Crypto exchange FTX’s implosion a lesson for big super

One big lesson from the $US32bn ($47.8bn) collapse for backers of crypto exchange FTX is to regularly review, probe and test the value of unlisted investments.

That can be applied to most Australian super funds that one way or another got in on early-stage tech investments during the easy money of the pandemic.

Super funds have been reviewing their own processes for unlisted investments, and even before the FTX implosion pressure has been building on the sector around hidden risks in toppish valuations of unlisted assets.

In Australia, FTX had big plans to expand into the regulated area of derivatives – specifically, it was developing products to get into the mind-bending world of crypto futures. This would have put a supercharged trading product within reach of a phone.

FTX Australia counted almost 30,000 accounts, with traders now locked out of accounts and facing heavy losses on funds.

Administrators from KordaMentha spent the weekend going through the accounts of FTX’s Australian arm, which was placed into administration separately from the Chapter 11 bankruptcy filing of its US parent, with the first creditors’ meeting planned for November 23.

Telstra Ventures, the $1.5bn venture capital arm, is Australia’s highest-profile backer of FTX. The fund, which runs at arm’s length from Telstra, has written down its initial FTX investment, understood to be in the low single millions, to zero. The investment was made by Telstra Ventures Fund 3, which raised $350m from 35 outside investors.

Telstra Ventures uses its brand to invest in early-stage technology, with FTX one of more than 70 early-stage investments. But the move into FTX is going to hurt its reputation, particularly through a video series recorded in June between FTX’s boyish founder, Sam Bankman-Fried, and Telstra Ventures’ San Francisco-based partner, Yash Patel.

Here Bankman-Fried offered a surprising lesson of his own as he discusses the rigour he applies when it came to assessing acquisition opportunities.

“A lot of it comes down to drilling down into it exactly. What are the numbers of the company, what (do) its revenues look like? What are its revenue forecasts? What is its expenses profile? What (does) its balance sheet look like, its valuation, the governance?” Bankman-Fried said on the Telstra Ventures video.

FTX had several other big-name global backers that have also written down their stakes, including BlackRock, the Singapore government-owned investment fund Temasek and Canada’s Ontario Teachers Pension Plan.

Fed hawks

Some clear messaging from Federal Reserve board member Chris Waller has left little doubt the hawks are in charge as he declared markets should be getting back in their box when it comes to inflation. Last week’s cooler-than-expected US inflation number spurred the biggest rally in 2½ years on Wall Street across both tech and industrial stocks.

But speaking at the UBS Australasia conference in Sydney, Waller said markets needed to take a reality check. It was only one number and inflation is still running hot.

The surge, which saw the Dow jump 5.5 per cent and the Nasdaq 7.4 per cent, highlights how keen markets are when it comes to looking for positive news. It also shows just how much money is on the sidelines waiting for the right time. This is equally so when it comes to picking the timing of a reopening of China from its tough Covid-19 restrictions.

Federal Reserve board member Christopher Waller. Picture: Bloomberg

Waller said last Thursday’s US inflation number “was just one data report”. “The market seems to have gotten way out in front of this over this one CPI report,” he told the UBS conference.

Waller said the thinking inside the Fed was that it needed to see a sustained cooling in inflation before backing off the interest rate trigger. The other take-out was that markets shouldn’t get overexcited about the pace of further rate rises. Rather, the destination was where the Fed needed to be on the cash rate – and this would be driven solely by inflation.

Cooling prices in the October numbers was a good sign “but we’ve got to see this continue before we stop (on interest rates), because the worst thing you can do is stop. And then it takes back off again, and you’re caught.”

Economists surveyed by Bloomberg see US interest rates hitting as high as 5 per cent by March, a move that puts a recession on the cards.

RBA review

With a little more than four months before the panel reviewing the Reserve Bank hands its final report to Jim Chalmers, Waller had some insights into his thinking around the independence of central banks.

While he was speaking about the US experience, the message is that institutions such as central banks have to have independence, but they also need to be accountable. His comments come as central banks around the world, including the RBA, are doubling down on efforts to stamp out inflation following ultra-loose settings during the pandemic. With a series of consecutive rate hikes, central banks are coming under political heat.

“In any democracy, a central bank has to be accountable. I’m sorry, it just has to be,” Waller told the UBS Australasia Conference.

“So the way I’ve always thought of this was congress gives me the goals – then they give me the freedom to pursue and meet those goals without interference. That’s what we mean by independence, we have instrument independence, but we do not have goal independence.

“The (Fed) chair goes up to congress and has to be accountable for what we’ve done and what’s happened. So I view this all as just part of the true aspect of this need to have an independent but accountable central bank.”

The RBA review, headed by former Bank of Canada deputy governor Carolyn Wilkins, is considering whether the central bank’s objectives around financial stability are fit for the times, including the 2-3 per cent inflation target. The review is scheduled to hand its report to the Treasurer by March.

Value trap

As shareholders prepare for a heated AGL annual meeting on Tuesday, JPMorgan energy analyst Mark Busuttil declared that Mike Cannon-Brookes may have destroyed value when he forced the energy major to abandon the split of its generation and retail businesses. Remember, Brookfield for a short time was a bid partner with Cannon-Brookes for AGL, before walking away.

Cannon-Brookes now has a stake of a little over 11 per cent in AGL. This is enough to represent a blocking stake in any future takeover as well as just enough to be a significant agitator to the AGL board. Ahead of the annual meeting, AGL’s board has supported the addition of one of Cannon-Brookes’ board candidates. He put forward four in total.

Looking at AGL through the lens of Origin’s $18.4bn takeover bid from Brookfield and US energy investor EIG, Busuttil says AGL is worth $11-$12 a share. This compares to $7.70 currently, and would give AGL a valuation of $6.85bn-$7.47bn.

He says AGL has an equivalent-sized energy markets business as Origin, although AGL has significantly better profitability in its electricity portfolio and longer-dated generation assets.

However, a major difference between Origin and AGL is the stability of the management team and the boardroom, which carries a takeover premium.

Brookfield is paying up for long-term management and planning. Even under the likely situation that CEO Frank Calabria exited after any takeover, there has been consistency in Origin’s operational executives. This compares to the high turnover over the past four years at AGL. In addition the boardroom upheaval at AGL has been immense, putting the energy generator years behind in planning a transition strategy.

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