What’s Temasek Doing? It’s Innovating Wisely

This blog is movingNot to worry: same blogger; same content; same price (free).

For a holding company that started life with significant positions in a bird park, a shoemaker and a steel mill, Temasek has come a long, long way. Today, the Singaporean sovereign wealth fund is one of the more creative and pro-active governmental investor in the world. As an illustration of this innovative spirit, I’d like to direct your attention to its new, wholly-owned asset manager called Pavilion Capital.

Pavilion will target investments in small and medium sized companies in North Asia (and especially China). It will be run by Temasek’s former CIO, Tow Heng Tan, and have roughly $1.9 billion to make direct investments in the region. Here’s how Temasek described the new venture:

“This new platform will focus on funds and direct investments in North Asia, particularly to expand our current reach and coverage of the opportunities with privately owned enterprises and small and medium enterprises in China.”

A SWF setting up a wholly owned, de novo asset manager is always an interesting development (even though it seems to be increasingly common), and a couple of questions jump out at me in this case:

  1. Why does Temasek – which has 77 percent (!) of its assets already invested in Asia – need to ‘expand its reach and coverage’ in Asia?
  2. Why does Temasek – a government-owned asset manager – need to set up a separate government-owned asset manager to achieve its objectives?

I have a few thoughts on this.

On the first question, Temasek may (once again) be setting up a vehicle that can attract third party funds. As we know from its Seatown Holdings venture, the SWF is already thinking in these terms. So, with Pavilion, it may be hoping to attract third party investors into a strategy that is undoubtedly one of the fund’s core competitive advantages: the Asian marketplace. Since Temasek has, arguably, unparalleled expertise in North Asia, then why shouldn’t it consider leveraging this expertise to make money through asset management fees? After all, this is the same type of strategy we’re seeing at OMERS these days with its infrastructure and real estate companies (see Borealis and Oxford Properties). I’d argue that OMERS is a pretty good model for Temasek to be following.

On the second question, I think Temasek recognizes that innovation and creativity are probably best achieved beyond the confines of the existing organizational structure of the fund. Traditionally, creativity is a real challenge within large, public investors (or any bureaucratic organizations for that matter). The hiring and firing rules can be quite cumbersome, and the decision-making can be slow and blunt. So by setting up a separate vehicle, the organizational and path dependent constraints can be overcome. For example, the new vehicle can pay market rates for talent. It can avoid legacy costs. And it can take on a bit more risk knowing that investment decisions will be dynamic and responsive to market developments (rather than calendarized appointments). In short, it can be more profitable.

So Temasek is being innovative and creative in a wise way. We’ll have to see what happens, but this really is an interesting start.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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