The investor studied crypto for years and then missed the FTX red flags

The investor studied crypto for years and then missed the FTX red flags

(Bloomberg) – When Sam Bankman-Fried was just 25 years old, he introduced his burgeoning crypto investment business to Silicon Valley investors – only to have them laugh at him and his cronies for their lack of experience and knowledge of crypto.

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“Neither of us has run a business before and we want $100 million by next Tuesday,” Bankman-Fried David Rubenstein said of the request in August. “It wasn’t a very convincing pitch for investors.”

Five years later, Bankman-Fried had become, in his own words, “one of the world’s largest fundraisers.”

Bankman-Fried ended up hiring some of Silicon Valley’s most prominent firms to raise billions for his FTX. After its rapid collapse over the past week and a half, that feat now looks like one of the biggest investment due diligence failures of all time.

FTX’s blue-chip backers have included funds such as the Ontario Teachers’ Pension Plan, a C$242.5 billion (US$181 billion) fund that has been pouring money into private companies for decades and is known for thriving Taking an active interest in the corporate governance of companies invested in.

Ontario Teachers in October 2021, along with other major investors including Tiger Global Management and Singapore’s state-owned Temasek Holdings, injected $75 million into two FTX companies in a $420 million fundraising round. Three months later, the Canadian fund made a follow-up investment of $20 million in FTX.US.

About $300 million of that October funding went to Bankman-Fried, which sold a portion of its personal interest in the company, the Wall Street Journal reported, citing FTX financial records and people familiar with the transaction.

The purchase of FTX stock went through a tougher-than-usual gauntlet for an investment of this size at Teachers, with multiple investment committees scrutinizing it, according to a person familiar with the matter. The investment was backed by Olivia Steedman, the respected head of the venture capital arm who has worked for the fund for two decades.

“Prior to any investment, our investment teams spent years tracking the digital assets space,” Dan Madge, a spokesman for Teachers, told Bloomberg in a statement. “TVG’s thesis was that exchanges like FTX could help refine our perspectives on digital assets without exposing the plan to significant, individual cryptocurrency risks. TVG spent many months carefully reviewing FTX in conjunction with experienced outside consultants to enable us to assess the risks involved in the investment.”

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

Red flags

The pension fund previously defended its process as “robust” in a statement Thursday, adding that “no due diligence process can uncover all risks, particularly in the context of a burgeoning tech company.”

Still, Ontario’s process appeared to have missed red flags — including FTX’s conflicts of interest with Alameda Research and the lack of a proper board of directors.

The latter is a particularly odd mistake for teachers, who early on believed that pension funds should pay close attention to the boards and management of their investments, and disclose their voting on public companies. The fund and its first CEO, Claude Lamoureux, played a pivotal role in founding the Canadian Coalition for Good Governance, an alliance of institutional investors, two decades ago.

Ontario Teachers said the FTX position represents less than 0.05% of the fund’s assets, “a small exposure to an emerging area in the financial technology sector.”

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

It’s the second time in three months that a major Canadian pension manager has been forced to fully write off a recent crypto investment. In August, Caisse de Depot et Placement du Quebec zeroed its $150 million stake in Celsius Network LLC after the cryptocurrency lender failed.

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

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

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