What Seatown could achieve for Temasek

Seatown Holdings, the fund manager being launched by the $121 billion Temasek, one of Singapore’s two sovereign wealth funds (SWFs), is not a hedge fund. It is a global investment company with a mandate to invest in stocks and bonds – but its size and private structure can enable it to tap sources of return beyond the reach of its large parent. Simon Mumme reports.

Speculation that Seatown will become a hedge fund may have been drummed up because of the professional backrgrounds of its leaders: Charles Ong, formerly the senior managing director and chief strategist with Temasek, has an investment banking background, while Nasser Ahmad is the founder of DiMaio Ahmad, a credit focused New York hedge fund.

Ong has said only that Seatown is a “global investment company” wholly owned by its Temasek. The SWF has pumped $3 billion into the manager, thought to be drawn from the most recent round of its $10 billion bond issuance program. Seatown’s investment mandate is believed to span stocks and bonds, but have the flexibility to buy large stakes in offshore companies and pursue alternative strategies, such as hedge fund-type bets and distressed debt.

It is also expected that Temasek will not be its only client. The belief that Seatown will attempt to raise capital from other investors stems from a speech made last year by Ho Ching, chief executive officer of Temasek, in which “sophisticated co-investors” were invited to allocate money alongside the fund over “one market cycle during the next five years”. A new subsidiary could be a means of achieving this without directly involving Temasek.

Also, if managed independently, Seatown may not be restrained by the remuneration structures set by the Singapore Government, and offer more attractive financial incentives to lure talented investors. It could also pursue alternative investments that its parent might be restricted from making, such as hedge fund-type strategies or distressed debt.

In the absence of further details about the purpose and structure of Seatown, financial media and expert observers have provided some plausible explanations for its creation. Chief among them is that Temasek will use the manager to diversify more aggressively into asset classes or investment strategies usually pursued by smaller, niche investment managers.

As the SWF grows beyond $121 billion, it can become more cumbersome and less reactive to investment opportunities: Seatown illustrates Temasek’s ability to create and seed more nimble investment vehicles, and potentially better exploit opportunistic investment ideas.

Seatown could also allow Temasek to make politically sensitive investments overseas, such as in resource companies or infrastructure, without sparking geopolitical concerns. Also, if it raises capital from other investors, foreign governments are likely to perceive that it is investing for profit only and not strategic objectives.

It could also be a move to help restore Temasek’s reputation at home. Like many SWFs, Temasek faced a crisis of legitimacy in the past two years as the public reacted adversely to its heavy losses. The SWF can now gain access to riskier exposures through Seatown. And by co-investing with other respected investors, the manager can legitimise its investment decisions. If things go badly, the government can point to these respected investors and spread the heat of the public’s blame.

This is the second time that Temasek has established a major funds manager. In 2003, it extracted an internal team to create Fullerton Fund Management, which manages multi-asset, multi-strategy and Asia-focused global funds. The SWF has also seeded several private equity funds focused on investments in mainland China. The moves indicate that Temasek is concerned that its monolithic size might prevent it from generating the highest returns possible.

Seatown is the English translation of Temasek, the Javanese name for an early city on the site of present day Singapore. Before joining the SWF, Ong, a 41-year-old Malaysian Chinese, worked as an investment banker with Lazard Frères in New York and then Deutsche Bank AG in Singapore. He heads a core investment team seconded from Temasek, and is building a bigger team.

He has stayed beneath the public radar after Temasek’s cross-border, $3.8 billion takeover of Shin Corp, the telecommunications company owned by former Thai prime minister Thaksin Shinawatra. The move sparked controversy in Thailand as the public considered the prime minister to be conflicted by the Shinawatra family’s holdings.

Ong is also credited with spearheading the fund’s entry into mainland China. In addition to seeding the China-focused private equity funds, Temasek bought a chunk of China Construction Bank when Bank of America offloaded a $7.3 billion in the company’s stock last year.

In time, it will become apparent how far Seatown’s investment strategy diverges from that run by its parent. In the main, Temasek pursues investments in industries driving the economic transformation of Singapore, growing middle income populations, companies with deepening comparative advantages, and those that are best-in-class, on a sector, national, regional or global level.

Its portfolio holds a 31 per cent exposure to Singapore, 27 per cent to north Asia, 22 per cent to OECD economies, 9 per cent to the conomies of ASEAN nations, 7 per cent to South Asia and 4 per cent to Latin America and other countries.

More than (30 per cent) 33 per cent of its investments are in financial services companies, followed by 26 per cent in telecommunications and media, 13 per cent in transportation and logistics and 9 per cent in real estate.

It owns big stakes in some of the island nation’s major businesses, such as Singapore Airlines, of which it owns 54 per cent, and Singtel, of which it holds 55 per cent. It fully owns Singapore Power.