Transcription
As I said, this is a massive fund. As of the fiscal year that ended last March. So I'm not going to say what happened for this year. They have $340 billion of assets under management. Dylan Palais has overseen this fund as it has changed pretty significantly from back in 2011, primarily being an investor in Singapore. Assets today being very different. Could you just, before we get into some of the current events and what's been going on in markets, just give us a sense of that transformation that you've seen?
So actually, the transformation done by my predecessor, Ho Ching, and she was brought in to Temasek to make us more of a global investor. When she first came on board, 97% of our assets were Singaporean companies, by the way. We own our assets. We do manage, if anyone. By 2011, we had made it such that it was about, you know, something like about 56%. And today, Singapore assets are just 36%. So 21% of our total net asset value. And so that transformation that's been done over the last, I would say 20 years, has been predicated on investment in global markets. We first started in Asia in the first decade of the 2000s, and then the second decade more into the US and Europe because we felt that balance between developed markets and emerging markets was required. We also started to increase our allocation to funds and asset management platforms that we set up. And so today, we have a fairly balanced portfolio, which is 41% Singapore companies that we control, roughly $150 billion of revenue that's either consolidated on a balance sheet or of companies that we that we control with significant minority stakes. 30% is in global investments all over the world, and the balance of 23% is in funds, asset management companies, and partnerships that we have with either financial institutions or corporates. So it's fairly balanced, I would say.
And you were speaking before and you were saying about half of the fund is liquid and half of the fund is illiquid in private markets. Yeah. As we sit here today, the world feels very dynamic. Yeah, we were thinking about AI disruption. Now we're thinking about an oil shock that could potentially set inflation spiraling. As someone who tries to toggle between private and public, liquid and illiquid, how do you think about catalysts that seem to be coming at us increasingly frequently?
Yeah, that's a good question. So if I go back to 2011, we were 80% liquid, 20% illiquid. By the end of the decade, we were sort of like 55% illiquid, 45% liquid. Today, we're about half and half. So 50% is in liquid, 50% is not liquid. If you look at this chart here, you will find that we're primarily an equities house. So you take away the private credit at 2% plus infrastructure, 1%, 97% in equities, and it's 48% liquid and 49% illiquid. So it's a balanced portfolio. Now, why is it that we went into private markets in a low interest rate environment in the past decade? You could actually argue that you could earn the illiquidity premium within a reasonable time frame. So in the previous decade, time to monetization to public markets was five years, and then went to eight years. Today, you're looking at even a decade. So the question for us today is whether you will get the illiquidity premium in a higher interest rate environment. So that's why we've decided to put a little bit more capital into liquid strategies. That includes public markets investing, indices, and things like that, because we feel that in a world where there are more surprises, shocks coming more frequently, disruptions like AIG, the summer, it is important to have enough liquidity to be able to pivot, change strategies, pivot, decide where you're going to put your chips for the longer term, or even rebalance for the shorter term. And so as a result of that, we've decided that we should maintain a certain level of liquidity in our portfolio because we do think there's a premium in being liquid today.
That's our view, too. And I want to get into just how much you are planning to continue to increase the liquid versus the illiquid part of your portfolio. I mean, is that significant in terms of how much more you have to go?
I think we're there. I think for now, for every dollar we invest, we're not going in a programmatic way. But I think it would end up being sort of 50/50, you know, some years that may even be a little bit more because of opportunity, some years a little bit less. But we'll make sure in the long run we maintain that balance. We'll get into the private side of things. But before we leave this, I want to get your thoughts on how you respond and be dynamic in the face of a potential oil shock. And that's the latest catalyst, in addition to air disruption and credit fears that seems to be targeting investors. Do you respond to that? Does it make you pivot?
You know, the things that oil shocks, we've had delivered it for a long time. And parts of our portfolio will be impacted by it. For example, we own an airline. By the way, for those of you who fly regularly, please consider airline. But, you know, whenever you have something like this, at what's going on in the Middle East, straight away, even though it involves a small portion of revenues, people think about the potential of increased oil prices on your P&L. People might travel less because of conflict and things like that. Every time there's something like the avian flu, your airline gets impacted by share price, so everything gets impacted. If you're on an airline that, look, you know, some parts of our portfolio clearly will be impacted by rising oil prices or, you know, power generation companies which have inputs from natural gas and things like that. But the bulk of the populace is not quite inoculated from the impact of oil prices. Obviously, for the financial services sector, it's a proxy for the broader economy, so that part of it gets impacted. But we've got a fairly balanced portfolio. So then I'm less concerned.
When you talk about the 50% that is in private markets, I just wonder how much you said 2% is in private credit. How closely you're watching what has percolated out that people see potentially deepening? Really the epicenter right now, BDCs, private credit funds tied to software.
Yeah. So first of all, I would say that private credit is a relatively new part of our portfolio. You know, we've always been battling it for the last, I would say 20 years, but we've started to ramp up about ten years ago, sort of 2% of our portfolio value, which is roughly about $7 billion US. It's really something that we've built in the last ten years. We have a separate entity, credit, a hybrid solutions entity that we spun out as a wholly owned subsidiary, and that has a very clear mandate. You know, get us something like a 5 to 6% cash yield on an annual basis, a total return of maybe, you know, low, low double digits, 11 to 13% with the leverage cap and a cap and pick because we want cash yield. And with that mandate, they've managed to do quite well. The credit quality is keeping up. Besides that, we have investments in funds with people that we believe are best in class. And, you know, so far they're holding up. So it's really a question of manager selection, the kind of the parts of the credit sector that you want to put your your money with. And and then you take you have to figure out whether, you know, the asset quality is there, whether the fund managers are doing what they're doing. And so far, you know, I'm not as concerned with our credit portfolio.
So there are two ways to ask this. First of all, it's only 2% of your real value, so it's pretty small. You address the one of how is your portfolio managing through this? The other way of saying this is at what point do you get excited about where you can potentially expand and get involved if there is dislocation?
So that's always the exciting part, isn't it? Because if you can get it cheaper, that's the best way to make returns. You know, it's all a question of the entry level price. So when there's a lot of froth in the market, you take on more risk. It's more expensive to get the returns that you want. So the question for us, you still have to go back to the question of asset quality and the pricing for the asset quality. Right. And so I think that there will be opportunities for us to partner with the funds that we invested in to look at those opportunities at the right time. You know, you have to it's opportunistic, it's opportunistic and it's not to be a major part of our portfolio is to be equities focused, right? So maybe private credit can go up to 5% of portfolio over the long run, but we don't want to change the DNA of the firm. You know, it's primarily an equities fund. Now, why do we do private credit? Well, it's simple. It's a little bit of a diversifier from a who's exposure. It gets us up the capital stack compared to where we normally would be. But the most important thing is it gives you market signals for what could happen in the equity space of your capital structure. You know, so that's what we look for.
What's the signal right now? You know, certain asset classes or certain. Yeah, certain sectors that we're invested in, we've got to be very careful about looking at the balance sheets of those companies and what it means in this in the cycle today. And you know, whether the cash flow through underwriting are going to be strong enough to withstand volatility or shocks in the system.
Shocks in the system is one thing, disruption as well, a big part of it. So how do you identify who's prone to it? Whether the software shock is really specific names that are going to go to zero and others that are going to be incredibly successful or some kind of widespread replacement.
So I think with what we've seen the last few months, things that you didn't think would be disrupted are becoming disrupted, or at least the perception of disruption is very high. And so you now have to think about other things they're investing in and what is the likelihood of disruption? Because today the reality is that disruption will come sooner than you've expected before. And therefore, to what extent are companies prepared for that? Now, I would say the counterbalancing to AI disruption is the adoption. You know, so if you have companies that can adopt AI to accentuate the business models and be able to not just withstand the shock of disruption but actually thrive in it, that's the most important thing that we look for and that's what we're doing today for our portfolio.
Are there certain types of companies that seem like they are able to get take advantage of this disruption versus just those that are looking to potentially survive through it?
Yeah. So, look, you know, even with software companies, right, which are in the news all the time, if you're mission critical and you know how to use it to actually accentuate your product offering, it's a good place to be in because no matter what, we're still burning software. It's not like I'm going to take over and and, you know, the entire software sector is going to disappear. But you've got to make sure you can pick the right the right companies to invest in. I think that is going to have a profound impact on sectors like, you know, pharma, biotech, you know, drug discovery, drug development. I think it's going to have a profound effect. And so those companies that partner with AI solutions are going to be a beneficiary. The question is just when. It's a it's a highly regulated sector. So a lot of things have to happen for you to see the full benefit of AI adoption.
So you're talking about how things are pretty dynamic and these are things you can't know right away. And so that's one of the reasons why you want to have a bigger proportion of your portfolio in liquid versus private companies or illiquid. Can you give us a sense of which companies you'd rather own in your liquid versus illiquid? Is there a certain type of of of asset class or a certain type of industry?
Yeah. So, you know, you got to when you look at liquid, you've got to figure out which part of your portfolio is really for the longer term, and that's compounding. So you've got to look for companies that you feel can be compounded. Some of them at seven. You can take the view you can compound for a long period of time. You know, if they keep innovating at the pace of innovating, the other companies, which we feel in the tech sector, etc., that could also be compounding. You look at where the top points are and demand with a supply and you can figure that some of these companies would be companies owned for ten years in the public markets. You know, you know, there is going to be more convergence between AI and climate adoption. Time to take adoption. Okay. And I think that that's what's going to help with with climate change transition for many of us. And I think that that's exciting for us to look at and see which companies will be prime beneficiaries of that. So there are many different sectors where you can look at it differently now because of AI.
You talk about returns and you've delivered some pretty significant returns investing in private markets over the years. And I just wonder, you know, you expect bigger returns for taking bigger risk and there are times that feel like a better time to take more risk in times when maybe not so much. How do you characterize the moment we're in right now?
So I think it's probably the most trying time to be a long-term investor, really is, you know, because if you're trying to invest for the long term, you're trying to invest through market cycles, you know, and nowadays with with the disruptive forces out there, you know, what exactly is the cycle for your business model? You know, are you continually transforming your business model for it for that? And I think a lot of it depends on the the industry, the company, the cycle management and things like that. Even we as a shareholder, you know, an investor pushing for companies to continue to always be on the edge of transformation. And I think that that is the biggest issue for us, you know, as a as a long-term investor. So if I look at what consensus as a long-term investor, what what's on the horizon for us? First of all, geopolitics doesn't back. Secondly, as geoeconomics, what happens in the US dollar does impact our returns. For example, the third would be technology, but would not. This in discussion about how do you use technology to actually improve things, you know, not just in business but in the world and find new investment strategies? I think all these things into account. So, you know, in that sense, you know, ten years ago we didn't have to think so much about geopolitics. You know, geopolitics were fairly stable. You know, technology disruption was identifiable. And then finally, investor strategies were pretty much linear. Today, it doesn't happen that way anymore, I think.
So, talking about geopolitics, do you think that people are overly sanguine right now in markets about the geopolitical risks?
I think the market has taken a view that some shocks can be shorter duration than otherwise, and so therefore they are pricing the risk. But they feel in the longer run, you know, you might be able to get around the risk and still be all right. I'm not smart enough to know what that's the right thing to do or not. I'll just watch and see where we put all of our funds to work. But I do think that there is a certain amount of I think markets are relatively sanguine, but everything that we're seeing, you know, and let's face it, I mean, since what's been happening in the Middle East, the markets really haven't moved down that much. You know, assets are down about 1.5, 1.6%. You know, our financial year is 31st of March. What happened second April last year and you saw the way the market moved down. Thankfully, our financial year ended 31st March. You know, not not the you know, or thankfully, the liberation day happened the second April. Anyway. This time around, you know, I'm still the 27th. We still got 27 days to go for fantasy and to close. It's better to look out five months down the road because something had happened. To turn around 37 days is it's interesting. So let's see.
Yeah, I want to finish up on dollar exposure because I. But can I just ask you, see, you know, well, we're allowed by our shareholders and so doesn't get involved in our business at all to take more risks because we're equities investors. So we're high risk, I would say, on the risk curve. And our threshold for pain therefore is behavior. And so the requirements for returns are therefore, you know, much more than what would be required with a sovereign wealth fund. So that puts us a little bit more on edge, right? Because, you know, you have a you have a responsibility of trying to deliver those outsized returns, an inflation-adjusted world where interest rates are higher and possibly higher for longer. Yeah, you know, we should expect to get those higher returns, you know, so we have to put that on ourselves. Yeah. So you notice some of the risks out there. I do want to finish up with the risk of the dollar because about half of your portfolio, I believe, is exposed to the dollar.
Only 41%. 41%. So I'm just curious how you're hedging. Are you planning to reduce exposure to the dollar in order to avoid some of the fluctuations, or are you going to double down?
So the most trying time was the second quarter of second quarter last calendar year when the dollar began to depreciate significantly against the Singapore dollar. And Singapore dollar is our reference currency. And in any event, 50% of our exposures are in Singapore dollars. So it moved, I think almost five or 6% during that time. It's about 7% down year on year, but it went up a little bit in the last few days. So that just tells you that the dollar is truly, you know, the currency going through in times of risk. So, what we tried to do then was we figured, okay, we'll hedge part of what part of the dollar denominated portfolio, which we did a significant amount, I would say, and the cost was what's fair was okay. But as we got along, everybody else had the same idea of people are not rotating out of US dollar denominated assets, were hedging for returns and hedging costs went up to, what, 2.5, 2.6%. So today, the cost of hedging doesn't make sense unless it's tactical for a shorter period of time. And so we now have to basically put in place what we will call natural hedges, which really means you have to invest in things that will give you a return that outpaces expected dollar depreciation. But, you know, the events of last few days reminds us that the US dollar is still, you know, the global currency of choice, a reserve, not just a reserve currency. It's a safe haven currency for for many things to happen in geopolitics and what happens in the world. And so I think we've got a good balance. I would say the dollar has strengthened. The policy of the Treasury Department is to have a strong dollar. So in that sense, would that change anything that we're doing? The answer is no. We'll continue to invest significantly in the US and US dollar denominated assets.
Well, there is so much more that I want to ask you, but unfortunately, we have run out of time. Dylan Appelé of Temasek. Thank you so much for being with us.
Thank you.