Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
ôWe are now entering a period of extreme uncertainty in the world economy and the global financial markets,ö Tan said during a speech at the inaugural annual GIC staff conference in Singapore. ôWe could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years.ö
As banks continue to de-leverage û cutting down on their lending activities and causing contraction in credit supply û the prospects for the US economy and possibly even the world economy are fraught with considerable downside risks, Tan notes.
If policy makers respond strongly and appropriately, investment markets and sentiment can turn around sharply; but if the stabilisation of the US housing market is left to market forces, the road to recovery will be a ôconsiderably more painful and long-drawn process,ö Tan says.
Tan expects financial and investment markets to be ôextremely nervous and volatileö over the next one to two years.
Amid this backdrop of uncertainty, SingaporeÆs sovereign wealth fund, which manages more than $100 billion, will have to step up to the challenge, Tan says.
ôThe next few years may well be among the most challenging years for GIC since our establishment in 1981. We have to brace ourselves for trying and difficult times but we are well prepared,ö Tan says.
Tan notes that GIC runs a tight ship, minimises risks where possible and takes advantage of its strengths as a long-term investor.
GICÆs investment operations are carried out through three subsidiaries: GIC Asset Management, which looks after public market assets; GIC Special Investments, which looks after private equity and infrastructure investments; and GIC Real Estate, which is responsible for real estate investments.
ôSuch a structure has provided us with the flexibility and responsiveness to make investment decisions which we need to act quickly and timely in the face of rapidly changing market circumstances,ö Tan says.
Being a nimble investor allowed GIC to take a more conservative approach in the third quarter of 2007 by liquidating a portion of its equity holdings and move into cash. That provided GIC with the liquidity to make substantial investments in UBS and Citi when the opportunities arose in December 2007 and January 2008, respectively, Tan says.
UBS and Citi are among the biggest casualties of the US subprime mortgage crisis. GIC invested SFr11 billion in mandatory convertible notes in UBS last December, after the bank's US housing crisis losses. In January, GIC invested $6.88 billion in Citi.
ôWe regard our investments in UBS and Citicorp as long-term investments which will give us good returns when markets stabilise and economic conditions return to more normal levels,ö Tan says.
Tan was one of the representatives who attended a meeting with government officials from Singapore, Abu Dhabi, and the US in Washington last month to agree on principles for sovereign wealth funds that emphasise transparency and specify that politics will not influence investment decisions.
Sovereign wealth funds have existed since the 1950s. Their asset size and clout in the investment community have grown dramatically over the past 10 to 15 years, however. The International Monetary Fund (IMF) estimates the total asset size of sovereign wealth funds at around $2 trillion to $3 trillion, with the potential to grow to between $6 trillion and $10 trillion by 2013.
In a background paper, the IMF estimates the size of GICÆs assets at between $100 billion to $330 billion. Based on the upper range of the IMF estimates, that places GIC as the third largest sovereign wealth fund in the world, next to Abu Dhabi Investment Authority that is on top with an estimated maximum asset size of $875 billion and NorwayÆs Government Pension Fund that is estimated to have up to $380 billion in assets.
Regulators keep their eyes open on tightening insurance industry by introducing more detailed risk management requirements, which could bring pressure on smaller players.
China and India are more obvious choices for AustralianSuper to consider in Asia Pacific, but the super fund currently lacks the expertise and prefers to stick to the US and Europe.
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Investors are increasingly turning to private companies and private debt in their hunt for ESG alpha, but the age-old problem of transparency and due diligence remains