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• FTX collapse rocks crypto industry
• Canadian pension fund loses millions on FTX investment
• Limited impact thanks to diversification
The sudden collapse of crypto exchange FTX rocked the industry. Doubts about the company’s capital reserves caused billions of dollars in capital to be withdrawn from clients and FTX ran into payment difficulties. Competitor Binance called off a possible rescue operation shortly after the announcement. The company applied for bankruptcy protection in the US and FTX boss Sam Bankman-Fried, who presented himself as a savior during the Terra/LUNA crash in spring and helped other crypto companies financially, announced his resignation.
FTX bust sends shockwaves
Meanwhile, according to the documents FTX filed with the court, it has been revealed that the crypto exchange owes more than $3 billion to its top 50 creditors alone, with FTX reportedly owing more than $10 billion in total have amassed over a million customers. Crypto companies such as BlockFi, Coinbase, CoinShares, Crypto.com and Galaxy Digital had also invested in the now insolvent crypto exchange. While the already ailing crypto lender BlockFi was hit hard by the FTX sinking and now had to file for bankruptcy itself, companies such as Coinbase, CoinShares, Crypto.com and Galaxy Digital, among others, sought transparency, published their investments in FTX and tried investors to calm down.
Canadian pension fund affected
The Canadian pension fund OTPP (Ontario Teachers’ Pension Plan) also blundered at FTX. The pension fund was also transparent, releasing a statement on Nov. 17 disclosing its investment in FTX.
OTPP says it invested $75 million in FTX International and its US unit (FTX.US) in October 2021. In January 2022 there was a follow-up investment of 20 million US dollars in FTX.US. “These investments were made through our Teachers’ Venture Growth (TVG) platform alongside a range of global investors to gain small-scale exposure to an emerging area of the financial technology sector,” the pension fund said in its statement. The investment in FTX represented less than 0.05 percent of OTPP’s total net assets and represented a 0.4 percent and 0.5 percent stake in FTX International and FTX.US, respectively.
Investment has been measured moderately in relation
The Teachers’ Venture Growth platform was founded in 2019, according to OTPP, “to invest in emerging technology companies and to raise late-stage venture and growth capital.” TVG’s investments are structured to provide Ontario teachers with returns commensurate with risk and to deliver new insights. Although not all investments in this asset class performed as expected in the early stages, TVG has solidly achieved its goals since inception, according to OTPP.
The pension fund states that Ontario Teachers’ investment departments, including TVG, conduct rigorous due diligence on all private investments. “In the case of FTX, our underwriting process involved working closely with external consultants and FTX to examine commercial, regulatory, tax, financial, technical and other matters,” OTPP writes in its statement. However, knowing that “no due diligence process can uncover all risks, especially in the context of an emerging technology company”, “the investment in FTX was measured moderately in relation to TVG and the overall portfolio of the plan”.
Thanks to diversification: Loss should have limited impact
Instead, the pension fund relies on diversification and, according to its own statements, tries to spread its investments across different asset classes, regions, time horizons and economic results in order to minimize risk and increase returns. This increases the chances of delivering good performance in a variety of investment environments and cushions the negative impact of individual investment losses on the fund as a whole – as the FTX example now also shows.
The Ontario Teachers’ Pension Plan will write off its investment in FTX to zero at the end of the year. “The financial loss from this investment will have limited impact on the plan given its size in relation to our total net assets and our strong financial position,” OTPP reassured. However, the pension fund is disappointed with the result of the investment. They take all losses seriously and will use the experience to further strengthen their own approach, OTPP said.
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