FTX blow-up is ‘an aberration’ in early stage investments: Temasek CEO

SINGAPORE - The blow-up of

disgraced American cryptocurrency exchange FTX

is “an aberration” in early stage investments, Temasek’s chief executive said, adding that it is “very difficult” to determine how an investment will turn out from the start.

In early stage investing, one has to accept the binary outcome of the investment, said Mr Dilhan Pillay, who is also Temasek’s executive director.

He said that in the case of FTX, which resulted in the group

writing off its US$275 million (S$369 million) bet on the firm

, the blow-up was to do with what are perceived to be individual actions, in a reference to FTX founder Sam Bankman-Fried.

Bankman-Fried is

accused of conspiracy to commit mail and wire fraud

, as well as orchestrating the theft of billions of dollars of customer assets, following the collapse of FTX in November 2022.

Temasek said in late May that it would

cut the pay of its investment team and senior management

as a result of the FTX debacle, although no misconduct was found. The one-off pay cut was reported to have been carried out.

Speaking at the Singapore state investor’s

annual review

on Tuesday, Mr Pillay said the investment team and senior management decided to take a pay cut because of the reputational damage from the FTX incident, particularly as the implosion came so soon after the investment was made. Temasek had pumped money into FTX across two funding rounds from October 2021 to January 2022. 

When asked why no one was let go as a result of Temasek’s poor investment in FTX, Mr Pillay said: “If you were to start to punish people beyond what we’ve done, who would want to be an investor?”

He added that as an investor, one takes calibrated risks, and “as long as you’ve done the work required to make the investment, the committee approves it, it goes forward”.

However, should an investment turn sour and negatively impact Temasek’s reputation, more punitive actions such as pay cuts could be taken, Mr Pillay said.

This is “to remind ourselves that every time we do something, the issue is not just the financial risk associated with the investment, it’s the reputational risk associated with us, and we take that very seriously”, he said.

Mr Pillay noted that most of Temasek’s investments have done well and very few have done very badly, like FTX. Others had started off performing well but became progressively worse, either due to external market conditions or internal conditions.

The state investor had held a 1.5 per cent stake in FTX and the investment constituted 0.09 per cent of its $403 billion portfolio as at end-March 2022.

The group was one of the exchange’s largest external investors, alongside Sequoia Capital and Canada’s Ontario Teachers’ Pension Plan. In November 2022, Sequoia wrote down the full value of its US$214 million investment in FTX.

Mr Rohit Sipahimalani, Temasek’s chief investment officer, said at the briefing that “FTX clearly was a situation we’re all disappointed with”.

He said Temasek caps the exposure to early stage companies

at 6 per cent of its total portfolio

, of which half are venture capital funds and the other half comprise over 200 companies that included FTX.

“We invested in FTX because at that time, it seemed like a company having good technology, it was rapidly gaining market share and all the checks with regulators suggested that they were very regulatory compliant and wanted to get licensed everywhere, so all that led us to invest in that company,” said Mr Sipahimalani.

He added that lessons have been learnt and that the group has enhanced its due diligence processes in the hopes of avoiding such situations in future, while “recognising that fraud is something that is difficult to protect against completely”.

Looking ahead, the group has built what it calls the “Temasek operating system” as part of its 2030 strategy.

This refers to a suite of specialised, next-generation capabilities in five areas – artificial intelligence (AI), blockchain, cyber security, data and digital, and sustainable solutions.

Temasek deputy chief executive Chia Song Hwee said these capabilities will be essential for the future and could differentiate the group as a value-adding investor and shareholder.

For now though, the group is trying to understand more about the business-to-business applications of AI and its investment in this area is “still a very small portion” of the portfolio, he said.

Mr Sipahimalani said the group will continue to invest in established tech companies as it is clear they will be winners, but he added that Temasek is less excited about investing directly in some of the start-ups for now as their revenue models are unclear and valuations are high.