SINGAPORE, — Generative artificial intelligence (AI) has been the “biggest surprise” in a recent market upswing but Temasek Holdings said today that it’s more interested in firms reaping the benefits of AI than investing directly in the “nascent” technology.
Top executives at the state investment firm said Temasek will be looking to use generative AI, which uses AI to generate content, to help the firms it invests in “create value” so they can innovate their products and services.
But Temasek International’s chief investment officer Rohit Sipahimalani said it remained wary over investing directly in AI technology firms and startups.
“Because there has been a lot of hype and the valuations are through the roof, so we’ve been very cautious of not really directly investing in those opportunities,” he said.
This was one of the topics discussed at Temasek’s review of its investment strategies today, where it announced that its net portfolio value had fallen for the first time in three years, by S$21 billion (RM72.9 billion) from a year earlier.
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Temasek’s net portfolio was valued at S$382 billion in the financial year which ended on March 31, a 5.2 per cent drop from the S$403 billion it achieved the previous year.
It also reported a loss of S$7 billion, compared to a net profit of S$11 billion a year earlier.
The one-year total shareholder return went into the red by 5.07 per cent, reversing the positive 5.81 per cent recorded a year earlier. This refers to all the dividends distributed to the shareholder minus any capital injections.
A statement by Temasek released today stated that the Singapore portfolio companies “remained resilient despite the draw downs in the global markets and the challenging macro environment”.
“However, our global direct investments saw a reversal of gains from the high valuations in the last two years, particularly in the technology, healthcare, and payments space, as valuations de-rated in the higher interest rate environment,” it added.
The 20-year and 10-year total shareholder returns were at 9 per cent and 6 per cent, respectively, similar to figures from the year before.
Temasek’s stance on generative AI
At a media briefing on the review, Sipahimalani said that generative AI has been the “biggest surprise” in recent months, helping to drive the S&P 500 into a bull market.
The S&P 500 is an index tracking the stock performance of 500 of the largest listed companies in the United States.
Responding to a question by TODAY on whether Temasek will be hopping on the bandwagon to invest more in generative AI firms, deputy chief executive officer Chia Song Hwee said the technology is still “nascent”.
Investment in AI is still “a very small portion” of its portfolio, he added.
“ChatGPT has created a lot of excitement but frankly speaking, it is still very nascent, especially when we talk about the business-to-business (space),” Mr Chia said.
“That is where we are spending more time trying to understand, rather than the business-to-customer space which today has been dominated by the big tech companies… which may not offer productive investment opportunities for us.”
He said that Temasek’s investment in this area is “very small” and comprises mainly specialised funds in the startup space.
Agreeing, Sipahimalani said that the revenue generating opportunities for these new startups is still “very unclear”.
Chia added that Temasek is more focused on helping “ourselves and our portfolio companies apply the technology so that value can be created”.
“We really believe that the value creation of such technology will be with the incumbent, and that’s where we are spending our time on, building capabilities to co-innovate products and services with the companies,” said Chia.
He did not elaborate on what specific kinds of generative AI Temasek will look to utilise.
Sipahimalani added that while generative AI is still an uncertain prospect, what is certain is that there has been a lot of investment around AI, such as companies producing microchips or storing data.
“And those companies we could invest in because they are more established companies, it’s clear that they will be winners,” he said.
Lessons from FTX investment
The review of Temasek Holdings’ performance over the past year included an assessment of its failed investment in cryptocurrency exchange FTX.
Sipahimalani said that Temasek was “disappointed with” the outcome but added that it had been an early stage investment and so came with its “binary risks”.
Deputy Prime Minister and Finance Minister Lawrence Wong had said that Temasek suffered not only a financial loss from FTX, but also “reputational damage”.
Temasek had initiated an internal review last November of its investment in FTX, which resulted in a write down of US$275 million (S$372 million) to reflect the losses in the investment.
In May, it had announced that it cut compensation for the team that recommended investing in the now-bankrupt FTX and for senior management, as they take “collective accountability” for the failed investment.
“It is a binary (risk) and that’s why you manage that risk by keeping it to less than 6 per cent of our portfolio,” said Sipahimalani.
He added that Temasek had invested in FTX as it seemed like at that time, the company had good technology, and looked to be gaining market share, and also looked “regulatorily compliant”.
While the situation panned out in a disappointing manner, he said that lessons have been learnt.
“For example, we have enhanced our due diligence processes, (and) the nature of our due diligence on the founders,” he said. “We hope to avoid the same situation in the future.”
He said that future fraud was difficult to predict when the investment was done at an early stage. FTX’s founder, Samuel Bankman-Fried, was charged with fraud earlier this year related to his firm’s collapse.
“Fraud is something that is difficult to protect against completely, and we do recognise that in early stage investing will have binary risks and we need to manage that risk.”
Decreased net investment
During the year, Temasek invested S$31 billion and divested itself of S$27 billion of investments, resulting in net investment of S$4 billion.
This is a slowdown from a year earlier, where Temasek invested S$61 billion and divested itself of S$37 billion of investment in the financial year, meaning net investment of S$24 billion.
Temasek said in its media statement that in the past year, there has been “persistent inflation” despite multiple interest rate hikes by central banks.
In addition, increased geopolitical tensions such as with United States-China tensions and the Russia-Ukraine war, alongside rising nationalism and protectionism, have led to a “marked shift from globalisation that has been the mainstay of global growth for the past 20 years”.
“The confluence of these events, not seen in decades, has raised the cost of capital and weighed on capital flows… It also had an impact on the pace of energy transition, in the face of greater demand for energy security and resilience,” said Temasek.
The state investment firm said that it had slowed down its investment pace as it “adopted a cautious approach” amid these global uncertainties, which saw a “global slowdown in deal activity as liquidity tightened”.
It had also reduced certain positions in the rebalancing of its portfolio.
“We continued to invest into opportunities that are aligned with long term structural trends, and engaged our large Singapore portfolio companies to seek out opportunities of the future,” Temasek said.
Temasek added that its portfolio “remained anchored” in Asia which accounts for 63 per cent of its investments, with Singapore (28 per cent), and China (22 per cent) being its top two markets.
Its investment in the Americas (21 per cent) rounds out the top three.
Its underlying exposure to developed economies, which include Singapore, North America, Europe, and Australia and New Zealand was at 64 per cent, compared to 58 per cent a decade ago.
Looking ahead
Amid a global environment where monetary policy remains tight with high interest rates and elevated inflation, growth is likely to be slow, said Sipahimalani.
However, Temasek is ready to act on any opportunities that present themselves.
“We have a lot of liquidity, and so we are ready to step up our investment in case of market dislocations,” he said.
“We will stay focused on investing into opportunities that align with our long term structural trends, so as to build a resilient and forward-looking portfolio,” he added.
These trends identified by Temasek include digitalisation, sustainability, future of consumption and longer lifespans.
Dilhan Pillay, Temasek Holdings’ executive director and chief executive officer, said that while the four largest recipients of Temasek’s capital to date are the US, China, Europe and India, the firm is now looking to invest closer to home.
“We are now looking to deploy more capital to Southeast Asia than we have in the past given the potential of the internet economy in these countries in the region,” he said.
Delving further into sustainability
Temasek said that in its commitment to carbon neutrality and the reduction of the environmental impact of its operations, it has made progress in its efforts to halve the 2010 carbon emission levels by 2030 and on its ambition to reach net zero by 2050.
For instance, it continues to evaluate material environmental, social and governance factors as part of its due diligence processes for investments, and also applied an internal carbon price of US$50 (S$66.51) per tonne of carbon dioxide equivalent, and expects to increase this to US$100 by 2030.
While the total portfolio emissions increased from 26 million to 27 million tonnes of carbon dioxide equivalent emissions between 2021 and 2022, Temasek said that this could be partly due to the reopening of borders post-pandemic.
“This still compares favourably to our pre-Covid emissions levels reported for the financial year ended 31 March 2020, which was 30 million tonnes of carbon dioxide equivalent emissions,” said Temasek.