Singapore fund Temasek aims to lift ‘aspiring unicorns’
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Singaporean state-backed fund Temasek Holdings is looking to boost its investment in “aspiring unicorns”, grabbing stakes in promising digital companies to secure high returns once they debut on the stock market.
“I would expect even in the next six to 12 months, we’ll be doing a few more” investments in such companies in south-east Asia, Rohit Sipahimalani, who leads Temasek’s start-up focus as a joint head of the investment group, told Nikkei recently in an exclusive interview.
“It’s not going to make a material difference in the portfolio in the next one year or two years,” he said. “But in the next five years, I expect to see this being a meaningfully larger number just because we see a lot of opportunities out here.”
In a strategy that defies the current trend towards greater scrutiny of start-ups and their profitability, Temasek last month acquired a stake in Social Bella, an Indonesian online beauty product retailer that is rapidly raising its profile in a country with a large youth population and a blossoming ecommerce sector. The company is expected to become a unicorn — an unlisted start-up with a valuation of more than $1bn.
This article is from the Nikkei Asian Review, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.
Social Bella joins Singaporean fashion ecommerce platform Zilingo and martial arts event organiser One Championship as “aspiring unicorns” that Temasek has invested in over the past year.
Temasek is “actively in dialogue with a few others in which we would probably invest in the next few months”, Mr Sipahimalani said.
The state fund’s focus on start-ups goes beyond south-east Asia. During the year ended in March, Temasek invested in US food delivery service DoorDash, Indian ride-hailing service Ola and the China business of co-working space provider WeWork.
Unlisted shares accounted for 48 per cent of the 24bn Singapore dollars ($17.4bn) in new investment made during the year.
The increasing investment in start-ups reflects Temasek’s belief that the digital economy will continue to grow through areas such as ecommerce, ride-hailing and online travel bookings. The fund forecasts south-east Asia’s digital market to reach $300bn by 2025, tripling from 2019.
Temasek plans to stay aggressive despite the prolonged Sino-American trade tensions, expecting that earnings for US and Chinese internet companies will remain solid.
The fund’s asset portfolio reflects the shift in policy. Financial services, telecommunications, media and technology and transportation and industrial sectors accounted for 61 per cent of Temasek’s exposure in terms of asset value during the year to March 2019, down from almost 80 per cent a decade earlier.
In contrast, investment in life sciences and agribusiness rose to 7 per cent after totalling just 1 per cent a decade ago.
China now ties with Singapore as Temasek’s top investment destination. Unlisted assets accounted for 42 per cent of the fund’s total as of March 31, rising from 28 per cent over the past 10 years.
Temasek possesses dense information networks in the US, China, India and elsewhere that enable it to discover promising companies before others do and revise its portfolio quickly. The net portfolio value more than doubled over the past decade to SG$313bn ($229bn) from SG$130bn. The average 10-year return on investment stands at 9 per cent.
Temasek also enjoys freedom from investor pressure, unlike private-sector funds. This lets the fund keep stakes in themes and companies it believes will produce sustainable growth.
Mr Sipahimalani said start-ups particularly benefit from Temasek because the fund can invest at different stages of growth.
“If we come in at an earlier stage, we can keep supporting them in subsequent rounds,” he said. “If they are performing and we have a good partnership, we can keep funding them.”
When Impossible Foods, a US developer of plant-based alternative meat, raised $300m in May, Temasek led the funding round as it did in July 2017.
As an investment fund with a large portfolio, the money devoted to one start-up usually exceeds $50m. Temasek’s venture capital arm, Vertex Holdings, handles investment in smaller firms that do not meet its asset management criteria. Vertex looks to complete financing of $1.3bn for a new fund by year-end and invest in companies in the US, China, India and Israel.
The Vertex unit was the first backer of Grab, providing money in 2014 to the Singapore-based ride-hailing company that debuted in 2012.
Chua Kee Lock, chief executive, told the Nikkei Asian Review that Vertex has local teams with good networks to capture opportunities. Each team has an investment committee and decides what to do in the market because they know best what is happening there, he said.
Temasek shifted focus towards start-ups because established domestic companies no longer bring high returns.
“Start-ups are indeed riskier than most publicly traded established firms, but the rewards for investing in the right ones are also exponentially higher,” said Jeffrey Halley, senior market analyst at Oanda in Singapore. Vertex’s funds achieve 20 per cent returns, much higher than Temasek’s.
Temasek is a contributor to Singapore’s coffers, along with fellow state fund GIC and the city state’s foreign reserves.
The total contribution from these funds is projected to reach SG$17.1bn in fiscal 2019. That figure would surpass corporate tax revenue of SG$16.7bn and goods and services tax revenue of SG$11.6bn as Singapore’s largest income source. As social security spending rises with an ageing population, the investment in start-ups aims to support government income in the future.
But putting money into start-ups comes with risks, especially when the valuations of unicorns are under scrutiny. The We Company, parent of US co-working space provider WeWork, was valued at $47bn at the start of this year, but that figure now is thought to sit at $20bn.
Mr Sipahimalani acknowledged the recent investor focus on profitability and corporate governance.
“What we’ve seen recently is that the public markets are not that receptive to companies who do not have a clear path to profitability or positive cash flow,” he said.
Temasek itself invested in WeWork’s China unit, joining Japan’s SoftBank Group and other backers in a $500m fundraising last year. Co-working spaces are viable business models, Mr Sipahimalani said, but the key issue is the base of growth.
“What people are saying is we don’t want models where you are just focusing on growth and there is no visibility as to when you are going to come to break-even,” he said. “So I think that’s the balance.”
But more investment in start-ups means more susceptibility to market fluctuations. The uncertain global economic outlook also matters.
“If the world falls into a structural recession, life will get just as hard for start-ups as well,” said Mr Halley.
Nikkei staff writer Kentaro Iwamoto contributed to this report
A version of this article was first published by the Nikkei Asian Review on October 8, 2019. ©2019 Nikkei Inc. All rights reserved.
Comments