SoftBank – From Telco to Structured Finance Unicorn Hunter
SoftBank (TYO:9984) CEO Masayoshi Son today announced a change of direction for both himself personally as well as his firm. As has been clear for years now, SoftBank is a major player in the technology investment space with stakes in Sprint (NYSE:S), Alibaba (NYSE:BABA), Uber, NVIDIA (NASDAQ:NVDA) and others while also outright owning Arm. Stakes which have been obtained by the now ubiquitous Vision Fund which the company uses to flex its muscle in the venture capital technology investing game to the tune of $100 billion.
Son claimed today that he has spent almost all of his time managing the telecoms business and only 3% on investing. Now he will be changing direction to focus on what Son calls “unicorn hunting”, effectively finding soon to be billion dollar companies and investing in them. It’s an interesting approach given the rapid rise to prominence both SoftBank and the Vision Fund itself have had in the technology world. Son went on to say at the shareholder meeting that he is unhappy with the stock price of his own company, mentioning that if its holding in Alibaba and ownership of Arm were taken into account appropriately, the stock price would be closer to 14,000 Yen than the 8,000 it sits at now. The weight of conglomeration around SoftBank’s neck so to speak. Spinning off the telco business as its own listing may help things here somewhat.
SoftBank – Tech Company or Investment Bank?
What perhaps isn’t as widely reported however is the background of the Vision Fund. Sure, we all know it has big stakes in tech companies and swoops audaciously putting a lot of other venture capital firms’ noses out of joint but is it taking on too much too soon? From $20 million in 2000 to Alibaba giving it a stake today worth about $150 billion, it is a deal making machine. It almost seems like nothing is too outlandish for it to invest in with $300 million being put into Wag (the dog walking app).
The strategy seems to be find tech growth, wherever you think it may justifiably come from and plough money into it. Profitability is reportedly vaguely irrelevant for invested in companies as long as they are pursuing growth. Some have even likened a Vision Fund investment to being equivalent to an IPO for the money it generates to drive growth initiatives. The Vision Fund also managed to convince a Saudi Prince to put $45 billion into it. But how did all this happen?
It’s likely the brainchild of one man. Rajeev Misra who is currently the CEO of SoftBank Investment Advisers UK, after joining the group as Head of Strategic Finance in 2013. Prior to joining SoftBank, Misra spent 24 years in and around the investment banking industry including a 12 year stint right up until the crisis as the Managing Director of credit trading, securitisation and commodities at Deutsche Bank. Additional tenures at Merrill Lynch and UBS round out his banking career.
Deutsche Bank (ETR:DBK) is of course the staid German bank which at one point was the bank with the single largest derivatives exposure in the world, mustering in at almost $73 trillion. Yes that’s right, keep in mind that US GDP (as in, the entire country’s economic output!) was about $18.5 trillion in 2016. Germany came in at a relatively paltry $3.5 trillion that year. Back in 2016, even the IMF named Deutsche as the bank which posed the greatest systemic risk to the global financial system given its huge links with other institutions, graphically displayed in a nice diagram which I’ve used several times in my articles.
Trawling LinkedIn for other employees of SoftBank Investment Advisers UK reveals a relatively extensive list of investment bankers and consultants so the question now is, at what point do things start to look too risky?
SoftBank Vision Fund - Leveraged for Failure or World Domination?
Some may remember Porsche’s disastrous attempt to takeover Volkswagen in 2008 via a series of derivatives trades which ultimately left Porsche with debts of $10 billion and facing financial ruin after trying to absorb a company 15 times its size. Wiedeking (the then CEO of Porsche) ultimately walked away with a $50 million payout due to the way his compensation package was structured and some of the quirks associated with the derivatives position amassed. There are other examples of complex finance ending in tears with Goldman Sachs deals for the Greek government in the run up to its debt crisis.
A cautionary tale in the truest sense of how overly complex structured finance which fails to account for adequate risk which are fully understood can backfire. The question really is whether the Vision Fund is approaching this or whether Misra truly has the vision to create what his boss Son wants in a strategy to “create a consortium of companies that can sustain SoftBank’s growth over 300 years”.
SoftBank currently sits on a debt pile of over $140 billion. Structured finance can be great, it allows you to access funds from other investments without having to liquidate positions (such as how Misra has drawn on the Alibaba holding without selling down) and to invest in Uber at a time of internal strife with what was seen by many as a bargain investment which still allowed Saudi Arabia (the principle backers of Uber) to save face and not have to write down an existing investment in the firm.
Is SoftBank and the Vision Fund leveraged too heavily? Only time will tell. A trade war and global economic downturn could hurt it depending on how its deals have been structured. Misra and his Chief Risk Officer Maria Khan will certainly have their work cut out for them if they don’t want to be painted into a financial corner at some point. Maybe they can do it. As ever, we’ll be watching closely.