GIC’s UBS stake puts Singapore into Switzerland

Euromoney, January 2008

You will have heard Singapore referred to as the Switzerland of Asia. There’s the emphasis on private banking; the willingness to protect the privacy of the client; even the whole gleaming cleanliness of the place. But now Singapore has overhauled the comparison, and perhaps changed its direction, by becoming the biggest shareholder in Switzerland’s most powerful bank. 

The Government of Singapore Investment Corporation, known as GIC, is one of two large sovereign wealth funds that invest on behalf of the Singapore state, the other being Temasek. It manages “well over US$100 billion” in foreign reserves, according to GIC itself (that’s as specific as it gets; Standard Chartered reckons it’s US$215 billion, Morgan Stanley US$330 billion) through eight offices worldwide, in all the major asset classes. And in December it made its most high profile investment yet, when it put in Sfr11 billion of a Sfr13 billion capital injection into UBS through a convertible note issue that will eventually give GIC around a 9% stake in the Swiss bank (the other Sfr2 billion is from an unnamed Middle Eastern investor).

 The injection follows UBS’s announcement of US$10 billion of losses on sub-prime mortgage securities. The bank clearly needs the capital – and the market has responded well to the new investment – but what are the implications for UBS of having a Singaporean sovereign wealth fund as its largest shareholder?

GIC’s track record suggests it will be a reasonably passive investor. Tony Tan Keng Yam, deputy chairman and executive director of GIC, spoke in a statement about GIC’s “confidence in the long-term growth potential of the bank’s businesses,” although he did also note that the UBS purchase is an unusually high-profile one: “GIC’s preferred practice in respect of our public equity investments is to take relatively small stakes in companies for portfolio investment.”

If this sounds familiar, it should: it mirrors the Abu Dhabi Investment Authority’s US$7.5 billion, nearly 5% stake in Citigroup, secured a matter of weeks earlier. Like GIC, Adia is a below-the-radar investor by preference, generally trying to stay just below the limits at which regulators require disclosure of holdings in individual companies. Yet both have broken with their established practice because of what they see as the opportunities in ailing global financial services houses.

Tan singled out UBS’s global wealth management business for particular praise, and this is significant. Singapore has strong aspirations in wealth management and private banking; this is one of the handful of areas where it has clearly established itself as the regional centre at Hong Kong’s expense. A state-owned vehicle owning the largest stake in arguably the most important wealth management business in the world helps to bolster the message Singapore wants to project: that it’s the place to go for wealth management in Asia.

From UBS’s side, one would imagine it won’t do the bank any harm at all in Singapore to have a state holding. It could pay off in attracting affluent capital, which might see the stake as a sort of stamp of approval; it could be handy in securing investment banking mandates too. But there is a flip side to that coin: Singapore is not beloved by all its neighbours, as the Thai response to Temasek’s holding in Shin Corp has shown. It may be the case that some Asian states have a problem with the bank’s new shareholder, though as things stand GIC is a long way short of anything like a controlling stake.

It has also been suggested that the stake may help UBS attract people to the bank, a perennial problem in Singapore, particularly in wealth management. The bank already has 2400 people in the city state.

Matt McGrath, head of corporate communications for Asia Pacific at UBS, says the bank is “obviously delighted to have an investor of their [GIC’s] stature on the register…We feel that their investment has provided a meaningful endorsement of the underlying strength of our business.” Privately, the bank is understood to feel that GIC’s long-term approach makes it a useful partner and that there has been no indication it will interfere with the bank’s management. There is also a feeling that, for all the suspicion around sovereign wealth funds globally, Singapore’s is a reasonably safe bet given its legislative and regulatory framework and its western-style approach to financial markets. “It would be hard to see any circumstances where there would be day to day operational influence over the business,” says one bank insider.

One curiosity is that it was GIC, rather than Temasek, that took the stake. Temasek after all is the institution best known for its global banking assets, including stakes in Standard Chartered, Barclays, Bank of China, China Construction Bank, Hana Financial Group, ICICI, Bank Danamon Indonesia and (locally) DBS. Temasek, while hefty – it had a net portfolio value of S$164 billion in March – is almost certainly smaller than GIC and may not have had the capital to spare to underpin a bid. Perhaps even sovereign wealth funds can be stretched for cash.