Temasek caps exposure to early-stage companies at 6%
TEMASEK caps the exposure to early-stage companies at 6 per cent of its total portfolio, which stood at S$403 billion as at Mar 31, 2022. With an estimated S$24 billion pot available, these stakes can serve an important function for the Singapore investment firm.
They can also generate attractive returns for Temasek. At the last count, returns for its early-stage investments are slightly above the industry average for venture capital funds.
Getting involved at an early stage allows Temasek to keep abreast of the latest technologies and innovations. Chief investment officer Rohit Sipahimalani said: “As an investor-owner seeking sustainable returns over the long term, we want to know not just the road ahead, but potentially what is around the corner. This is why we are focused on trends and in technology and innovation.”
This allows Temasek to develop market intelligence and insights to better understand the implications for its existing portfolio. At the same time, it can start to build positions in new winners to be a part of the portfolio.
Underlying this is the overall aim of building a portfolio that is resilient to market and economic cycles and different geopolitical environments, said chief financial officer Png Chin Yee.
Generating attractive returns
Investing in early-stage companies is one way of generating attractive returns. Take e-commerce giant Alibaba, which was one of the early winners for Temasek. In 2010, Temasek made a small investment in Alibaba, which was then mainly in the B2B (business-to-business) space. However, its retail business arm Taobao was showing signs of outperforming. Subsequently, Temasek pumped in significant sums. In 2014, when Alibaba went public, the return achieved was six times the investment cost.
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In the world of investing, making the initial investment is an important step towards being offered an opportunity to invest further. It also allows Temasek to understand the business better and to see if it wants to scale up the investment. Ms Png added: “It is by identifying the winners early on, and therefore ‘doubling down’ or committing more money with these companies, that gives the large payoff.”
Spin-off gains to portfolio companies
But there is also a wider imperative. Introducing the disruptive technologies from these early-stage investments can drive revenue or improve cost efficiencies at Temasek’s existing portfolio companies.
One example is Adyen, a global integrated payments platform provider. Adyen has been working with Singapore Airlines to facilitate a frictionless payment experience for customers when they book air tickets online or in-app.
Temasek also founded Istari, which works with companies to build sustainable cyber resilience in the long term.
Another Temasek investment is in BioNTech, the company that developed a Covid-19 vaccine. It is setting up an mRNA manufacturing facility here in Singapore, its first in the region.
Temasek has also invested in bio-based chemicals manufacturer Solugen, which plans to expand its research and development and production facilities in the region to meet demand in the areas of clean water and agriculture.
Sipahimalani noted: “This is how we add value to not only our portfolio companies, but also the broader Singapore ecosystem. Having an active dialogue with these companies gives us access to their people and technologies.”
Another investment is in Verily, a Google spinoff that uses artificial intelligence and data science in the area of life sciences. Verily has set up a regional headquarters here and has been roped in by the National Environment Agency to tackle dengue.
Managing the risk of early-stage investments
One way of managing the higher risk of investing in early-stage companies is to keep the total exposure at 6 per cent. The actual figure currently is slightly lower, Temasek said.
Another way of managing the risk is through diversification. About half of the figure is held in direct investments spread over 200 companies, including FTX. Slightly less than half is held in venture capital funds.
Temasek said that investment decisions are made from a bottom-up perspective, assessing individual opportunities against its risk-adjusted cost of capital. It does not allocate funds to specific geographies or sectors.
Temasek also maintains a disciplined divestment plan as, unlike pension funds that get regular inflows from its members, it needs to generate capital to invest, through divestments, dividends from its portfolio or distributions from funds.
CIMB Private Banking economist Song Seng Wun commented: “Long-term investment requires looking for companies with a diverse portfolio of products and services that can weather economic downturns and ride the latest macro or technology trends.
“Everyone tries to understand current trends and identify, after doing their due diligence, companies that may benefit from these trends.
“The bottom line is that you can never be right 100 per cent but, with the right amount of ‘homework’, one can be more right than wrong.”
Three engines of the Temasek portfolio
Temasek’s portfolio is categorised under three growth engines. The largest is the Investment Engine, which makes up about 84 per cent of the total portfolio.
The Investment Engine accounts for Temasek’s stakes in local and global companies. It includes the Singapore portfolio companies such as DBS Bank, Mapletree and PSA. It also includes global direct investments where Temasek has invested in the likes of China Internet giant Tencent or payments firm Visa.
The FTX investment is part of the Investment Engine.
About 13 per cent of the portfolio comes under the second engine, Partnership, which includes the asset management business. This is where Temasek has helped nurture the Singapore innovation ecosystem through such firms as Vertex, which invests in start-ups, or Heliconia Capital, which supports small and medium-sized enterprises. Temasek, together with its asset management arms, has invested in more than 10 unicorns – start-ups worth US$1 billion (S$1.35 billion) or more – in the region.
Among the success stories are ride-hailing and food delivery firm Grab and gaming hardware firm Razer. Gaming chair maker Secretlab is another example.
The third engine, the Development Engine, is the smallest, making up only 3 per cent of the portfolio. It focuses on future capabilities such as quantum computing and climate change.
Temasek cultivates strategic partnerships with deep tech investors such as Breakthrough Energy Ventures to gain insights on deep tech and scientific research that could disrupt existing businesses or offer exponential growth potential in the future.
Temasek has invested in Pasqal, a France-based venture that is advancing quantum computing with its Nobel Prize-winning technology.
Early-stage investments can be found within global direct investments, the asset management business as well as the Development Engine. THE STRAITS TIMES
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