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A. Singapore – Government of Singapore Investment Corporation (GIC)
Background
Since 1970s., Singapore government had accumulated huge foreign reserves and high national savings. Therefore, the Singapore government decided to make use of this money.
The government wanted to manage the excess reserves more efficiently and actively, and hoped to facilitate the country’s economy by this way as well. On 22 May 1981, the Government of Singapore Investment Corporation (GIC) was incorporated to fulfill this goal.
Purpose and Intention
1. Find a better way to manage Singapore’s foreign reserves for a higher return within acceptable risk limits over the long term.
2. Enhance and preserve Singapore government‘s global purchasing power.
Scale
Current scale: (as March 2008)
1. Over 100 billion U.S. dollars.
2. Invest in more than 40 markets worldwide.
3. 8 offices located in the key financial capitals worldwide as networks.
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Source
Basically, there are three source for GIC, and the first two are the main sources:
1. National savings (main) 2. Foreign reserves (main) 3. Investment returns by GIC
Investment Policy
The investment of GIC is globally and well diversified by investing in multiple asset classes and regions. There are 3 levels of investment decisions, as shown in Figure 12, to help accessing GIC’s purpose:
Step 1, the long-term allocation decision is based on the clients’ (government) risk tolerance, investment objectives, time horizon, and the return expectations of asset class.
After that, GIC would manage on how to implement the mix policy, including the proportion of funds, the active or passive managing way, and the type of investment strategies, risk capital allocation, and the manager selection. In the last step, GIC would make portfolio construction and decisions, which includes the currency management, allocation decision, and others.
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Figure 12. Three levels of investment decision of GIC33
Source: GIC website
The investment objectives of GIC is comprehensive, including equities, fixed income, foreign exchange, commodities, money markets, alternative investments, real estate, private equity and infrastructure. And those investment portfolios are managed by 3 subsidiaries:
GIC Asset Management Private Ltd, GIC Real Estate Private Ltd, and GIC Special Investment Private Ltd. Each subsidiary operates independently and has its own authority to oversee the operations.
GIC Asset Management Private Ltd takes charge of the investment in public markets. It can be organized into 3 departments: Equities, External Managers, and Fixed Income Currency Commodity. GIC Real Estate Private Ltd takes charge of the investment in real estate. It is one of the top 10 global real estate investment firms. Its investments include
33 GIC website, http://www.gic.com.sg/aboutus_invest.htm
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traditional private real estate, public equities, and real estate vehicles. GIC Special Investment Private Ltd takes charge of private equity investment. Its mission is to become one of the world’s biggest and experienced private equity investors. Its investment strategy is to select and cultivate the best performing private equity and venture capital funds. The objectives it invests in are top global, regional, country focus, sector focus, and special situation funds.
The charts and table following are the assets allocation classified by class and region.
The biggest part of asset class invested is the Public Equities (44%). For the geographical distribution, America and Europe are still the main targets (40% and 35% respectively).
Figure 13.The actual asset class distribution of the portfolio as of 31 March 200834
Source: GIC “Report on the Management of the Government’s Portfolio for the Year 2007/08”
34 “Report on the Management of the Government’s Portfolio for the Year 2007/08”,GIC, pp 11
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Figure 14.The geographical distribution of the portfolio as of 31 March 200835
Source: GIC “Report on the Management of the Government’s Portfolio for the Year 2007/08”
From Table 7, it is obvious that the highlights of GIC’s investment industries are financials and real estate. There are 5 financial and 5 real estate transactions among those major investments.
35 “Report on the Management of the Government’s Portfolio for the Year 2007/08”,GIC, pp 11
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Table 7. GIC’s major direct foreign investments till 200836
Source: SWF Institute
Governance
GIC was established as a private company under the Companies’ Act, and the ownership was held wholly by Singapore Government. GIC itself does not own the funds but manage them for its clients (The Government of Singapore and the Monetary Authority).
As Figure 15 shows, the governance accountability of GIC is up to down: the clients would set the investment objectives for GIC; and GIC Board is given the autonomy to decide
36 SWF institute, http://www.swfinstitute.org/fund/gic.php
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the SAA, which is translated from the clients’ (the government) investment objectives; and the management team will accomplish the left investing tasks.
On the other hand, the accountability system in GIC is in the bottom-up style: GIC has accountability to its clients and the clients have the rights to monitor GIC’s overall performance.
Figure 15. The flow chart of GIC governance accountability37
Source: GIC website
GIC was designated a “Fifth Schedule”38 company under the Constitution of the Republic of Singapore since it manages the country’s foreign reserves. Being a Fifth
37 GIC website, http://www.gic.com.sg/aboutus_invest.htm
Client (The Government of Singapore and the Monetary Authority):
Set the investment objectives according to their expected returns and risk tolerance
GIC Board:
Strategic assets allocations which are translated from the clients
GIC Management Team:
Decide how and where to invest with their won autonomy Owner
Manager
Manager
Governance direction
Accountability direction
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Schedule company, GIC operates under the purview of Singapore’s President in several key areas such as the appointment or removal of GIC’s Directors and Group Management Directors. Simultaneously, GIC needs to submit its financial statements and budget proposal to President for approval. In addition, GIC is also audited by the Auditor-General regularly.
As Figure 16 shows, there are three additional committees formed independently at the group level in order to coordinate and review the entire group, ensuring the GIC’s operations are fiscal and ethical. These three committees look into issues that involve people, risk, policy, planning and operations; in the meantime, they report to the Group Executive Committee:
Committee Descriptions
Board Investment Committee
Oversee GIC’s performance and manage the implementation of investment policies.
Risk Committee Provide oversight about the risks issues in GIC group like reviewing the appropriateness and effectiveness of the risk management.
Remuneration Committee Oversee GIC’s remuneration policies and executive compensation.
The Committees’ members and the managers in GIC are composed by scholars and government officers. Although the members in manage levels are kind of government concerns, the criteria that GIC hire staff is according to their performance. Hence GIC recruit the talents from all around the world, but most of them are Singaporeans.
38 In 1991, the Singapore Constitution was amended to provide for the direct election of the President of the Republic of Singapore. This constitutional amendment gives the President an independent role as an elected Head of State to safeguard Singapore’s critical assets and past reserves. After that, the companies that should obey this amended Constitution were designated the “Fifth Schedule Company”.
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Figure 16. The GIC Organizational structure39
39 GIC website, http://www.gic.com.sg/aboutus_structure.htm Source: GIC website
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B. Singapore - Temasek Holdings
Background
From 1960, Government of Singapore already had direct stakes in local industries.
These companies became government linked companies (GLC). Because Singapore Government is the market rule maker, it is not appropriate for the government to play the market regulation role at the same time. Therefore, Singapore Government needed a private company to own and manage the investments that were held previously by Ministry of Finance of Singapore in order to ensure those investments are made by a commercial basis.
Due to this consideration, the Temasek Holdings was incorporated in 1974, and it can also let the government to focus on the economy in the larger interest.
Purpose and Intention
1. Create and maximize long-term investment returns as an active investor and shareholder of blue-chip enterprises.
2. Contribute to the country and communities as a responsible corporate citizen through supporting efforts to develop a better environment for people, like establishing research institutions, scholarships, and other non-profit philanthropic organizations.
Scale
Start with an initial portfolio of US $134 million.
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Source
1. Dividends received from portfolio companies.
2. Divestment proceeds.
3. Commercial borrowings.
4. The maiden Yankee bond (issued in 2005).
5. Seldom asset injections from Temasek Holdings’ shareholder, the Ministry of Finance.
Investment Policy
Temaske Holding adapts a long-term investment policy based on commercial basis.
Figure 17 indicates that the investment locations are focused primarily on Singapore (33%), North Asia (22%), and OECD(23%) economics. Within the Asia exposure, the investment in AA/AAA-rated and OECD economies is about 62%.
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Figure 17. Portfolio by Geography (%)40
Source: Temasek Review 2008
Temasek Holdings investments are focused on four themes:
1. Transforming economies
Temasek Holdings would invest in those industry sectors that are connected with and helpful about the economic transformation of Singapore. Take the deal of selling Tuas Power Ltd. (the electric company which generates one third of the electricity needs of Singapore) for example. Temasek Holdings sold Tuas Power for S$4.2 billion to SinoSing Power in March 2008. This deal represented that Temasek Holdings spent 14 years to restructure power
40 Temasek Review,2008, p12
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generating industry of Singapore successfully. By being cooperated with relevant Singapore government agency closely, Temasek Holdings played an important role to institutionalize a sturdy and sustainable market regulatory framework for the electricity market.
2. Growing middle class
Temasek Holdings would invest in companies and industries whose growth is stimulated by the increasing purchasing power of the middle class. Take the investments in Tiger Airways and Orangestar investment Holdings (the low-cost airlines) for example. This action represented the air travel needs for emerging Asian middle class.
3. Depending comparative advantages
Temasek Holdings would invest in companies with potential comparative advantages.
Like the investments in Interpharma Investment Ltd., the largest pharmaceutical distribution company in Asia. The intention behind this action is the increasing significance of healthcare and pharmaceuticals in Asia
4. Emerging champions
Temasek Holdings would invest in companies with best performance whether in industry or globally.
From the inception till March 2008, the total shareholder return is more than 18%
compounded annually. Besides, Temasek Holdings also got AAA/Aaa corporate credit rating by Standard & Poor’s and Moody’s respectively.
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The investment portfolio of Temasek covers various industries, including: Banking and Financial Services, Telecommunications and Media, Transportation and Logistics, Real Estate, Infrastructure, Engineering and Technology, Energy and Resources, Bioscience and Healthcare, Consumer and Lifestyle, and others. However, the Financial Services and Telecommunications & Media sectors are more than half of the investment portfolio due to both objectives fit Temasek Holdings’ investment themes. (Both sectors will benefit Singaporean when Asia economic transforming with its growing middle-class demands)
As Table 8 shows, about half of Temasek Holdings major direct foreign investments are in financial fields. Especially for the deals of PT Bank Danamon Indonesia, Temask owned more than half ownership in this company.
Table 8. Temasek Holdings’ major direct foreign investments41
Source: SWF Institute
41 SWF institute, http://www.swfinstitute.org/fund/temasek.php
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Overall, Temasek Holdings can be regarded as a strategic SWF. It plays as a medium for government to adjust the industry policy. Temasek Holdings would withdraw from the industries without strategic intentions and without the needs for government intervening (private enterprises can operate well by themselves). On the contrary, Temasek Holdings would like to play a pioneer role entering the industries with higher risk, more strategic, and less mature. Whenever the industries grow to be mature enough for private company entering, Temasek Holdings would withdraw from the sectors gradually.
Governance
Temasek Holdings was designated a “Fifth Schedule” company under the Constitution of the Republic of Singapore, and operated under all other applicable laws and regulations governing companies incorporated in Singapore. Therefore, Temasek Holdings should operate under the purview of Singapore’s President in several key areas such as the appointment or removal of Board members and the CEO and Temasek Holdings cannot draw on or diminish past reserves without the President’s concurrence. The President of Singapore act as a check to institutionalize the role of Temasek’s Board in safeguarding Temasek’s past reserves; simultaneously, the CEO and the Chairman have the accountability to President.
The Board of Director is largely consisted of non-executive independent private company leaders, and the remainders are the officials. The officials represent the concerns
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about country’s benefits and strategies; the members with business background represent the ensuring of the efficient operation in competitive market. The Board has full operation autonomy, provides overall guidance and policy directions to the management on a commercial principles, and pursues maximize long-term investment return. Neither the President nor the Singapore Government can direct the Board’s business decisions.
The Board is assisted by the Executive Committee (EXCO), the Audit Committee (AC), and the Leadership Development & Compensation Committee (LDCC).
Executive Committee takes charge of formulating guidelines and policies to manage Temasek Holdings’ capital resources efficiently. Audit Committee takes charge of reviewing the systems and processes to ensure the proper direct of company business. Leadership Development & Compensation Committee takes charge of establishing policies and providing guidance in areas of succession plans for key positions, leadership, Board appointments, and compensation…etc.
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