Wednesday, January 23, 2008

Will the governments “hands off” approach benefit GIC and Temasek Holdings?

Tharman Shanmugaratnam, Singapore's minister of finance, said the government will take a "hands off" approach to the investments of its sovereign wealth funds Temasek Holdings and Government of Singapore Investment. He made these comments to lawmakers in Parliament.

Temasek and GIC have invested about $23 billion in UBS AG, Citigroup and Merrill Lynch since mid-December as the banks turned to investors after record write downs and losses.

“Let me first state that GIC and Temasek make their investment decisions independent of each other, and of the government. They make these decisions for commercial reasons, based on their own calculations, free of any influence from government.”

GIC has explained the reasons why it made a major investment in UBS, and more recently in Citigroup. Likewise, Temasek has stated why it invested in Merrill Lynch. The U.S. subprime crisis has resulted in several global financial institutions facing large write downs of their assets, and requiring fresh capital. This presents opportunities for investors that are liquid, and able to take a long-term view. GIC and Temasek were among those approached.

“They assessed the proposals rigorously. In each instance, GIC and Temasek concluded that these were good, long-term investments and valuable additions to their overall portfolios. They considered each of the banks as having a strong business franchise and good long-term growth potential, across multiple businesses and multiple locations. Hence they negotiated terms which protected their interests and made financial sense, and entered into the deals.”

When asked to comment on the risks involved, they referred to the large investments as with all commercial investments, there will be some downside risk. It is up to GIC and Temasek to assess this risk, and decide if it is acceptable. Their responsibility is to accept prudent risks in order to earn good returns on their overall portfolios.

“It is not the government's role to comment on or second guess whether it was timely for GIC and Temasek to have made these two investments. It does not judge the performance of GIC and Temasek by their individual deals. Nevertheless the government is assured that both GIC and Temasek had thoroughly assessed the risks of each of these investments, and had made hard-headed commercial decisions after careful assessment of the risks and the prospects for returns over the long term.”

Albeit the government is assured, will GIC and Temasek actually manage to live up to what their expected of?