Temasek headquarters, Singapore — the buck starts here

Mumbai's private equity brotherhood doesn't like to speak about the men in its circle. But a former McKinsey & Co partner's plunge into the fiercely competitive world of private equity deal-making has managed to breach the wall of reticence. Most regard Manish Kejriwal, managing director of Temasek India Advisors for seven months now, as a rank novice. Others admire his pluck.

He has plunged, quite literally, from McKinsey's 21st-floor offices at Express Towers in Nariman Point, Mumbai, to the 12th floor, where Temasek set up shop in March. The implications are not lost on the Mumbai-born Kejriwal. "I'm closer to the ground," he quips. On a more serious note, he reflects that the responsibilities are quite different. "Here you make the final call. The pressure's a bit more," he says.

The onus of proving his mettle as a dealmaker is only a part of the story. The bigger challenge is Temasek itself. There aren't any private equity players in the market quite like it. No other private equity fund has any linkage with a national government. Temasek, on the other hand, was born with a clear purpose: to act as the Singapore government's investment arm. That partly explains why it works differently.

Temasek tends to take its time to evaluate deals, largely because it is accountable to Singapore's Ministry of Finance. "In the past, timely deal closures have been an issue because of bureaucratic hurdles. Decisions are usually centralised with the Singapore leadership and they tend to be over-cautious," says a veteran private equity investor in Mumbai who was involved in a number of co-investment deals with Temasek in other Asian markets a few years back. There is another facet: Temasek has a reputation of being not very transparent even to its own shareholders.

The criticism is belied by the swiftness with which Temasek has snapped up deals in India over the last eight months. It debuted with the acquisition of a 5 per cent stake in ICICI Bank for $200 million in December last year, which it subsequently raised to 9 per cent. The same month, it teamed up with Newbridge Capital to pick up 7.7 per cent in the Bangalore-based Matrix Labs (the formalities ended in May 2004). That was before Kejriwal took over - and he hasn't wasted any time in going after fresh prey.

According to unconfirmed reports, in April this year Temasek appointed DSP Merrill Lynch to represent it in the bidding process for a 10 per cent stake in Reliance Infocomm. Recently it also announced the launch of a $200-million power fund in collaboration with the Reliance group. In the meantime, sources at Mumbai-based BPO ICICI OneSource (backed by ICICI Bank, ICICI Venture and WestBridge Capital Partners) say the company is in advanced negotiations with Temasek for an investment worth $20 million to $30 million. Temasek may pick up a 20 per cent stake. ICICI OneSource CEO Ananda Mukerji declined to comment on the negotiations.

On the face of it, it seems that maintaining the deal flow has not been a problem. Word is out that Temasek is on a buying spree - it is already the second largest private equity fund in India (See 'Big Window For Buyout Funds', BW, 1 March 2004). Temasek has committed or invested $500 million in India. And the allocation is not fixed - if it finds juicy deals, money isn't a constraint. Besides, Kejriwal's own approach to deals has probably helped. "We have created 70 per cent of the deal flow ourselves. Walk-ins have constituted only 30 per cent," he explains.

Now, most private equity funds tend to rely on walk-ins. Temasek can't afford to do so simply because it has a specific mandate to fulfil - usually laid down by the Singapore leadership. Take, for instance, its widely-reported bid for a 30 per cent stake in India's first no-frills airline, Air Deccan. No-frills airlines are a focus area for the Singapore government. Earlier in the year, Temasek Holdings teamed up with Australian carrier Qantas to set up a $100-million no-frills airline - JetStar Asia - in which it retained a 19 per cent stake. The bid for Air Deccan falls in line with Temasek's pan-Asian interest in the sector.

India In The Cross-hairs

Before getting into the details of its game plan for India, it is important to understand why the insular and intensely secretive Singapore-based investor is here in the first place. That India is top of its list of priority markets - the others being China, Thailand, South Korea and Malaysia - is evident from the fact that it is the first, and so far only, country to have a formal office outside the island nation.

The answer lies in the Temasek Charter, issued by the Singapore government on 3 July 2002, which splits government-linked companies into two groups. One group comprises companies that are deemed critical to Singapore's national interest and would continue to be under Temasek's control. The second group is made up of those with the potential to grow beyond the domestic market. The Charter came two months after Ho Ching, former head of Singapore Technologies (SingTel) and wife of Singapore's premier-in-waiting Lee Hsien Loong, took charge as CEO at Temasek. Ho's mandate is to "rationalise and consolidate" the 40-odd Temasek-linked companies dominating Singapore's economy.

Manish Kejriwal has already inked two deals in India. Can he keep the pace?

Within months of Ho taking charge, more than a dozen senior executives at top-rung Temasek-linked companies - among them Chartered Semiconductor Manufacturing, DBS Group Holdings, Keppel Telecom and the Singapore Exchange - quit their jobs. When queried whether Temasek played an active role in these departures, a spokesperson said: "CEO evaluation and leadership management and succession are strategic responsibilities of the boards of our companies. We expect the respective boards to review CEO performance and succession on a regular basis."

Many of these companies were found to be under-performers compared to their regional peers. Take Chartered Semiconductor, 60.5 per cent of which is owned by SingTel, a Temasek-held company. In 2002, Chartered was steadily losing market share to Taiwanese rivals Taiwan Semiconductor Manufacturing and United Microelectronics, who commanded 62 per cent of the global market against Chartered's 6 per cent. Between March 2000 and September 2002, the company's market capitalisation shrunk by $23.4 billion - 15 per cent of Singapore's total economic output.

Yet, Temasek came in for criticism from minority investors for not ensuring management accountability where it was the majority shareholder. Subsequently, in line with the Charter's objectives, Temasek initiated a series of measures to restructure its investments, which involved divesting holdings in some companies. For instance, it has completely divested its holdings in NatSteel and its subsidiary NatSteel Brasil. The divestment earned Temasek a 14 per cent internal rate of return.

With its Singapore-based holdings clearly in need of re-inventing themselves to survive global competition, Temasek realised that it would have to play a more active role in accelerating the pace of growing an external economy. In February this year, when Ho Ching reiterated the objectives of the Charter at a public meeting in Singapore, she also outlined Temasek's investment theme for the next decade. In the past, Singapore-based investments accounted for two-thirds of investments, while the rest was invested in North America and Europe. This has changed with Asia emerging as a hot new opportunity, says Kejriwal.

Temasek also said it would open its books - the first time in 30 years - to credit rating agencies. This would help it borrow from external markets. Not that Temasek needs the money. Over the past three decades, it has earned the government a compounded annual return of 18 per cent, including an average annual dividend yield of 6.7 per cent. The borrowings are aimed more at instilling fiscal discipline within the organisation, says a Temasek spokesperson.

Second Coming In India

Eight months ago, Temasek decided to focus on India as a direct investment market. Till then, it had an indirect presence through investee companies like SingTel, which holds 28.5 per cent in Bharti TeleVentures. Last August, it set up the $100-million Merlion India Fund in collaboration with Standard Chartered Bank to invest in early-stage technology companies. Earlier this year, it invested in the Goldman Sachs-backed private equity fund, WestBridge Capital Partners. According to Kejriwal, the investments in Merlion and WestBridge are part of a two-pronged strategy for the Indian market - fund-of-funds and direct investments.

CEO Ho Ching brought in winds of change when she took over in 2002

All this makes sense, except that it's not Temasek's first attempt at creating a base in India. Back in mid-2001, it made an attempt to launch an incubation programme for technology start-ups. The programme, titled InCube, was headquartered at Chennai and Temasek had earmarked an investment of Rs 1.5 crore for setting up an 8,600-sq.-ft incubation centre. In addition, it planned to invest at least Rs 1 crore in each start-up chosen for the programme. The initiative sank without much noise and the centre was shut in 2003. What went wrong is still not clear. Kejriwal attempts an explanation: "The market was different then. The technology boom at the time drove the InCube initiative. This time it's clearly a geographic play. The two situations are not comparable."

Even then, InCube doesn't count much as an experience in dealing with the Indian market. Kejriwal says Temasek actually has an edge over some of its peers. "Having a local presence is a big plus," he says, in obvious reference to investors like Warburg Pincus and Newbridge Capital, who currently monitor Indian investments all the way from Singapore. Riding this advantage, Kejriwal is looking at three kinds of investments in India. (See 'The India Plan')

The question is whether Temasek and its new Indian management will be able to translate this strategy into effective deals. One of the perceived handicaps it has is that it's not structured like a typical private equity fund. This means that Temasek's fund managers don't get to take home a percentage of the profits (the industry average is 20 per cent) usually due to fund managers. "The absence of a carried interest can affect the appetite to push deals through," says one CEO of an Asian private equity fund based in Mumbai. Kejriwal argues that Temasek's uncommon structure enables it to take a long view. "Our investee companies tend to appreciate us as a supportive, long-term investor... and not just divest when the going is bad," he says.

Of the two deals that Temasek has closed in India, one - Matrix Labs - has stirred controversy. Temasek and co-investor Newbridge decided to invest $127 million in Matrix at a price-earning multiple of 15 against the sector average of 6-7 in December 2003. At the time, Temasek's Merlion Fund was negotiating with Aurobindo Pharma for a minority stake at Rs 302 per share. When the Matrix deal took place, the Aurobindo management decided to raise the price to Rs 380. Merlion eventually paid Rs 375 for 2.3 million shares (See 'Chrysalis, Citi Deal Off', BW, 1 March 2003). Merlion India CEO Raj Dugar and Kejriwal declined to comment on the deal.

Some contend that these are just teething troubles. What Temasek lacks in terms of experience in India, it makes up in its experience as a strategic investor back home. "The combination of having an operating knowledge of large companies and a huge balance sheet makes a powerful combination," says a venture capitalist based in Bangalore. Moreover, few players in India play in the segment Temasek is targeting - $100-million deals. All this, plus its voracious appetite, may make Temasek the largest private equity investor in India sooner rather than later.