Lawrence Wong: Temasek Doing Internal Review on Failed FTX Investment

The FTX saga is not over yet.

If you feel bad about losing your investments in FTX, imagine losing USD$275 million.

Update on FTX losses

Deputy Prime Minister Lawrence Wong informed Parliament on Wednesday (30 Nov) that Temasek has started an internal review after declaring it would write down its USD$275 million investment in the bitcoin exchange (FTX).

This follows after Temasek announced earlier this month that regardless of the outcome of the cryptocurrency exchange’s bankruptcy protection filing, it will write down its investment in FTX.

The objective of the internal review is to investigate and improve its procedures and to draw lessons for the future. The team in charge of this will consist of people outside of the investment team so that when making judgments, they will not be influenced by the decisions made. Results will be reported directly to the board.

The report will also include a thorough explanation of its process and events that led to its investment in FTX.

This will not be Temasek’s first time holding a review; in the past, there were “similar instances”, such as a write-off in an investment project when there is permanent impairment.

In comparison to Temasek’s usual standard review procedure, this will be a “step up”. Mr Wong added that the Government would not rule out the possibility of bringing in external auditors, but doing so would suggest it was more complicated than merely an investment loss.

Regarding the investment itself, Mr Wong, who is also the Minister of Finance, pointed out that emerging technology and early-stage enterprises are two sectors in which the private equity arms of Temasek and the Government of Singapore Investment Corporation (GIC) participate.

Investments are made with exercised due diligence and based on the facts provided, but ultimately, no amount of research or supervision can completely avert the dangers.

So when Singapore’s state investment organizations suffer a loss, much like what is happening now with FTX, it is regrettable. What happened with FTX cost Temasek “not only financial loss to Temasek, but also reputational damage”.

In case you aren’t aware, the FTX’s collapse was in short, due to suspected fraud and improper management of consumer funds.

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No Cap on Investments?

In the first place, how is Temasek allowed to invest such a huge amount into one entity?

The government does not impose rules on the distribution of specific asset classes, including cryptocurrency.

This applies to statutory bodies and the three investment companies Temasek, GIC, and the Monetary Authority of Singapore, which manage assets for the whole government.

The government, however, does establish risk tolerance guidelines for investment entities and monitors appropriate diversification in asset classes, sectors, and geographies, while ensuring that the downside risk is reasonable.

For two of the three investment companies, GIC, which oversees public funds, is audited by the Auditor-General, whereas Temasek, an investment holding company, is audited by commercial auditors.

Handling the FTX loss

According to Mr Wong, Temasek’s FTX loss should be seen from the perspective of the state investment firm’s overall early-stage investment performance.

Including writing off its investment in FTX, Temasek’s early-stage portfolio as of March produced an internal rate of return “in the mid-teens” over the last decade.

This, according to him, is far better as compared to industry averages.

In addition, the net investment return contribution (NIRC), a source of revenue that goes into the reserves and supports the Budget, will not be impacted by FTX loss.

This is so because, rather than being based on individual investments, the NIRC is linked to the overall predicted long-term returns of Singapore’s investment entities.

Overall, investment losses do not automatically mean that the governance structure is ineffective. Instead, it should be seen as how investing and taking risk works.

I don’t think people can relate to losing that much investment. Anyways. 

To Mr Wong, what matters is that Singapore’s investment firms learn from each setback and success and continue to take calculated risks to generate favourable long-term returns.

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Featured Image: YouTube (CNA)