“It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried … would appear to have been misplaced,” Temasek said about the FTX founder.
Temasek Holdings said on Thursday (Nov 17) that it will write down its US$275 million (S$376.8 million) investment in FTX, irrespective of the outcome of the cryptocurrency exchange’s bankruptcy protection filing.
Temasek’s announcement comes after FTX collapsed last week, sending shockwaves through the cryptocurrency industry.
In a statement published on its website, Temasek said that it invested US$210 million in FTX International for a minority stake of about 1 per cent, and US$65 million for a minority stake of about 1.5 per cent in FTX US. This was across two funding rounds from October 2021 to January this year.
The cost of Temasek’s investment in FTX was 0.09 per cent of its net portfolio value of S$403 billion as of Mar 31, 2022, the Singapore state investment firm said.
“In view of FTX’s financial position, we have decided to write down our full investment in FTX, irrespective of the outcome of FTX’s bankruptcy protection filing,” Temasek said in its statement.
“There are inherent risks whenever we invest, divest or hold our assets, and wherever we operate. While this write down of our investment in FTX will not have significant impact on our overall performance, we treat any investment losses seriously and there will be learnings for us from this.
“We will continue to remain prudent and exercise caution even as we explore opportunities that are aligned with our structural trends, to deliver sustainable returns over the long term for our overall portfolio.”
It added that there have been “misperceptions” about its investment in FTX as an investment into cryptocurrencies.
“To clarify, we currently have no direct exposure to cryptocurrencies,” said Temasek.
The state investment firm also addressed its assessment of FTX founder Sam Bankman-Fried.
“It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced,” Temasek said.
“We expect companies that we invest in to comply with their obligations under the laws and regulations of jurisdictions in which they have investments or operations, abide by sound corporate governance, and above all act ethically always.”
Temasek added that it is “supportive of the efforts of the regulators and the courts”, and encouraged the principals involved with FTX to cooperate for an “orderly resolution of outstanding matters”.
INNUMERABLE OPPORTUNITIES, SIGNIFICANT RISKS
In its statement, Temasek explained its strategy on blockchain and the rationale behind its investment in FTX.
Describing innovative technologies such as blockchain technology as “enablers with the potential to transform sectors and create a more connected world”, Temasek said: “The nascency of the blockchain and digital asset industry presents innumerable opportunities as well as significant risks.”
It closely tracks the risks involved and has taken a “calibrated two-pronged approach for exposure” in this space: Venture building and investing.
“Our venture building efforts have been focused on programmable money, digital assets tokenisation and decentralised identity and data,” Temasek said.
“Several of these entities are not blockchain-based at this stage but rely on the technology and focus on delivering open data solutions and open networks.”
As for its blockchain investment activity, Temasek said that it focuses on financial market service providers to the digital asset space providing protocol-agnostic and market-neutral exposure, as well as technology infrastructure including protocols, wallets, developer tools, cross-chain messaging, the metaverse and gaming infrastructure.
Temasek said that its investment in FTX was based on its belief that exchanges form a key part of global financial systems.
“The thesis for our investment in FTX was to invest in a leading digital asset exchange providing us with protocol-agnostic and market-neutral exposure to crypto markets with a fee income model and no trading or balance sheet risk,” it said.
The Singapore state investment firm added that it believes it has to invest in new sectors and emerging, nascent business models. This will help it to understand the applications and impact they may have on the business and financial models of its portfolio, or be “drivers for future value in an ever-changing world”.
“This is why we invest in early stage companies and accept the binary risks associated with such investments,” said Temasek.
Early stage investments account for about 6 per cent of its portfolio, and as a group, it has generated “good returns”, with internal rates of returns “in the mid-teens”.
“However, we do recognise the inherent risks of investing in early stage companies and take a very measured approach to such investments by applying an illiquidity risk premium on the cost of capital,” it said.
“In addition, we also add on a venture risk premium for the early stage they are in. Our blockchain direct investments are not a significant part of our early stage investments.”
In its statement, Temasek also shed light on its due diligence process prior to its investment in FTX.
“Similar to all investments, we conducted an extensive due diligence process on FTX, which took approximately eight months from February to October 2021,” it said.
“During this time, we reviewed FTX’s audited financial statement, which showed it to be profitable. In addition, our due diligence efforts focused on the associated regulatory risk with crypto financial market service providers, particularly licensing and regulatory compliance … and cybersecurity.
“Advice from external legal and cybersecurity specialists in key jurisdictions was sought, with legal and regulatory review done for the investments.”
Temasek also spoke to people familiar with FTX.
“Separately, we also gathered qualitative feedback on the company and management team based on interviews with people familiar with the company, including employees, industry participants and other investors,” it said.
“Post investment, we continued to engage management on business strategy and monitor performance. We recognise that while our due diligence processes may mitigate certain risks, it is not practicable to eliminate all risks.”
The Singapore state investment firm said that it still sees the potential of blockchain applications and decentralised technologies to “transform sectors and create a more connected world”.