Pillay jump-started talent development in GIC. GIC’s department heads were expatriates when he assumed office, a situation at odds with the vision that GIC’s destiny should be in the hands of Singaporeans. Local managers were then groomed to take over leadership positions. When Pillay left GIC, a Singaporean top management team was in place. That team would lead GIC for up to the next two decades. Pillay also launched an intensive effort to recruit and train staff to meet GIC’s expanding needs. So successful was this effort that GIC’s hires soon became the favourite targets of headhunters!
Pillay also put in place a structured investment process. The process itself was not original – it was standard practice among US institutional investors. However, he provided the leadership to prime the board to the new approach and to have the framework implemented. GIC now had an investment process that addressed, systematically, the whole range of decisions, from long-term asset allocation to the selection of individual securities.
Another milestone during Pillay’s tenure was the inception of a performance measurement system. With the aid of a British boutique firm, the system was built from scratch, as it had to capture and measure the whole gamut of factors impacting GIC’s investment performance. To boot, performance reports had to be timely.
GIC’s stakeholders were now able to know how well – or otherwise – every investment decision in GIC was doing.
Towards the end of the GIC’s first decade, its officers endured a “baptism of fire” sparked by a “Black Monday”, when global stock markets fell by as much as 60 per cent. The falls raised fears of an impending global recession. The outcome for GIC, however, was encouraging. Its diversified portfolio weathered the crisis while the management team Pillay had put in place provided the leadership to calm nerves.
Reporting to the board, Pillay commented that GIC’s responses had been reassuring, noting that “there was a good chance of GIC living up to its billing as genuine, unflappable investors with a durable view.”
It was also testament to GIC’s growing maturity as an investment management company.
Out of the Comfort Zone
In the 1990s, GIC ventured beyond its accustomed investment terrain. It became more globalised and an early institutional investor in Asian emerging markets. GIC also enhanced its private equity and real estate capabilities. These advances reflected a vision of the global changes to come and the boldness to adopt new ways to invest in unfamiliar investment situations.
The changes engineered were against the backdrop of two developments that Lee had highlighted to GIC as having “seismic implications.” One was the profound changes in Europe: the dissolution of the USSR and the end of communist regimes in Eastern Europe; the fall of the Berlin Wall and the re-unification of Germany; and, the formation of the European Union linked through a common currency, the Euro. Lee counselled that GIC be positioned to exploit the consequent investment opportunities in the continent.
Second was the unprecedented transformations in Asia, particularly in China. There, the reforms that Deng Xiaoping had introduced in the late 1970s and 1980s had taken root, and Dr Goh and Lee posited that China was poised to be one of the leading economies in the world. As we know now, their prognostications on China and the investment opportunities there were spot-on. Elsewhere, India, too, was beginning to liberalise. Indeed, the region seemed set to have higher growth rates compared to others.
A strategic move into Asia and Europe would be a major shift for GIC. At the beginning of the 1990s, GIC’s portfolio was distinctly Anglo-Saxon in orientation: all its private equity and real estate, and about two-thirds of its public market investments, were in the US and the UK.
When it came to Asia, GIC’s investments were mostly in Japan. GIC’s low exposure to the other regional markets was mainly because, except for Hong Kong and Malaysia, they were illiquid, undeveloped and lacked clear governance standards. GIC was restricted from investing in Singapore.
But Lee intuited that GIC’s predisposition to Anglo-Saxon markets also reflected a cultural and language affinity: “Because of Singapore’s history and cultural involvement with Britain and the US”, he observed “Singapore would naturally operate, by and large, with the Anglo-Saxon economies. The language barrier and cultural bias made it difficult for GIC to be more than a marginal player in countries like Japan and Germany.”
At another board meeting, Lee noted that though GIC recognised that East Asia would enjoy high rates of growth, “it should do more to position itself to react to this fundamental change. GIC should not let language and cultural bias skew its strategic thinking.”
GIC acted to remedy this cultural blind spot. It moved out of its comfort zone.
Lee Ek Tieng, who succeeded J Y Pillay in 1989, oversaw GIC’s investment shift towards Asia. He moved the management teams of Real Estate and Special Investments from Redwood City, which was close to San Francisco, back to Singapore. Their Asian teams were also expanded.
GIC then embarked on a five-year plan to raise its Asian investments by allocating more of its funds to the region, while still invested in Europe and the US. The new investments would be mainly in the equity markets, which were generally more liquid than the private markets. But GIC also planned to raise its real estate and special investments, particularly in countries like China where the equities markets were small.
Under Teh Kok Peng, who led the private markets group, Special Investments became a force in Asian private equity. The team’s chief hurdle was the scarcity of attractive investment opportunities of size. Most of the promising, unlisted Asian companies were family-owned, with the owner families generally loath to relinquish control.
GIC, therefore, could not confine its efforts to recognisable names or sectors. It had to scour far and wide. In China, the early deals included investments in firms manufacturing batteries, toilet bowls and washing machines. GIC’s practice of co-investing with partners, usually experts in the industries concerned, helped.
Teh recruited Seek Ngee Huat to run Real Estate. His team’s first major Asian investment, with a Japanese group, was securing a prized Tokyo site and developing the Shiodome City Centre on it. The team would eventually acquire properties in other major Asian cities.
The Asian Financial Crisis (AFC), which erupted in 1997, did not shake the board’s conviction in Asia. Lee saw the crisis as an opportunity for GIC to “make good strategic purchases, not just a quick profit.” He also suggested that the board co-opt industry leaders who had regional experience. Subsequently, Peter Seah, then-CEO, Overseas Union Bank (OUB); Ang Kong Hua, then-CEO, National Steel; and Ho Kwon Ping, Chairman, Wah Chang International Corporation and Banyan Tree Hotels and Resorts, were appointed to the board.
A milestone for Real Estate and Special Investments was their corporatisation as GIC Real Estate Pte Ltd (GIC RE) and GIC Special Investments Pte Ltd (GIC SI) respectively. By the late 1990s both were competing against the best in their fields. Lee Ek Tieng had assessed that corporatisation would then give them the organizational autonomy to develop the culture, business practices and personnel policies. GIC’s largest investment group, Public Markets, would be incorporated later.
The advances in the 1990s laid the foundations for GIC to become what it is now, a global sovereign wealth fund (SWF) with multi-asset capabilities. The vision that GIC should invest beyond its traditional markets led to new sources of returns and diversification. GIC’s early pivot into emerging Asia, especially China, gave it a head start in a fast-growing area. The corporatisation of Real Estate and Special Investments catalysed their development into investment entities of world-class standing.
Not just a rainy day fund manager
In 2002, the Board commissioned a review of GIC’s investment policy and strategy. While the review led to important changes to GIC’s investment framework, the more momentous outcome was a follow-up initiative led by MOF. The initiative resulted in a transformative view of the role of the reserves, changes to GIC’s investment policy and a Constitutional Amendment that cemented the link between the reserves and the welfare of Singaporeans.
In approving the review, Lee noted that its purpose “was not because the growth and achievement of GIC was in doubt. It was because there were fundamental changes going on and nobody could be sure what would happen in the future.”
Lee was referring to developments such as the bursting of the dot-com bubble, the 9/11 terrorist attacks in the US, the prospect then of the US invading Iraq, the prolonged stagnation of the Japanese economy and the difficult structural changes that Europe was undergoing. “It was necessary”, he added “to find the right navigator with good maps in order to steer through the treacherous waters.”
A consulting firm, Cambridge Associates, was engaged. It was chosen chiefly because of its expertise on the investment policies and practices of large US university endowments. The firm’s director of research, Ian Kennedy, led the assignment. He was given a wide ambit, with access to board members, including Lee.
Kennedy was asked to start from first principles, beginning with the very purpose of the assets managed by GIC. As it turned out, Kennedy’s conclusion on this would be refined further by a more fundamental review later. Even so, his conclusion was deftly put – that the assets managed by GIC were long-term savings to “provide for the future support of the Republic of Singapore and its citizens.” GIC’s financial objective could, therefore, be defined as “preserving and enhancing the fund’s inflation-adjusted purchasing power over the long term”.