Temasek initiates internal review after loss of investment in FTX

SINGAPORE: Temasek has initiated an internal review after it said it would write down its US$275 million investment into cryptocurrency exchange FTX, Deputy Prime Minister Lawrence Wong told Parliament on Wednesday (Nov 30).

The internal review will be done by an independent team and is intended "to study and improve its processes, and to draw lessons for the future".

Mr Wong, who is also Minister for Finance, was responding to questions by several Members of Parliament (MPs) on the impact of FTX's collapse.

Earlier this month, Temasek said it would write down its investment in FTX, irrespective of the outcome of the cryptocurrency exchange's bankruptcy protection filing.

Mr Wong noted that one of the areas that the private equity arms of Temasek and GIC operate in is new technology and early-stage companies.

"As long-term investors, our investment entities have to operate in this space. They do their best due diligence based on the information available," said Mr Wong.

"Having made the investments, they monitor the investee companies closely, but no amount of due diligence and monitoring can eliminate the risks altogether."

Mr Wong said it is disappointing when there is a loss by Singapore's state investment entities, as in the case of Temasek's investment in FTX.

"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," said the Deputy Prime Minister.

The fact that other leading global institutional investors like BlackRock and Sequoia Capital also invested in FTX did not mitigate this, he added.

"What happened with FTX therefore has not only caused financial loss to Temasek, but also reputational damage," said Mr Wong.

"Temasek recognises this and has issued a comprehensive statement to explain its due diligence process and the circumstances leading to its investment in FTX."

After Leader of the Opposition MP Pritam Singh (WP-Aljunied) sought clarification, Mr Wong said the internal review would be "led by people who are separate from the investment team that made this decision".

"So they will be separate, they will not be clouded by what steps were taken, and they will report directly to the board," he said.

He added that this review was a "step up" from Temasek's usual review process. Temasek has conducted reviews in the past when there were "similar instances" – for example, a write-off in an investment project where there is permanent impairment – but it does not happen very often, he said.

Mr Wong added that the Government would not rule out calling in external auditors, but that would mean it was not just a matter of an investment loss.

"It would be something that we feel has gone wrong within the organisation, possibly, there might be negligence, there might be fraud, there might be misconduct," he said.

"So it has to be of that significant threshold for us to say, look, something is not right within the organisation. Let us commission or get the Auditor-General to go in and do a proper audit and investigation. And we will not rule out if something like that were to happen."

GOVERNANCE OF INVESTMENT ENTITIES

The Deputy Prime Minister said that the Government does not prescribe guidelines on the allocation of specific assets or asset classes, including cryptocurrencies.

This applies to statutory boards as well as the three investment entities managing whole-of-Government assets, namely Temasek, GIC and the Monetary Authority of Singapore (MAS).

For the investment entities, the Government sets out risk tolerance limits, monitors for appropriate diversification in asset classes, sectors and geographies, and ensures that downside risks are not excessive.

The Government also does not prescribe an exclusion list for specific assets, but expects the entities to incorporate environmental, social and governance considerations into their investment processes, said Mr Wong.

"Ultimately, the Government holds the boards and management teams responsible for formulating investment strategies in accordance with the Government's overall risk tolerance," said Mr Wong.

He added that governance structures currently in place for Temasek and GIC are already "more extensive than those of a typical company".

Mr Wong said Temasek, an investment holding company, is audited by commercial auditors, while GIC, which manages public funds, is audited by the Auditor-General.

The budgets and key appointments of both are also subject to the President's oversight, and the Ministry of Finance will respond to parliamentary questions about the performance of the entities, he added.

"There is therefore no need for additional audit requirements or parliamentary committees. Instead, we should insulate the boards from political pressures," said Mr Wong.

"Let them do their work, carry out their responsibilities, and fulfil their investment mandates commercially and professionally."

He added that the Government evaluates the entities based on their long-term performance, and their track records show that they have performed "creditably, even in challenging environments".

RETURN ON INVESTMENT

Mr Wong said that Temasek's FTX loss should be seen in the broader context of the state investment firm's performance in early-stage investments.

After writing off its investment in FTX, Temasek's early-stage portfolio as of March has generated an internal rate of return "in the mid-teens" over the last decade. Mr Wong said this was better than industry averages.

He added that the FTX loss will not impact the net investment return contribution (NIRC), a stream of income that goes into the reserves and contributes to the Budget. This is because the NIRC is tied to the overall expected long-term returns of Singapore's investment entities, and not to individual investments.

On investments in new technology and early-stage companies, Mr Wong said some waves of innovation and technology will "turn out to be hype and fizzle out over time", while others will "prove revolutionary and transformational".

"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. Risk taking is an essential part of such investments," said Mr Wong.

He reiterated that Temasek and GIC have some investments in the digital asset space, but no direct exposure to cryptocurrencies.

"The FTX loss is disappointing, and is being taken seriously. But the occurrence of investment losses does not in itself imply that the governance system is not working. Rather, this is the nature of investment and risk-taking.

"What is important is that our investment entities take lessons from each failure and success, and continue to take well-judged risks in order to achieve good overall returns in the long term," said Mr Wong.