments in both Silicon Valley and in China, with Mr Lim noting that the technology from both innovation centres differ.

While places such as Shenzhen are producing technology solutions that offer an edge in manufacturing, Silicon Valley remains more focused on software development and is more international in nature.

"From our point of view, we want to make sure that we are present in both places," said Mr Lim.

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