Temasek shares update on FTX investment, reduces pay of investment team & senior management

The firm affirmed no misconduct was found internally, but that the pay reduction comes as both teams have taken collective accountability for the failed investment in FTX.

Temasek, an investment firm headquartered in Singapore, has announced a reduction in compensation for its investment team and senior management, following an internal review of its investments in FTX – a digital currency exchange platform that is now bankrupt.

In a statement on Monday (29 May 2023), Temasek Charmain Lim Boon Heng said this move was made as both groups (the investment team and senior management) took collective accountability for the results "although there was no misconduct by the investment team in reaching their investment recommendation," and as senior management was "ultimately responsible for investment decisions made."

Background on the case involving FTX 

According to an update by Temasek in November 2022, it had invested US$210mn for a minority stake of ~1% in FTX International, and invested US$65mn for a minority stake of ~1.5% in FTX US, across two funding rounds from October 2021 to January 2022.

The cost of the investment in FTX was 0.09% of Temasek's net portfolio value of S$403bn as of 31 March 2022.

"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 explained.

The firm further clarified: "There have been misperceptions that our investment in FTX is an investment into cryptocurrencies. To clarify, we currently have no direct exposure to cryptocurrencies."

On why it chooses to invest in early-stage companies, the firm shared: "As an investor-owner seeking sustainable returns over the long term, we believe that we have to invest in new sectors and emerging, nascent business models to understand the applications and impact they may have on the business and financial models of our existing 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."

According to the update, its early-stage investments constitute ~6% of its portfolio, and as a group, it has "generated good returns" for the company, with IRRs (internal rates of return) "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. 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.

Zooming in on the case: Between February to October 2021, Temasek conducted an "extensive due diligence process" on FTX, during which it reviewed FTX’s audited financial statement, which showed it to be profitable.

In addition, these efforts 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. The firm also sought advice from external legal and cybersecurity specialists in key jurisdictions, with a legal and regulatory review done for the investments.

Separately, it 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.

Post-investment, the firm 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."

"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. As we only had a ~1% stake in FTX, we did not have a board seat. However, we take corporate governance seriously, engage the boards and management of our investee companies regularly and hold them accountable for the activities of their companies," it added.

Addressing queries on the issue in Parliament last November, following Temasek's update, Deputy Prime Minister and Minister for Finance Lawrence Wong called the loss disappointing, adding that it was being taken seriously.

However, he affirmed, "the occurrence of investment losses does not in itself imply that the governance system is not working."

"Rather, this is the nature of investment and risk-taking. What is important is that our investment entities take lessons from each failure and success, and continue to take well-judged risks in order to achieve good overall returns in the long term. In this way, we can continue to add to our national reserves, and provide a stable income stream to fund government programmes for a long time to come."

In light of the incident, an independent team conducted an internal review of the investment, and the findings were then presented directly to the Board Risk & Sustainability Committee and the Temasek Board, following which the above-mentioned accountability was taken.

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