We believe that innovative technologies, including blockchain technology, are enablers with the potential to transform sectors and create a more connected world. The nascency of the blockchain and digital asset industry presents innumerable opportunities as well as significant risks.

As a forward looking global investor, we have to be open to invest in emerging business models, technologies and trends. In doing so, and being mindful of risks, our approach is to engage in a calibrated manner.

We therefore decided to track blockchain technologies and the space even more closely in 2018. Our view was that the impact of this technology would be geography and sector agnostic. We wanted to seek opportunities that harness the technology to address changing consumption patterns and new use cases, and understand the impact of such technologies on our existing portfolio.

There has been steady progress in our efforts in this space – from starting our own ventures, to increasing indirect exposure to the blockchain space through fund investments, and more recently, to making direct investments.

Our venture building efforts have been focused on programmable money, digital assets tokenisation, and decentralised identity and data. Several of these entities are not blockchain-based at this stage but rely on the technology and focus on delivering open data solutions and open networks.

Our blockchain investment activity focuses on:

• Financial market service providers to the digital asset space, providing protocol agnostic and market neutral exposure (e.g., exchanges); and
• Technology infrastructure including protocols, wallets, developer tools, cross-chain messaging, metaverse and gaming infrastructure.

The thesis for our investment in FTX was to invest in a leading digital asset exchange providing us with protocol agnostic and market neutral exposure to crypto markets with a fee income model and no trading or balance sheet risk. Such exchanges could play a key role in the financial systems of tomorrow where a variety of assets can be tokenised and traded on these exchanges.

Despite being founded only in 2019, FTX was a fast-growing company that showed promise, and had attracted external early investors at the time of our investments. We reviewed FTX International’s audited financial statement as part of our due diligence, which suggested that it was performing well and was profitable. FTX International was on track to reach US$1b in revenue and generate net income in excess of US$350m in 2021 at the time of our investment.

Our investment was also underpinned by other strengths of the company. It had:

• shown a willingness to engage with regulators to obtain the necessary licenses;
• a resilient technology platform and liquidation engine;
• a growing market share; and
• a committed and growing customer base, that included leading market makers, institutions, and high net worth individuals, because of its proven technology and wide product offerings.

We invested in FTX over the course of October 2021 to January 2022. We invested US$210 million in FTX International for a minority stake of ~1%, and US$65 million in FTX US for a minority stake of ~1.5%. There was a fundraising round in FTX in July 2021 which we did not participate in, as we were undertaking due diligence which had yet to be completed.

There is a misconception that our investment in FTX is an investment into cryptocurrencies. This is not the case. We invested in market infrastructure and we currently have no direct exposure to cryptocurrencies.

The investment in FTX was subject to the same analysis and due diligence process that we would conduct for other investments of a similar risk and type.

There are many different forms of due diligence and the level of due diligence done is commensurate with the type of investee company, its business, process of share purchase (e.g., block-trade, public markets, competitive bid), and the percentage shareholding being acquired. 

For a 1-1.5% stake (such as our investment in FTX), it is neither feasible nor the market norm to conduct due diligence equivalent to an investment where a significant shareholding or a controlling stake is being acquired. 

Nevertheless, in line with the global regulatory focus on cryptocurrencies and exchanges and in spite of our small shareholding, we conducted significant regulatory and licensing due diligence on the business model of FTX, particularly on financial regulations, licensing, anti-money laundering (AML) / Know Your Customer (KYC) and sanctions across multiple jurisdictions. The due diligence process also included a review of audited financial statements and a cybersecurity review.

External legal counsel for key jurisdictions were appointed to carry out the legal and regulatory due diligence.

Throughout the multiple rounds of due diligence, FTX demonstrated a clear willingness to discuss and engage with us, which indicated that they were willing to do business in the right way. During this process, we enquired about the relationship, preferential treatment, and separation between Alameda and FTX, and were given appropriate confirmations that were contractually binding.

Separately, we gathered qualitative feedback on the company and management team based on interviews with people familiar with the company, including employees, industry participants, and other investors.

As part of due diligence, we had identified possible enhancements around FTX’s regulatory stance and gaps around leadership roles. We engaged FTX management on addressing these leadership gaps in the lead up to and post-investment. This approach is not uncommon for investors when investing in companies in their early stages of development.

Ultimately, we recognise that there are inherent risks in all investments and due diligence processes have their limitations. While due diligence may identify and mitigate certain risks, it is not feasible to eliminate all risks in the investment.

Because due diligence is conducted from an outside-in perspective and access to information is limited, there is the risk that a well-concealed fraud by a small group of people, as reports on FTX suggest, can go on undetected. 

Post investment, we continued to monitor performance and engage management on business strategy, as well as legal, policy and regulatory matters. We also encouraged FTX to improve and upgrade their regulatory and legal functions, as well as to appoint experienced executives to strengthen their leadership team in these areas, which they did. This is similar to how we engage other early stage investments as an active investor and shareholder.

Investors with a small shareholding are usually not granted board seats. With a ~1% stake in FTX International and a ~1.5% stake in FTX US, our shareholding did not entitle us to a board seat.

We recognise that FTX had a young leadership team. It is not uncommon for investors to back talented young founders and management teams in early stage ventures. Such founder-led structures form the typical profile for digital and technology-based start-ups, and the founders are often the key drivers in every operational aspect of their companies. Many large technology companies we see today were created by young founders with a vision and the tenacity to build towards that. Key person risks are inherent risks for these start-ups.

Reports have recently surfaced of mismanagement by FTX's executives, including misuse of customer assets. These reports allege serious misconduct or fraud at FTX. We do not condone misconduct in any of our investee companies. We are unable to comment further on FTX given that there are ongoing investigations.

In view of FTX’s financial position, we have decided to write down our full investment in FTX. We treat investment losses seriously, and have an independent team reviewing this investment as part of our review process.

As an active investor, we engage the companies in our portfolio and conduct regular internal reviews of our investments. For each investment, the relevant investment team monitors the performance of the company and engages its management team. We have a formal review each quarter to assess all investments individually, and therefore, the performance of our portfolio.  

Should there be a significant and permanent loss in value for an investment, we conduct a review to understand what went wrong, to discern the learnings and share it with our wider investment group to ensure that the organisation benefits from such learnings when overseeing our portfolio and future investments.

In the case of FTX, we continue to monitor the ongoing developments surrounding the situation.

At a portfolio level, early stage investments have generated good returns for us, with internal rate of returns in the mid-teens over the last decade. This is higher than the industry averages.

For each investment we make, we conduct a bottom-up intrinsic value analysis, with investments in riskier sectors or markets having higher costs of capital. We then add an illiquidity risk premium for unlisted investments and a venture risk premium for early stage investments. We also use risk-adjusted cost of capital to normalise the risks in order to compare the relative attractiveness among investment opportunities.

Our early stage investments, which constitute about 6% of our portfolio, allow us to gain insights into innovation in disruptive technology and business models. This enables us to better assess future opportunities and segments, as well as better understand potential implications for our broader portfolio. 

A diversified portfolio is key for our early stage investments. The risks in early stage investing is binary. Therefore, early stage investing requires the investments to be spread out over a diversified portfolio and we need to look at the overall return of the portfolio to determine performance. Our portfolio is also spread across geographies and sectors, and the early stage companies in our portfolio have the potential to achieve significant growth over time and deliver attractive risk-adjusted returns. Several of these companies have matured from early stage into successful growth stage entities and generated attractive returns for our portfolio.