Investors Studied Crypto for Years, Then Missed FTX’s Red Flags

“None of us have run a business before and we’d like $100 million by next Tuesday,” Bankman-Fried told David Rubenstein in August of the request. “It wasn’t a very compelling pitch to investors.”

Fast forward five years and Bankman-Fried had become, in his own words, one of “the greatest fundraisers in the world”.

Bankman-Fried eventually tapped some of Silicon Valley’s best-known companies to raise billions for its FTX. After its rapid collapse over the past week and a half, that feat now looks like one of the greatest investment due diligence failures ever.

FTX’s list of blue chip funders included funds such as the Ontario Teachers’ Pension Plan, a C$242.5 billion ($181 billion) fund that paid out Money in private companies for decades and is known to take an active interest in the corporate governance of the companies he invests in.

Teachers’ invested $75 million in two FTX entities in October 2021 in a $420 million fundraising round, alongside other major investors like Tiger Global Management and Singaporean state-owned Temasek Holdings. Three months later, the Canadian fund made a follow-on investment of $20 million in FTX.US.

Some $300 million of that October funding went to Bankman-Fried, who sold some of his personal stake in the company, The Wall Street Journal reported, citing FTX financial records and people familiar with the issue. transaction.

The FTX stock purchase has gone through a tougher than usual challenge for an investment of this size at Teachers, with multiple investment committees reviewing it, according to a person familiar with the matter. The investment was championed by Olivia Steedman, the well-known head of its venture capital arm, who has been with the fund for two decades.

“Before making an investment, our investment teams spent years tracking the digital asset space,” Dan Madge, a spokesperson for Teachers, told Bloomberg in a statement. “TVG’s thesis was that exchanges, such as FTX, could help refine our outlook around digital assets without exposing the plan to significant and unique cryptocurrency risks. TVG spent many months on the due diligence of FTX , in partnership with experienced external advisers, to enable us to assess the risks associated with the investment.

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

Red flags

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

Yet the Ontario process appears to have missed red flags, including FTX’s conflicts of interest with Alameda Research and its lack of a proper board.

The latter is particularly strange missing for teachers, an early adopter of the idea that pension funds should pay close attention to the boards and governance of their investments and disclose their vote on public companies. The fund and its first CEOClaude Lamoureux, played a central role in founding the Canadian Coalition for Good Governance, an alliance of institutional investors, two decades ago.

Ontario Teachers said the FTX position was less than 0.05% of the fund’s assets, “a small-scale exposure to an emerging area of ​​the fintech industry.”

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

This is the second time in three months that a major Canadian pension plan manager has been forced to completely cancel a crypto investment he only recently made. In August, Caisse de Dépôt et Placement du Québec reduced its $150 million stake in Celsius Network LLC to zero after the cryptocurrency lender failed.

Ontario Teachers launched its venture capital division in 2019 under Steedman, who previously worked in its infrastructure and natural resources unit. Last year, the venture capital group, which includes about 25 investment professionals in Toronto, London, Hong Kong and San Francisco, reported a 39% return on its portfolio. Its investments include some large companies, such as Space Exploration Technologies Corp. of Elon Musk, better known as SpaceX.

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

This story was published from a news feed with no text edits.

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