Many people in Singapore were disappointed that Temasek Holdings invested and wrote down US$275 million in its investment in FTX.
There were surprised and shocked to learn, after the collapse, that FTX was run by a team of young, inexperienced people, and there were no proper governance, accounting and risk management practices in place.
How did TH carry out its due diligence, and invested a large sum into a a badly run business?
This is my understanding of how the venture capital industry works.
The people in this industry that invest large funds into startup companies, such as FTX, form a closely knit community. They know each other personally through attendance at international conferences, business introductions and joint investments in ventures.
Often, a leading VC capitalist gets to know a startup entrepreneur and decides to fund the startup business. This VC capitalist introduces the startup to the their close contacts in the industry, and probably describes it as "an opportunity not to be missed".
The other VC investors line up to get a share of this opportunity. They would probably not carry out their own due diligence, as it would take time, and the opportunity might go to other investors who are willing to decide promptly.
I have spent a few decades of my working career in the insurance industry. This is also how the big insurers spread their risk through reinsurance. They follow the leader and take a share of the big risks, often based on trust that the leader has carried out the proper due diligence.
The problem with this approach is that the leading VC capitalist that brings to "opportunity" to other investors might have a vested interest, e.g. they are paid a finder's fee based on the investments made by new investors.
I do not know for certain if this is the case for FTX, but it might be. The finder fees can be quite hefty, and the payment would probably be considered legal.
Nevertheless, I consider it to be a bad practice for an institution to make a big investment based on this practice of following the leader blindly.
Many large hedge and institutional funds are involved in FTX. Temasek Holdings was not the leading investor and not the largest investor.
I expect that the decision to invest in FTX was not made by the portfolio manager on his own. It probably had to be approved by an investment committee. I would expect that the investment committee would include members of the non-executive board.
I found that Temasek Holdings have a Senior Divestment and Investment Committee (SDIC) that comprised solely of the full time management. It does not appear to include the non-executive board directors. The annual report did not disclose the names and positions of members of SDIC.
I think that this is a bad practice that needs to be corrected. Some non-executive members of the board should sit in the SDIC. Their role is to check that the full time managers are doing their work diligently.
My above view is based on my the information that I was able to obtain, and that information may be incomplete or inaccurate.
The government has announced that they will carry out an investigation into this matter. I will wait to read the findings of this investigation. I hope that it will be released in full and quite promptly.
Tan Kin Lian
2 comments:
In my view, the greater danger now is LHL is no longer in the picture. He knew and though he does not look well, he is still holding on for the sake of the country. When LKY died, people were extremely nervous that the country would deteriorate. It did, but now with LHL PM hanging, the situation is even worse than was expected. Not a lot of people are keen on the 4G except for the $600,000 yearly Peanut.
What contrast will there be when Lee Hsien Loong or Lawrence Wong tell Big Companies or Civil Service to buck up? Who will be more effective with their telling?
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