- Erick Brimen
Temasek and the Singapore Model
Temasek Holdings, Singapore’s sovereign wealth fund, has nearly $300 billion in equity holdings, placing them confidently as one of the most substantial sovereign wealth funds in existence. Temasek was founded in 1974, originally formed as an outlet for the infrastructure and economic investments by the Singapore Government. Lee Kuan Yew, recognizing the importance of economic growth, was leading the Singapore government to catalyze a number of industries by investing in the founding of a variety of strategic companies, and Temasek was created to manage the Singapore government’s substantial equity holdings in these companies. Initially, they managed a portfolio of S$354 million. However, between 1974 and today, their portfolio has seen an astonishing growth of over 23,000%. Temasek and its portfolio companies have played an important role in the development of Singapore’s economic prosperity as well.
First, it's important to understand the grey area Temasek occupies between sovereign wealth funds and traditional private sector hedge funds, as this unique status is key to its success. Temasek functions similarly to other private sector investment entities in that it has a CEO, shareholders with voting rights, and a board of directors. However, it diverges in that it is officially written into the Singapore constitution as one of Singapore fundamental entities, meaning it is entitled to constitutional safeguards. Its one and only shareholder is the Singapore Ministry of Finance. However, it still distributes dividends like a traditional private sector firm. Profits are either directly put back into the Singapore government budget or reinvested into Temasek, further catalyzing the fund’s growth and with it, the growth of Singapore as a whole.
Temasek is set apart from every other sovereign wealth fund functioning today in that it pays taxes, invests in equity, and owns all of its assets. It also varies in its investment activity, investing heavily in emerging markets around the world, which is quite a risky strategy. This backs Temasek’ claim that they are not an SWF, but are instead an ordinary investment company.
This is important to note because it is precisely this autonomy and private sector behavior that allows Temasek to be successful. Lee Kuan Yew recognized that government bureaucrats don’t exactly make for good portfolio managers, so he guided the creation of Temasek to be like any other investment company on the free market. This meant the firm had to be competitive, take risks, and seek a profit in order to provide the highest value possible to its shareholder. It just so happens that this shareholder is the Singapore government. This autonomy also enables Temasek to invest in risky asset classes and risky emerging markets as this graph makes clear:
Temasek is world renown for its decisively high-risk investment strategy that is starkly different from the strategy of other, lower-returning government-managed sovereign wealth funds.
Temasek's profitability is extremely important to the proper alignment of incentives between the government of Singapore and the economic health of the nation as a whole: it enables the government of Singapore to partially capture a very small portion of the positive externalities created by its good governance. It is only through best practices governance such as strong respect for property rights and efficient regulatory and tax institutions that Singapore was able to attract the astounding level of business it has today and rise from third world poverty to first world prosperity in a mere 40 years. Temasek allows Singapore to capture some of the positive externalities that this governance-catalyzed prosperity creates by capturing the value increases of the businesses which are enabled by Singapore’s governance. In other words, Temasek makes good governance a profitable endeavor for Singapore.
The massive wealth generated by Temasek also functions as a conduit for the social development of Singapore. Temasek is involved with many philanthropic endeavors and has created six philanthropies underneath the umbrella of the Temasek Foundation. These foundations work to directly benefit the welfare of the citizens of Singapore by doing things like funding schools, scholarships, disaster relief, youth camps, healthcare for poor pregnant women, scientific research, and environmental improvement projects.
Temasek and the Singapore model show that properly aligning the incentives of a governing entity with the shared prosperity of the people of the jurisdiction can rapidly catalyze economic development, profitably.