FTX fallout: Does Temasek have to be on bleeding edge of tech to get best returns?

TEMASEK Holdings offered a fascinating window into its investment strategy when it issued an extensive statement about its exposure to FTX, the cryptocurrency exchange that imploded over the last few weeks amid allegations of mismanagement and fraud.

In particular, Temasek explained that investing in FTX was part of its effort to keep abreast of how new technologies and global trends might affect the returns generated by its portfolio.

“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,” Temasek said in the statement on Nov 17.

The Singapore investment company acknowledged the “binary risks” associated with investing in such emerging fields and nascent business models, but explained that it keeps its exposure to such investments small and diversified.

Temasek said in the statement that its early stage investments, which constitute about 6 per cent of its portfolio, have generated internal rates of return in the mid-teens.

Yet, in the face of the spectacular FTX blow-up, Temasek’s stakeholders seemed to want more information.

Several questions were raised in Parliament on Nov 30 about Temasek’s investment in FTX and the risks associated with cryptocurrencies in general.

Responding to the questions, Deputy Prime Minister and Finance Minister Lawrence Wong echoed some of what Temasek said in its Nov 17 statement about the importance of astute risk-taking in emerging fields.

“There will always be new waves of innovation and technology that seek to disrupt the status quo. Some waves will turn out to be hype and fizzle out over time. Other technologies will prove revolutionary and transformational, like the Internet,” Wong said.

“But even with genuinely revolutionary technology, there are risks. Many start-ups will fail, while a few will prove successful and grow into industry leaders like Tencent and BioNTech. The skill of venture capitalists lies in discerning the promising projects and backing them,” he added.

Wong went on to say that investment losses, as in the case of FTX, are disappointing: “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.”

Besides putting out a statement to explain its due diligence process and circumstances leading to its investment in FTX, Temasek has also initiated an internal review to improve its processes and draw lessons for the future, Wong said.

One question Temasek should perhaps ask itself is how its investment in FTX specifically advanced its knowledge of the digital assets field.

By its own account, Temasek only had a 1 per cent stake in FTX and no board seat. Couldn’t Temasek have learnt everything it needed to know about FTX through some in-depth research?

More generally, Temasek should perhaps look into whether its active investment approach in up-and-coming fields is fit for purpose.

Does Temasek really have to be exposed to nascent companies on the bleeding edge of new technologies to generate the best returns? Would Temasek generate better long-term risk-adjusted returns if it focused entirely on investing in well-established companies in industries growing at a moderate pace?

If Temasek ultimately decides that it has too much brain power in its ranks to merely invest in the likes of Apple or Amazon, it should then perhaps begin to regularly offer its stakeholders case studies of specific investments it has made in emerging sectors that closely detail how it earned decent returns.

Temasek said its policy is not to comment on individual investments, and to report its performance on a portfolio basis. But debacles such as FTX will never fail to make headlines.

Instead of only responding to bad news, it is perhaps time for Temasek to educate its stakeholders about its strategy in the hot, new fields that are changing the world in which we live.