Temasek charm offensive to fend off protectionism

At the World Economic Forum in Davos yesterday, political and business leaders took up the debate over whether a code of conduct should be imposed on sovereign wealth funds (SWFs).

The rapidly growing class of government-owned investment groups, who control at least $2.5trn (£1.25trn) between them, have ridden to the rescue of several Wall Street giants laid low by the credit crisis in recent weeks.

The debate comes on the heels of bellicose statements by politicians across Europe, including the French President Nicolas Sarkozy, against these "extremely aggressive" state-owned funds. Yet in a sunny meeting room at the headquarters of Temasek, Singapore's $106bn fund that has found itself at the centre of the storm after it stepped in with a $5bn bail-out of Merrill Lynch, the brewing backlash seems miles away.

"I don't see protectionism as a big issue," Simon Israel, executive director of the fund, said coolly. "I think people will reason this through and will come to understand that keeping global financial markets open is better than leaning toward protectionism."

Of course, Mr Israel is not content to let politicians figure this out for themselves. Next month, he will fly to London where he will hold the fund's first-ever meeting with British MPs – the Singapore all-party group, led by the Tory MP James Paice – to explain how Temasek works and why they shouldn't fear its increasingly international ambitions. "There is a huge education to be done, and we are doing that," said Mr Israel. "We are aware of the need to be far more sensitive in the current environment to investing in industries that may be iconic or have sensitivity from a national perspective."

Flush with bulging foreign currency reserves and inflows from record commodity prices, governments, primarily in Asia and the Middle East, are setting aside trillions of dollars into new funds to invest in companies and assets outside their domestic markets. Already in control of more money than the private equity and hedge fund industries combined, some expect SWFs to have as much as $15trn to deploy by 2015.

For Western politicians and executives, the worry is that opaque funds from the likes of China, Qatar and Libya may buy strategically sensitive companies, or be motivated by political or other less than commercial reasons. Temasek is desperate not to be tarred with the same brush. "When you speak about all this, please recognise that we at least believe we are differentiated," said Mr Israel. "We are trying to help people debunk some of the myths around Temasek. There are factors that highly differentiate us from the others."

Set up 34 years ago by the still-nascent Singapore government, Temasek, which means "sea town" in Malay, was gifted several state-owned assets, such as Singapore Airlines and the shipping giant Neptune Orient Lines. As its sole shareholder, the state endowed it with a purely commercial mandate, and as long as it produced returns – Temasek pays 7 per cent of its earnings each year in a dividend to the government – it let it go about its business.

From that relatively humble start, the firm has generated an average annual return of 18 per cent, growing into the seventh-largest fund of its kind on the world. It is an impressive growth story – its $106bn in funds represents 85 per cent of Singapore's GDP – and one borne in part out of the fortress mentality that pervades Singapore. A tiny island city-state of 4.5 million people, Singapore is surrounded by the much larger nations of Malaysia and Indonesia. Blessed with virtually no natural resources, the country has staked its future on its status as a business oasis where rule of law is absolute, an environment that has proven very attractive for financial services and multinationals eager to operate in the region.

And because it has so little of its own, it must necessarily be outward-looking. As a Singapore-based executive explained: "Singapore has no natural right to exist. We are not self-sufficient on water, we produce virtually no food, we import everything as a consequence. Every day for us is about survival, and that's why this country has this ability to make tough decisions for the long term. It's really unique. There are very few countries that are in that situation, so there is a different sense of purpose."

Unique among SWFs, Temasek has, since 2004, published an annual report. A year after that, it issued a bond, making it the only such fund to carry a credit rating from the likes of Moody's and Standard & Poor's. Nearly half of its board members are non-Singaporean. It does not depend on the government for new funds, rather it recycles the gains it makes into new investments. Neither does the government have a role in its investment decisions. "All you have to do is look at the returns we're making and it really does suggest that the government could not be operating this business," said Mr Israel.

Not all investments have gone according to plan. Since it invested $2bn in Barclays in July, the bank's shares have lost about a third of their value. Yet Mr Israel said that the fund takes a long-term view on investments, as opposed to the "short-termism of the market."

Yet for all of the pains it takes to distance itself from the rest of the SWF pack, Temasek is more often than not lumped together with them. The President's approval is needed for the appointment or removal of Temasek's board members and its CEO. Ho Ching, its chief executive, is also the wife of the prime minister, Lee Hsien Loong, and daughter in-law of the country's founding father and the first prime minister Lee Kuan Yew. She has been the driving force behind the transformation of Temasek from a regionally focused holding company to a more active investor making bigger, more direct bets in new markets.

In the five years since she took the helm, the fund's assets under management have more than doubled. She has hired more international executives and begun making investments beyond Singapore's comfort zones in Asia. Later this year it will open an office in Brazil.

Yet during all that time, it is difficult to find a single interview that Ms Ho has conducted with the Western press. Her most noteworthy interaction of late has instead come through her lawyers. Late last year, The Financial Times published an apology over a story that implied that her post at Temasek was granted because of nepotism rather than merit alone. The Economist published an apology and paid damages to Lee Hsien Loong and Lee Kuan Yew, now with the title of minister mentor, in 2004 after it wrote a story questioning her appointment. They won a similar case against Bloomberg News in 2002.

Mr Israel said Ms Ho's reticence can be explained simply enough. "We'd rather Temasek be understood as an institution more than any one person," he said. The upshot however is that an element of mystery remains over Temasek, which works against its efforts to be considered as any other purely commercial entity.

What is certain is that as Temasek and its peers continue to invest aggressively abroad, political and regulatory scrutiny will intensify. Could they start a formal body, much like the major private equity firms did in America last year, to formulate a united response to growing criticism of the industry?

"The idea may have some merit," Mr Israel said, before quickly adding: "We don't see it as our role to rally the SWFs to form a bloc of some shape or form."

Troubles at home

For all the hue and cry about sovereign wealth funds in Europe and America, Temasek has had free run so far in these markets. Its $5bn injection into Merrill Lynch was done and dusted in a matter of weeks. The stake it bought in Barclays inspired not a peep.

The ease of those deals stand in contrast to several recent transactions in its own backyard. Singapore Airlines and Temasek received Beijing's blessing for a joint offer to buy a quarter of China Eastern Airlines, only to see it later fall by the wayside this month when the state-owned Air China proposed a richer offer for the carrier. Singapore Airlines and Temasek hope to ultimately win the day, but will have to wait for the stand-off between China Eastern and Air China to be resolved.

Late last year, Indonesia's anti-trust regulator ruled that Temasek must sell its holding in one of the country's two leading mobile phone companies and was slapped with a fine after it was found to have a monopoly in the market. It is appealing the case. Its purchase in 2006 of the then Thai prime minister Thaksin Shinawatra's stake in the telecoms group Shin also inspired great controversy.