Crypto exchange FTX, which the “Wolf of Wall Street” Jordan Belfort correctly described as more of a broker who simply took client funds, is broke. On November 11th, FTX declared bankruptcy in the US. It is the mega disaster for the global crypto market this year. Not only trading customers of FTX are affected, but also investors who financed FTX. And what the general public hardly noticed: Funds from teachers from Canada also ended up at FTX, and are probably lost. A total of $95 million was invested in FTX’s US unit between October 2021 and January 2022 through the Ontario Teachers Pension Plan. According to its own information, the pension fund for active and retired teachers in Canada manages 242 billion dollars for 333,000 members in all categories of the capital market.
In a statement released last week, the Ontario Teachers Pension Plan explained its rationale for investing in FTX and why it went awry. It made these investments through its Teachers’ Venture Growth (TVG) unit, along with a number of global investors, to gain a small exposure to an “emerging area of the financial technology sector.” “Our investment represented less than 0.05% of our total net assets,” according to the pension fund.
“TVG was founded in 2019 to invest in emerging technology companies raising late-stage venture and growth capital. The investments are structured to provide the Ontario Teachers Pension Plan with returns commensurate with the risk taken and to provide insights of their own that feed into other investments in the plan. Of course, not all investments in this early asset class live up to expectations, but since inception, TVG has solidly delivered on its intended goals.”, the pension fund explained. So she manages a kind of high-risk venture capital fund “in house”.
“Ontario Teachers’ investment departments, including TVG, conduct robust due diligence on all private investments. Assisted by experienced external consultants who have financial, commercial and other relevant expertise, and often in consultation with the investment partners, the due diligence is designed using materials provided by the companies and other investigations, to assess the risk associated with a particular investment. In the case of FTX, our underwriting process involved working closely with external advisors and FTX to examine commercial, regulatory, tax, financial, technical and other issues”, is how the pension fund explained its review of the investment at FTX. As no due diligence can uncover all risks, especially for an emerging technology company, the investment in FTX has been measured moderately relative to the total value of TVG and the plan’s overall portfolio. To put it plainly: because you knew that it was a high-risk investment, you invested a rather small amount in relation to the entire portfolio at 95 million dollars.
The statements by the pension fund that the investment strategy is to invest the money widely should have a reassuring effect on the teachers who are already paying in and who have already retired. The strategy aims to diversify investments across asset classes, geographic regions, time horizons and economic outcomes to mitigate risk and enhance returns. This supported the plan’s ability to perform well in a variety of investment environments and mitigated the negative impact of a single investment loss on the fund as a whole. The level of investment in FTX reflects the diversification approach.
The pension fund wants to write off its investment in FTX to zero by the end of the year. The financial loss from this investment will have limited impact given its size relative to total net assets and strong financial position. However, they are disappointed with the result of this investment, take all losses seriously and will use this experience to further strengthen the approach.
FMW Note: The explanations of the Ontario Teachers Pension Plan on the investment review at FTX are interesting. There one speaks of “Solider due diligence, from “Experienced Consultants” and “Relevant Expertise”. But one also writes that “no due diligence can uncover all risks”. So when examining FTX, you obviously couldn’t really see through the company in depth? From today’s point of view one can say: No wonder, as complex as the company was apparently. But especially when it comes to pension money, shouldn’t you keep your hands off it, even with high-risk investments?
That’s what tests like this are supposed to be for. If you don’t understand something, you should better keep your hands off it – and especially on the crypto market. And remember the Wirecard case. Even recognized investment experts often didn’t really understand Wirecard’s “success model”, but they just wanted to be part of the great price gains – until the house of cards collapsed. The question remains open as to whether the investment decision-makers at the Canadian pension fund simply let themselves be dazzled by the big, colourful, hip crypto party that (almost) everyone wanted to be part of for years.
Read and write comments, click here