Temasek to hold internal review on its US$275m investment into bankrupted FTX

Temasek to hold internal review on its US$275m investment into bankrupted FTX

SINGAPORE — Temasek Holdings will be conducting an internal review into its write-down investment of US$275 million in bankrupted cryptocurrency exchange FTX.

The review will be conducted by a team within the sovereign wealth fund led by people separate from the investment team that made the decision to invest in FTX and is intended “to study and improve its processes, and to draw lessons for the future”.

This was said by Deputy Prime Minister and Finance Minister Lawrence Wong in his response to questions filed by Members of Parliament on Wednesday in regard to the control of cryptocurrency in Singapore and the oversight of sovereign wealth funds (30 Nov).

These questions are filed in light of Temasek’s recent write-down of its US$275 million in FTX which filed for bankruptcy on 11 November.

Mr Wong in his answer said that it is disappointing when there is a loss by Singapore’s investment entities, as in the case of Temasek’s investment in FTX.

“Even more so because the loss arose from what turned out to be a very badly managed company and from possible fraud and mishandling of customer funds.”

“The fact that other leading global institutional investors like BlackRock and Sequoia Capital also invested in FDX does not mitigate this won’t happen if FTX, therefore, has not only caused financial loss to Temasek but also reputational damage.”

Mr Wong said that Temasek has recognized this and has issued a comprehensive statement to explain its due diligence process and the circumstances leading to its investment in FTX.

According to Mr Wong, Temasek has also initiated an internal review by an independent team to study and improve its processes and to draw lessons for the future.

“I am confident that the Temasek Board and Management Team will learn and improve from this experience.”

On the independent team reviewing the FTX investment, Mr Pritam Singh, Workers’ Party Secretary General and Leader of the Opposition asked Mr Wong if the team is an external or internal entity and what is the threshold before the Auditor General steps in to audit a Temasek investment or its investment process.

Mr Wong replied by saying that the review by Temasek is an internal one and that it will be led by people who are separate from the investment team that made the decision to invest in FTX.

“So they will be separate. They will not be clouded by what steps were taken and they will report directly to the board,” said Mr Wong.

Mr Wong shared Temasek had done such reviews in the past when there are similar instances such as a write-off in an investment project where there is a permanent impairment or an investment that did not go well, which is a step up from their usual review process, which applies to all investments.

As to what thresholds it must reach in order for the government to trigger further action other than Temasek’s internal review which the government will not rule out, it would have to be something significant.

“It will be something that we feel has gone wrong within the organization.” said Mr Wong.

“Possibly that might be negligence, that might be fraud, that might be misconduct, that might be so. It has to be of that significant threshold for us to say, look, this is something is not right within the organization and let us commission or get the Auditor General to go in and do a proper audit and investigation. And we will not rule out if something like that were to happen.”

Temasek’s Investment Into Bankrupted Cryptocurrency Exchange

Temasek issued a statement on 17 November to announce that it will be writing down its US$275 million into the cryptocurrency exchange FTX in light of FTX’s bankruptcy filing.

The SWF noted that the thesis for its investment in FTX was to invest in a leading digital asset exchange providing it with protocol agnostic and market neutral exposure to crypto markets with a fee income model and no trading or balance sheet risk.

In regards to its due diligence prior to the investment into FTX, Temasek said it had reviewed FTX’s audited financial statement in a process which took approximately 8 months from February to October 2021, which showed it to be profitable.

It added that its due diligence efforts were focused on the associated regulatory risk with crypto financial market service providers, particularly licensing and regulatory compliance (i.e. financial regulations, licensing, anti-money laundering (AML)/ Know Your Customer (KYC), sanctions) and cybersecurity.

“We recognise that while our due diligence processes may mitigate certain risks, it is not practicable to eliminate all risks.” said Temasek.

Temasek defended its investment into FTX by saying, “Our investment discipline, centred around intrinsic value and our risk-return framework, guides our due diligence for new investments and ongoing engagement with our investee companies.”

“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 added. “In addition, we also add on a venture risk premium for the early stage they are in.”

However, in light of the new FTX CEO’s findings and assessment of FTX’s former management, many have wondered how Temasek went about its due diligence process before investing US$275 million into the company.

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