"Everyone wanted a piece of the pie": the role of funds in the FTX debacle
Attracted by the deal of the 'century', the world's biggest funds invested hundreds of millions of dollars in FTX, helping to turn the US platform into a global giant. With familiar consequences...
This is one of the questions that has been asked repeatedly since FTX's brutal collapse: "How could they have screwed up so badly?"
The question is aimed not at FTX employees, regulators or even Sam Bankman-Fried (SBF) himself, but the funds that have invested fortunes in the crypto exchange platform.
In less than two years, Sequoia, Paradigm, Temasek, Tiger Global, SoftBank and a few other big names from traditional finance have put nearly $2 billion on the table helping to turn FTX into a giant. Just a few weeks ago, the valuation of the platform - with just 300 employees - was still $32 billion 😅.
Sums that have obviously gone up in smoke and raise questions about the practice of some, because funds never invest randomly.
Before putting any money into a company, they have to carry out what's known as due diligence, i.e. look at what's under the bonnet of the company: accounting, management, organisation, in short, they have to make sure that everything is in order in the company in which they're going to invest their clients' money.
"Some clearly haven't done their job. If they had, they would have immediately seen that FTX was a huge scam," stresses a French investor, who wished to remain anonymous.
The list of revelations about FTX is indeed quite mind-boggling.
Besides the fact that SBF was dipping into the company's coffers to bail out its investment fund, Alameda Research, the company's audit showed that employees were getting credit (several million dollars 💸 ) at the drop of a hat, that SBF's parents had invested more than $100 million in real estate in the Bahamas with FTX money...
How do you explain that the funds didn't see any of this? It's hard to know, but there are a few things that help us understand what might have happened.
When questioned by The Big Whale, none of the funds involved wished to comment. According to the "Wall Street Journal", Sequoia is said to have apologised to its investors for the FTX-related losses.
👉 The hype around FTX
First we need to put ourselves in context, and remember the sort of "madness" that surrounded FTX and SBF. Before he became the most hated man in crypto, Sam Bankman-Fried was the darling of politicians, regulators and of course investors.
He was also a star in the press. We ourselves caught up with him in an interview at the end of October, and the man who was still at the time the youngest billionaire under the age of 30 ($25 billion) brushed aside all questions around his company's solvency with a wave of his hand.
SBF even explained that it was sitting on "a few billion dollars" that would allow it to make acquisitions in Europe... In fact, before falling like a house of cards, FTX was posting extraordinary performances.
According to CNBC, the company had generated $272 million before tax in 2021. An almost off-the-charts performance for a company that was only created in 2019 and has been attracting funds like flies.
"Everyone wanted a piece of the pie, without looking at how the pie had been made," explains Irina Heaver, a lawyer specialising in cryptocurrencies who is accompanying several "victims" of FTX's fall.
👉 How an investment fund works
It's also important to understand how a like Sequoia, whose aim is to make its clients' money profitable; that's why they get paid a lot (a lot) of money. It's also why they invest in a lot of projects.
The figures vary, but some players like Tiger Global can do 200 operations a year, or more than one every other day. "There is so much competition between funds that some invest in lots of companies without really looking at what they are doing," confirms the head of a French fund.
To the point of not carrying out the necessary checks?
To save time, not all investors obviously carry out the checks, but generally delegate this task to one of the investors. "It's the person who leads the round on a fundraise who takes care of it," explains the head of a UK fund.
Who was in this position for FTX? Everyone is kindly passing the quid, but the investigation should reveal more soon enough.
There is also the question of directors' seats. Yet according to the latest information, none of the funds had a seat on the board. "If this is true, it means that no one controlled what SBF was doing, which is nonsense," slips in one investor.
👉 Record cash
Lastly, there is the unprecedented economic context in which we find ourselves. After two years of massive injections of liquidity, notably to combat the Covid crisis, there has never been so much cash on the planet.
A large part of this money has ended up in the pockets of investment funds, which have invested it massively without necessarily taking a good look, as with FTX, at where this money was going...
"There's a kind of collective blindness about FTX", sums up one investor, adding: "If there hadn't been WeWork or Theranos, we might have understood, but this is unforgivable. A lot of people used FTX because they had the backing of the biggest funds on the planet."
According to the latest figures, there are more than a million victims (individuals and companies) caught up in the scandal...