Why is Temasek raising more debt?
As the Singapore population starts to age and with the need to tap into our investment return, the amount of assets return for investment had been halved. Under the net investment returns contribution (NIRC) framework, the Singapore government could spend half of the long-term investment returns generated by the Monetary Authority of Singapore, Temasek Holdings and GIC, the three entities that manage and invest the reserves. While that is conservative for the Singapore Government and will be instrumental in bringing a quality of life into our community, this increases the pressure for the three pillars to perform.
As of 31 March 2018, there were USD$8.7 billion of Temasek Bonds outstanding, with weighted average maturity of over 11 years. Compared with an assets of USD$235 billion, that is reasonable level of debt. While the nominal amount looks big, it is often important to understand that certain industry do provide predictable cashflow and debt usage is often logical and desirable. But in the era of easy money (or debt), we should be mindful that we are raising debt for the right reasons and not just to boost short term investment returns.
In recent weeks, I had been reading of news of Temasek establishing a
- US$20 billion guaranteed global medium term note programme on the 25th July 2018 through Temasek Financial (I)
- SGD$5 billion medium term note programme on the 3rd August 2018 through Temasek Financial (IV)
"So did Temasek Financial (II) (III) (IV) (V) raised debt as well?"
Too Much Debt?
Considering that if the USD $8.7 billion amount is correct (in which Temasek has zero off-balance sheet liabilities), then Temasek would have increase their debt capacity by at least 3 times. If you use the net debt number of SGD 49.7 billion (USD 36 billion) from their website, debt would have increased a fold.
While I can comprehend the reason of raising debt now (since interest rate in the United States is still low and will be rising soon), I cannot comprehend the reason of raising such a huge sum of money at such a short period. With such a huge amount of money raised, Temasek management would be extremely incentivised and motivated to put it to "good use".
But due to a decade of low interest rates from the financial crisis, most assets around the world are inflated and pricey. So would Temasek be on the cusp of a decade of bad investment? For the past 10 years, Temasek return only 5% and if you look back at 20 years, they would have average 7%. While that is nothing to shout about, it is comparable to GIC's return.
The Beauty of Compounding Returns
If you are able to invest and compound your returns for a long period of time, even a small base and a small return would have made a modest man pretty wealthy. GIC Portfolio’s 20-year real return was 3.4%, or 5.9% per annum in nominal USD terms. Over the 10-year period, the GIC Portfolio returned 4.6% per annum in USD nominal terms. By understanding how small a base we had came from in 1965, we should really appreciate why Einstein term compounding as the 8th wonder of the world.
"“Compound interest is the eighth wonder of the world. He who understands it, earns it.” - Albert Einstein
Sometimes, in a haste to improve returns, we often took the route that is the easiest, And the easiest way to boost investment returns is to leverage
Too Little Opportunity!
Leverage is the easiest way to increase returns but leverage works both ways. If you are able to generate a return on capital, leverage will boost your return. If you are on the other side, leverage will also amplify your losses. As a country who had done well for the past 53 years, it is often apt to remember that we should only be seeking to ensure that our annualised return stay above global inflation and provide us with a slightly superior purchasing power across a long period of time.
With assets trading as multi-year high both in the stock market and venture capital space, we do wonder if Temasek is pushing its luck too far. While Return ON Capital is an important metric, we would argue that Return OF Capital is a more important metric in this era of inflated assets.
With the series of fund raising done by Temasek, we also started to witness a flurry of deal making in the Venture Capital space.
- 26th July 2018 - Temasek leads Fitness Network ClassPass Series D investment of US$85m
- 28th July 2018 - Temasek leads Flywire Series D funding round of US$100m
- 3rd August 2018 - Temasek extends US$200m credit facility to Rent the Runway
- 8th August 2018 - Temasek spent US225m to purchase a single-digit stake in Ola from a group of early investors
With the last transaction, I can see someone in India who is laughing at the way to the bank. With Ola projecting more losses in the coming year and possibly more competitors emerging in the ride hailing space,
Temasek could be in for a long and painful investment ride...