An investor has studied cryptocurrencies for years, then missed the FTX red flags


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dated: 2022-11-19 20:13:46 .

(Bloomberg) — When Sam Bankman-Fried was just 25 years old, he pitched his growing crypto investment business to Silicon Valley investors — only to have them laugh at him and his friends for their lack of crypto experience and knowledge.

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“None of us have run a business before, and we want $100 million by next Tuesday,” Bankman-Fried David Rubenstein said of the August request. “It was not a very convincing proposition for investors.”

Five years later, Bankman-Fried became, in his own words, “one of the world’s biggest donors.”

Bankman-Fried eventually enlisted some of Silicon Valley’s most prominent companies to raise billions for his FTX. After rapidly collapsing over the past week and a half, that feat now looks like one of the biggest due diligence investment failures of all time.

FTX’s blue-chip backers included funds such as the Ontario Teachers’ Pension Plan, a C$242.5 billion (US$181 billion) fund that has poured money into private companies for decades and is known for its track record. He is actively interested in the corporate management of companies in which they are invested.

Ontario Teachers in October 2021, along with other major investors including Tiger Global Management and Singapore’s state-owned Temasek Holdings, invested $75 million in two FTX companies in a $420 million fundraising round. Three months later, the Canadian fund invested $20 million in FTX.US.

About $300 million of that October funding went to Bankman-Fried, which sold some of its personal stake in the company, the Wall Street Journal reported, citing financial records from FTX and people familiar with the transaction.

Buying FTX stock has gone through more difficult challenges than usual for an investment of this size in Teachers, with multiple investment committees scrutinizing it, according to a person familiar with the matter. The investment was backed by Olivia Steedman, a respected head of venture capital who has worked for the fund for two decades.

“Prior to any investment, our investment teams have been monitoring the digital asset space for years,” Dan Madge, a spokesman for Teachers, told Bloomberg in a statement. “TVG’s thesis was that exchanges like FTX could help improve our outlook on digital assets without exposing the plan to significant, individual cryptocurrency risks. TVG spent many months carefully reviewing FTX in cooperation with experienced external consultants so that we could assess the risks involved in the investment.”

Teachers is now writing off its entire $95 million investment in FTX.

red flags

The pension fund had previously defended its process as “robust” in a statement on Thursday, adding that “no due diligence process can detect all risks, particularly in the context of an emerging technology company”.

Still, the Ontario proceedings appear to have missed red flags — including FTX’s conflict of interest with Alameda Research and the lack of a proper board of directors.

The latter is a particularly strange mistake for teachers, who believed early on that pension funds should pay close attention to the boards and management of their investments, and disclose their voting on public companies. The fund and its first executive director, Claude Lamoureux, played a key role in founding the Canadian Coalition for Good Governance, an alliance of institutional investors, two decades ago.

Ontario Teachers said the FTX position represents less than 0.05% of the fund’s assets, “small exposure to a growing area in the financial technology sector.”

Some experts defend the approach. “We have to admit that the growth of cryptocurrencies in the last five, six, seven years has been tremendous,” Sebastien Betermier, an associate professor of finance at McGill University, said in a telephone interview. “From the perspective of a long-term investor like a pension fund, should we invest some of our wealth in crypto?”

This is the second time in three months that Canada’s top pension manager has been forced to completely write off a recent crypto investment. In August, Caisse de Depot et Placement du Quebec canceled its $150 million stake in Celsius Network LLC after the cryptocurrency lender collapsed.

Ontario Teachers launched its entrepreneurship department in 2019, headed by Steedman, who previously worked in their infrastructure and natural resources department. Over the past year, the venture group, which includes about 25 investment professionals in Toronto, London, Hong Kong and San Francisco, reported a 39% return on its portfolio. His investments include some major companies like Space Exploration Technologies Corp. Elon Musk, better known as SpaceX.

“As a global, technology-driven innovator in the financial sector, FTX fits well with our mandate,” Steedman said in a press release announcing the October 2021 fundraising, which includes Sequoia Capital, Lightspeed Venture Partners and Tiger Global Management. Sequoia wrote off its $214 million investment in FTX last week.

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An investor has studied cryptocurrencies for years, then missed the FTX red flags

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