Could Singapore be heading for an Iceland-style meltdown?

By Paul Mackintosh - 19/05/14

Singapore’s Temasek Holdings has resurfaced again in the news – hardly difficult as it’s seldom out of it. Hard on the heels of its 2013 financial year results, it has just committed US$500 million to local asset manager Dymon Asia Capital, seeking to kick-start a hedge fund seeding venture that could help further boost the asset class’s recent recovery in Asia. It is also due to join RRJ Capital in a $1.8 billion pre-IPO commitment to the listing of ING Group’s Japanese and European insurance/investment unit. Furthermore, Temasek is contributing $100 million, alongside Chinese and Qatari peers, to the $5.1 billion funding package just raised by Hong Kong-listed CITIC Pacific Ltd to help fund the purchase of some $36 billion in assets from its state-owned parent company. All this in a year when the SWF also opened up its new Europe office in London.

A very recent report from the London-headquartered Institutional Investor’s Sovereign Wealth Centre concluded that Temasek and its sister sovereign fund GIC Pte were in fact the world’s most active sovereign acquirers for a second year running, based on $15.7 billion spent on acquisitions in 2013 – around one third of SWF direct investments worldwide for the year. Given the deep reserves of other competing SWFs and directly investing pension funds, it’s not easy to conceive that all those acquisitions were purely driven by value investment considerations. After all, some SWFs must face similar macroeconomic and internal constraints to Temasek and GIC – why weren’t they out as well investing at the same pace?

Singapore SWFs have made public commitments to the Santiago Principles of value investment, but it’s hard sometimes not to conclude that Temasek and GIC are still operating as strategic acquisition arms of Singapore Inc, with the same focus on market share and capacity at the expense of value and sustainability that have distinguished Japanese corporations and other Asian investors. Temasek certainly has vehicles that serve industrial development functions in Singapore. Take Heliconia Capital Management, which “provides growth capital for Singapore-based small and medium sized enterprises”, or Clifford Capital, which “commenced operations in late 2012, with a focus on financing Singapore-based companies to grow into new markets”. However laudable and potentially lucrative, and even allowing for home-ground advantage in picking private equity investment targets, such platforms are hard to square with a neutral and objective focus on purely value-driven investing.

One recent report in Forbes by analyst Jesse Colombo actually concluded that Singapore faces “an Iceland-style meltdown”, with Temasek and GIC directly exposed to any collapse. Cheap credit, of the kind that could fuel many Temasek-backed investments, was implicated in the potential crisis. It’ll be interesting to see how this plays out.