STATE investor Temasek said that the due diligence process for the FTX investment took into account its audited financial statement and feedback on FTX’s management.

The process took about eight months, from February 2021 to October 2021, and its financial statement showed it was profitable, said Temasek in a statement on Thursday (Nov 17).

Efforts were also focused on associated regulatory risk with crypto financial market service providers, especially in licensing and regulatory compliance, and cybersecurity. Feedback was sought on the company and management team from employees, industry peers and other investors.

“Advice from external legal and cybersecurity specialists in key jurisdictions was sought, with legal and regulatory review done for the investments,” said Temasek.

After the investment, the state investor claimed it continued to engage with FTX management on business strategy and monitor performance. In the wake of the reports of customer assets being potentially mishandled at FTX, Temasek admitted that their belief in the actions, judgement and leadership of FTX founder, Sam Bankman-Fried appear to have been misplaced.

“We recognise that while our due diligence processes may mitigate certain risks, it is not practicable to eliminate all risks,” said Temasek.

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The state investor wrote down its US$275 million FTX investment regardless of FTX’s bankruptcy filing. That investment over two rounds was for a total minority stake of 1 per cent of FTX International and 1.5 per cent of FTX US.

Temasek revealed that the cost of investment was 0.09 per cent of its net portfolio value of S$403 billion as at Mar 31, 2022.

“There have been misperceptions that our investment in FTX is an investment into cryptocurrencies. To clarify, we currently have no direct exposure in cryptocurrencies,” said Temasek.

In addition, the state investor said it was supportive of the regulators’ and courts’ efforts and encouraged FTX to cooperate for an orderly resolution.

The blockchain investment strategy for Temasek is focused on financial market service providers in the digital asset space and technology infrastructure. While the state investor continues to recognise the potential of blockchain technology, the nascency of the blockchain and crypto industry involves significant risks.

The companies that Temasek invests in are expected to comply with the laws and regulations. With about 1 per cent stake in FTX, the state investor said that it takes corporate governance seriously, engages the boards and management of their investee companies regularly and holds them accountable.

Temasek believed that it has to invest in new sectors and emerging, nascent business models that could drive future value as a seeker of sustainable returns over the long term. There are risks associated with investing in early stage companies, which the state investor accepts.

“Our early stage investments constitute around 6 per cent of our portfolio, and as a group have generated good returns for us, with an internal rate of returns in the mid-teens,” said Temasek.

There is a measured approach to early stage investing, and the state investor said it applies an illiquidity risk premium and a venture risk premium, where it would be paid an excess return for tying up its capital.

Blockchain direct investments did not make up a significant part of Temasek’s early stage investments.

This is not the first time it has happened to a Temasek investee, with fashion startup Zillingo imploding earlier this year.

“While this write down of our investment in FTX will not have significant impact on our overall performance, we treat any investment losses seriously and there will be learnings for us from this,” said Temasek.