Top Consulting Firm Bain & Co. Conducted Due Diligence on FTX Before Tiger Global Investment and Bankruptcy
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Investment firm Tiger Global Management reportedly pays consulting firm Bain & Company more than $100 million a year to research private companies that it is considering investing in. According to a recently published report from Bloomberg, Bain conducted due diligence on FTX before Tiger Global invested in the now-bankrupt crypto exchange.
Due diligence entails an investigation of a potential investment (such as a stock) or product to confirm all facts by reviewing financial records, past company performance, among other things, according to Investopedia.
During its due diligence, Bain did highlight FTX founder Sam Bankman-Fried’s “oversight of a vast web of FTX-linked entities was one of the risks highlighted during the due-diligence process, but the money manager still believed it was a sound investment at the time,” Bloomberg reported sources revealed.
Now Tiger Global has written down its $38 million FTX stake to zero, sources told Bloomberg.
An accounting term, a write-down is when there is a reduction in the book value of an asset when its fair market value (FMV) has dropped below the carrying book value, and it has become an impaired asset.
Tiger Global’s FTX investment was a small piece of its $12.7 billion Private Investment Partners 15 fund. Tiger Global initially backed FTX in October 2021, when FTX was valued at $25 billion. Tiger Global again backed the crypto exchange in January at a $32.5 billion valuation, according to PitchBook data.
In 2021 the FTX investment was one of 358 venture capital investments Tiger Global made, and one of 290 in 2022, according to PitchBook.
Some are questioning Bain’s seeming lack of warning to Tiger Global against the FTX bets.
“This shows companies should stay in their lane. Bain obviously wasn’t experienced in performing due diligence on cryptocurrency exchanges or they would have raised some questions. Now they are going to take a significant image hit, and likely some liability and lost revenues from the funds they represented,” Kyle Asman, managing partner of private investment fund Backswing Ventures, told Moguldom Nation. Asman was a co-founder of BX3 Capital, a boutique investment bank.
FTX’s collapse has resulted in billions of dollars of potential losses for investors. It has also caused legal and regulatory probes as many questions arose about how warning signs were missed by institutional investors, including hedge funds and venture capital firms.
“The U.S. financial sector is one of the most regulated environments in the world…But these regulations were drafted decades ago and are framed on the so-called ‘traditional’ investing community of high-priced brokers and sophisticated, wealthy investors,” regulatory and enforcement attorney Braden Perry, a former enforcement attorney at a federal agency and chief compliance cfficer of a financial firm, told Moguldom Nation.
Crypto entered untested waters.
“With the rise of cryptocurrency, the crypto investment community has significantly grown, and both sophisticated and novice investors have joined the fray. Add regarding crypto exchanges and wallets, there is a transformed investment environment that is ripe for novel products and services — but also abuse. The ever-increasing amount of exchanges/wallets, and issues/hacks of the has undoubtedly served as a shot across the bow to the regulators and likely will be the impetus for future rulemaking,” noted Perry, a litigation, regulatory and government investigations attorney with Kennyhertz Perry, LLC.
FTX has heightened a call for regulation of the crypto world.
“And with several high-profile issues with exchanges and wallets and the associated public outcry, new regulation was inevitable. But the FTX debacle shocked the world and will likely significantly quicken the regulation,” TK pointed out. “Specifically, on FTX, it shows that there is a significant hole in crypto exchange transparency. It also shows the fragile nature of crypto and the risk/reward in those that are looking for alternative investments. The unreliable financials and questionable leadership were shielded by the unregulated environment that also led to significant gains in the past few years. FTX is a reminder of the need for due diligence and a true understanding of a business is necessary for solid investments.”
