Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Temasek is cozying up to private markets. The Singapore state investor announced a decline in the value of its holdings to S$242 billion ($179 billion) for the fiscal year ended March 31, the first drop in seven years. Shareholder returns for the year were minus 9 percent. Considering that it was aiming to clear a hurdle rate of plus 8 percent to create wealth for its owner, the Ministry of Finance, the year can be termed a washout.

But that's just one year. Temasek's track record of 15 percent shareholder returns since its inception in 1974 makes it a formidable wealth builder. The question is whether that performance is sustainable when 54 percent of the portfolio consists of equities in Singapore and China, and 23 percent is made up of financial heavyweights, including Bank of China, China Construction Bank, DBS and Standard Chartered.

Falling Short
On shorter time frames, Temasek has struggled to create wealth for the Ministry of Finance
Source: Temasek Review 2016

That focus, which was once synonymous with growth, has become a burden now. Maybe China will avert a credit crisis, and perhaps Singapore's troubled rig builders will get some new orders. With some luck, CEO Bill Winters will be able to clean up StanChart's sullied balance sheet. But a resumption of the kind of growth from which Temasek once eked out great returns is in doubt.

There will still be good years in stock markets, but those are more likely to be driven by monetary easing and a scramble for mergers and acquisitions than an enduring improvement in corporate profitability. For durable growth in its portfolio, Temasek may have to look increasingly to private equity-type investments in everything from self-driving cars to biopharma and fintech.

There are some signs that the company is already moving in that direction. Unlisted assets now account for 39 percent of the total, according to the latest annual report released Thursday.  Two years ago, the figure was just 30 percent. Indeed, Temasek now has more of these presumably illiquid assets than it has extremely liquid ones -- cash, cash equivalents and shares in which Temasek's ownership is less than 20 percent. In its last fiscal year, Temasek raised its stake in Didi Chuxing, an Alibaba- and Tencent-backed Chinese ride-hailing service, and made fresh bets on Funding Circle in the U.K. and C2FO, a U.S.-based marketplace for working capital. 

Less Kick From Liquids
Unlisted assets are rising steadily in Singapore investor Temasek's portfolio
Source: Temasek Review 2016
*Cash, cash equivalents and company shares with less than 20% holdings. **Listed equity where Temasek holds 20% or more but less than 50%. ***Listed equity where Temasek holds 50% or more. ****Unlisted equity.

The Singapore government's budget already taps into the returns generated by Temasek and GIC, the sovereign wealth fund, to keep taxes low. The rapidly aging society may need those contributions to rise to underwrite future prosperity. For Temasek CEO Ho Ching, that means continued pressure to earn shareholder returns of more than 8 percent at a time when the 10-year U.S. government bond yields less than 1.4 percent. Trying to achieve that goal in frothy public securities will be risky. The pivot toward private markets makes far more sense.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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