there's reason to believe SoftBank is gonna go "boom", and in a big way:
- they have tons of illiquid assets (equity in startups and early stage companies - hard to shed - see later)
- SoftBank Vision Fund "borrows" from its huge illiquid assets (Uber + other SV stuff) in order to make the market by throwing around insane amounts of cash ($billions); in other words, they make their own markets in order to pump up their valuations but the underlying thing is fantasy-land VC goop (see any problems here?);
- the only way to shed many of these assets are with buyouts or IPOs and the most recent ones haven't been great (the 'big names' of which [UBER, LYFT] were treated like hot garbage even shorted by IPO underwriters in case of UBER) so it's not like this garbage can be punted to someone else
- SoftBank routinely sells assets to its Vision Fund and uses shady stuff like this in order to provide non-standard accounting; we have no idea what their financial health is due to a maze of non-standard reporting
- SoftBank owns over half (!!) of Japanese corporate bonds
- they have insane amounts of debt - "¥15.7tn ($143bn) of interest-bearing debt and ¥27tn of total liabilities, far greater than its ¥11.6tn market capitalisation"
as best i can tell this is approaching Ponzi territory. once more greater fools wake up to the fact that VC isn't all the rage, get the hell out of the way of anything that SoftBank touches.
It's a pretty standard interpretation that the Softbank funds are a vehicle to deploy capital that is otherwise hard to invest (because of political controversy, dubious origins, etc). That's why they can afford to throw cash around so liberally.
It's neither. They account for half of the retail JPY corparate market. Much different and smaller market than overall (institutional) corporate market. Half of JPY corporate markets is an astronomical number that doesn't pass a basic sniff test.
SoftBank was missing some billions for its own new fund and the solution is create debt to fund the fund. Since it's illegal for themselves to invest in their own... they workaround it through it's own employees.
If a workaround/scheme is required to obtain enough capital for the fund... that means that either there isn't enough capital in the world or that the owners of such capital don't believe in the fund.
The important question is why it's better to resort to this scheme than to not have enough capital for the fund?
Do you think they're still trying to get more Saudi money after the Jamal Khashoggi government sponsored murder? VCs need to be smart about their LPs. Idealistic startup founders / employees (the one's VCs tend to invest in) don't want to take blood money for their company.
Tangentially related: Could someone explain to me why SoftBank often seems to be the only major company playing in the "traditional" VC space? We hear of the "SoftBank round", but not, for example, the "Microsoft round" or the "AT&T round".
Relative to many companies, SoftBank is not so big. And the bigger companies do have VC-style subsidiaries set up (e.g. Microsoft's M12). But SoftBank seems to make the highest profile investments by a significant margin. Is there any particular reason for this? Are they simply more tolerant of risk and therefore write bigger checks?
Softbank deals are hardly what I would call VC-style -- certainly not "early" or even "mid stage" venture. Their very size tends to require much later-stage deals to absorb the large check sizes. This is growth or borderline "mezz" or "PE" frankly.
In contrast, Microsoft Ventures / M12 will do proper early-stage venture, doing a check of $2 M or $5 M or $10 M into a growing but still uncertain company.
Source: I have done single-digit $M deals with M12 and am a VC.
Softbank isn't really a traditional company. And it's not really a bank. It started as a kindof publisher for software ("software bank"), so it has a lot of expertise in identifying and distributing new technologies, and it's essentially acted as a holding company for tech investments (including alibaba) since 2000. Really it's the manifestation of Masayoshi Son, who is an incredible entrepreneur, technologist, and investor.
Apple+ more invest in the Softbank Vision fund, so the "SoftBank round" is already what you are thinking.
The Vision Fund is, among other things, the manifestation of the idea that an order of magnitude more scale will qualitatively change VC investing.
VC funds historically have been in the hundreds of millions, so you can invest up to tens of millions in any one company to keep a balanced portfolio.
SoftBank's Vision is in the hundreds of billions, so it can invest up to hundreds of millions.
This means they can single-handedly shepherd companies across the 'valley of death' or out-spend the competition to reach critical network effects... Essentially instead of just making bets, they're tipping the scales.
The point of this strategy is the scale, which is only possible by raising billions from sovereign wealth funds and mega corporations.
No one company could do it. Apple's net income last year was ~$60 billion.
I work in a SoftBank invested company. SoftBank started investing in us when the company was already ~7 years old and had a pretty high market share, with established technology, big customers etc. So, SB investment is not necessarily an early stage investment. Unfortunately, I don't know if our case is pathological or the common case.
It's important to understand what SoftBank is, and why betting against them is a bad idea.
Globally we are going through a period of deflation.
Japanese Banks have been dealing with this problem for 30 years now.
BOJ can print money ( yen ) and flood the world and the value of the yen would still go up !
The reason is there is a lot of latent demand for Japanese exports.
When Softbank invests in lets say India, ( through Uber drivers ), and suffers losses.
The yens released ends ups creating demand for Japanese export.
From Softbank's perspective it's a win-win, they get to be owners of really important tech companies and at the same time Japanese companies see a demand surge for their products.
It's hard to understand initially - but don't be surprised to see Softbank clones propping up in Europe in 10 years - once the EU has been completely battered by deflation.
In the US you might yet see the largest types of these funds in the future once the US govt. decides it wants some fiscal spending.
I'm really not understanding this. What you seem to be saying is that when Softbank succeeds they get to own a load of tech companies. That's great, that's the upside of any VC.
Where I'm not understanding is you're saying when they fail, the money they've lost has gone into stimulating demand for japanese goods and kept the currency low. But firstly, that's still them failing - the company will fail, ROI will be low. It might help the domestic japanese manufacturing industry, but it's not going to help softbank.
But also to take your example, Softbank blows a load of money in India on Uber, those Indian Uber drivers go out and buy japanese cars. But it's not like 100% of the cash you're putting into Uber goes to Japanese car companies. It's probably not even 5% - the vast majority of the money will be going to stimulate the Indian economy.
I just don't understand, because what you seem to be saying is that for a primarily export based economy, you should just print money always, that doesn't seem correct to me - but I really don't know enough about it. Surely there must be downside? Normally I'd say this maps to inflation and squeezed living standards- but are we just no longer seeing those effects?
There is a huge overlap here with MMT ( Modern Monetary Theory ), but the book was published way before MMT become more widely read. Richard studies what happened in Japan from an economic history prespective. ( I will do a dis-service to the whole topic trying to explain everything in a few sentences, but I will try to answer specific point raised ).
> I just don't understand, because what you seem to be saying is that for a primarily export based economy, you should just print money always.
As an exporter you cant help but accumulate FOREX. so the value of the yen would always head north, if you want to stay a top exporter you have to constantly print money to balance out your FOREX accumulation.
> Surely there must be downside?
Nope, no downside when you build capital goods that everybody else wants.
> Normally I'd say this maps to inflation and squeezed living standards- but are we just no longer seeing those effects?
inflation happens when aggregate demand > aggregate supply. If you are not supply constrained then inflation wont happen regardless of how much money you print.
Japan specifically could print unimaginable amount of money and use it to create whatever technology they want.
Technology acts as an accelerator to this deflation doom loops, since these technology products further increase supply or reduce cost.
You might have hard limits due to physical commodities like oil. But technology has been able to squeeze even more value out each unit.
> Where I'm not understanding is you're saying when they fail, the money they've lost has gone into stimulating demand for Japanese goods and kept the currency low. But firstly, that's still them failing - the company will fail, ROI will be low. It might help the domestic Japanese manufacturing industry, but it's not going to help softbank.
Japanese banks are very much interwoven with their state, softbank might get certain lending quota from BOJ that they must lend out. Remember if Japan doen't print yen and spread it around then their deflation problem gets worse. My personal opinion is Japan should pay attention to their domestic proverty problem, they could just implement UBI, but having too much Yen domestically wont solve their deflation problem. The last time they tried helicopter money, everybody just bought
government bonds, making the problem worse ! So they might prefer to figure out to create demand in foreign markets.
> It's probably not even 5% - the vast majority of the money will be going to stimulate the Indian economy.
I do not think Japan really cares if the Indian economy is stimulated or not, they just want there to be healthy demand for Japanese products, printing money and lending it out and then suffering some loss might even be preferable to having a large marketing and advertisement industry like we do in the West.
Fringe academic theory is being generous. This is more someone watched that ten minute cartoon YouTube video on "how centralized banks really work" and now think they're economic experts.
> Globally we are going through a period of deflation.
What? Pretty much every country has inflation [0].
> BOJ can print money ( yen ) and flood the world and the value of the yen would still go up !
That is definitely not true. If they were to print 518,755,944,000,000 Yen (2017 estimate for their gdp) and flood the market with it (say by giving every citizen an equal share as a lump sum a la helicopter money [1]) the value would certainly drop.
> From Softbank's perspective it's a win-win, they get to be owners of really important tech companies and at the same time Japanese companies see a demand surge for their products.
So you're saying Softbank doesn't actually care about their return on investments and is really in it to boost Japanese exports? Softbank is big but there's no way any secondary effects from their vision funds investments will return more money to them than the initial investments. Not only that, but your also effectively saying that they were able to swindle 40 billion dollars from the Saudis and I say swindle because the Saudis don't care 1 bit about Japanese exports and are 100% in it for the initial return on investment.
Can you elaborate a bit on the part between Softbank spending on India's uber drivers resulting in an increase of Japanese exports? Is it just that there is a desire for Japanese products in India, but not enough cash?
Softbank invests in Uber India pushing up automobile demand[1]. Indian drivers buy cars manufactured by Maruti Suzuki (54% market share [2]). Maruti Suzuki is a JV between an Indian company (Maruti) and Suzuki (Japan) where-in Maruti pays 6% of sales as royalty for design and other facilities. In addition, you have to realize that Japan exports $35b of auto parts and $101b of automobiles [4]. So any lever which pushes up sales of automobiles in any nation is bound to have an impact on exports.
Okay, now where does all the demand for these Indian taxi services come from that are actually going to pay for all of these automobile imports? It's not like Uber demand is insatiable. The notion that investing in Uber is going to drive the auto industry (which is completely contrary to the mission of these transportation companies) is an odd one.
I can see that, at the margins, a company can spend money where it thinks it it can receive complimentary benefits. But this idea that you can spend your way into riches is a fallacy.
So, I think we agree on some things, mainly that Japan is printing money and Softbank is a beneficiary and is using that cash to spread around the tech industry. Cheap money. Except I think it will backfire, eventually.
+1
Indeed, one of the reasons for the current auto-slowdown in India appears to be the drastic decrease in benefits offered by Taxi aggregators, which is hitting taxi drivers hard. Can't complain, since taxis saturate the roads in Bengaluru already.
In Indiranagar (a popular, hip neighbourhood in Bangalore), you might have to wait for an hour to get an Uber or Ola, on weekday mornings too! Hence a lot of people are using Yulu (India's Bird).
Add HSR Layout to that list , too. I’ve started using a combination of Bounce( two wheeler point-to-point rental ) for <2km travel , public transport for longer distance travel and cabs as the last option.
Based on where equities are and where the bond market are, you're going to have one hell of a hard time trying to get 5% return on the loans they're handing out. Take a look at some of the projections on 10 year returns for equities and bond market. The 2018 Vanguard report shows equities will return 3% real return over the next 10 years, and there are many estimates lower than that. Bond prices are also at all time highs. I wouldn't even take this loan if it were 2%.
No. There's no requirement they invest the loans in the Vision Fund. Nor is there a requirement to take out the loan.
We already see something similar at law firms - partnership in a firm means literally buying into it, and one of the perks you receive at many law firms is the ability to take out a loan at favorable rates, particularly to help with said buying in.
I haven't heard of "partners" anteing up (paying) to become partners before - if you think about it this would favour "Tim nice but dim" with a rich mummy and daddy.
You sort of have to pay to become a partner to buy your equity share, that's just how it works, and as the other poster said, you can get a loan from the partnership to pay for your partnership buy in
I checked that and I don't see that requirement for Goldman Sachs or any other partnership set up - the potential for corruption and nepotism is huge if its pay to play.
Some form of coops Mondragon for example do but that is a very different type of employment.
Goldman sachs isn't a partnership, and the potential for corruption and nepotism is always huge in any structure. That's why they extend loans to new partners, but the whole point is that partners no longer take salaries, they are equity holders in the actual firm, and they're obviously not going to let just anyone become a partner because they have money. What exactly do you see as the difference here between having to buy your way into the partnership after the other partners vote and then taking equity versus being promoted to partner after the other partners vote and then taking a salary? Who exactly is supposed to own the law firm in the second case if not the partners?
Goldman Sachs hasn't been a partnership since they IPO'd. They just use "partner" as a title for legacy reasons.
In general, a partnership is a collection of equity owners ("the partners"). To become a partner you have to buy equity, usually sold by a retiring partner.
Sometimes "new partners" are created by diluting the stock; this is generally avoided unless the person is expected to grow the business by at least that much.
I think anecdotally it was around 6-800k USD, which could be covered no problem with a few years of contributions from salaries and bonuses. Basically its just company equity that you are buying. The amount can be token but you are still a "partner".
Can someone explain to me how this is not like that episode of Arrested Development where they steal a dollar from the banana stand and then throw out a banana to "cancel it out"?
5% for a loan is pretty good these days if it's low risk. With yields way down and now negative, it's hard for companies to make use of cash reserves. If SoftBank has cash, and they know that employees are making way above 5% returns on average (cough Vision Fund), then it seems like a good investment.
For example,
0) SoftBank loans extra cash to Masayoshi Son.
1) Masayoshi Son invests a portion in the next Vision fund which makes 40% returns, and the rest in safer strategies (public equities, long-term debt)
2) Masayoshi Son makes a killing, has no trouble repaying the loan.
3) SoftBank just grew their cash reserves well above the market rate.
The key assumption here is 2). But since this is a loan, and Masayoshi Son invested most of the money in safe investments (and has a lot of wealth anyways), even if the Vision fund underperforms, SoftBank can be confident they can still make money back (step 3). They're using their advantages to build their own unique loan product.
Why bother with the middle man? If Softbank is so confident that its vision fund is going to make much bigger than 5% returns, it should be putting the money directly into there.
The fact that it doesn't do this is a little ominous. Why does it believe that it will get a better return by loaning out cash at 5% rather than investing in its own fund?
Why bother with the middle man? If Softbank is so confident that its vision fund is going to make much bigger than 5% returns, it should be putting the money directly into there.
This is a perk for employees. Stock options/RSUs on steroids. It’s nothing more complicated than that.
It’s unusual to do it this way in tech but in big accounting and law firms giving favourable loans for people to “buy into” the partnership is business as usual.
Yes, this is more convincing, but is still a little concerning. Given current interest rates, presumably these people 'gifted' the 5% loans could have already borrowed money at lower cost, they just wouldn't have had any access to throw the money into the vision fund.
Perhaps the borrowers can take the cash, invest it, then borrow elsewhere at lower rates to pay back the more expensive loan? In all, it still seems a vastly complicated scheme for the attested goals. I guess that there are tax reasons behind it all.
I find this strange too. I think they're trying to reduce risk. This basically transforms what would otherwise be an equity investment into a debt investment which lowers overall risk
Because you can't just take corporate cash and invest it in a private equity fund.
Fiduciary duty requires low risk products, and liquidity. Generally that means long-term debt (e.g. t-bonds) or 'corporate paper' which are nearly risk-free. Those yields are 3% or lower, certainly less than 5%. The risk profiles are about as far away from a VC fund as can be.
Generally a personal loan would be way too risky for corporate cash -- so this is actually an incredible show of confidence in the Vision Fund!
>Because you can't just take corporate cash and invest it in a private equity fund. Fiduciary duty requires low risk products, and liquidity.
I call bullshit. Specifically, what you wrote is not remotely true under US law or under Japanese law.
A company's managers have very broad leeway to spend the company's cash however they like. In fact, if the cash, treasuries, corporate paper, etc, of a company starts to pile up over the years, the markets tend to take that as a sign of managerial incompetence or at least managerial lack of vision.
Anyone that can buy and hold shares in SoftBank can also hold cash, treasuries or corporate paper directly. In other words, SoftBank's investors don't need SoftBank to hold cash, treasuries or corporate paper on their behalf; they invest in Softbank because they expect that SoftBank has a more ambitious plan than that. Creating and selling the iPhone is an example of an ambitious plan that turned out extremely well for investors in the company with that plan.
If that argument is not persuasive enough, consider this concrete counterexample to your claim: for 6 years, Google had a venture-capital arm:
Specifically, although GV is currently owned by Alphabet, for a period of 6 years before that it was owned directly by Google (under the name Google Ventures I believe).
can't as in "that asset class does not meet the risk and liquidity requirements for cash management in general"
not can't as in "de-facto illegal."
dereliction of fiduciary duty is illegal, of course the circumstances matter.
I think you are conflating capex + investments with overall cash management.
They already invest a lot in the vision fund. This is a way for them to route more money into the vision fund on top of what they already invest, by tapping into an additional asset class within their portfolio allocation.
If a company's portfolio is a high percentage of cash management products, that's a bad sign of low innovation. If the portfolio is too low a percentage, that's a bad sign also because they would be unable to access liquidity to cover operations given a downturn or sudden need for capex etc... Different companies have different allocations but healthy companies (including google) have allocations into a diverse bucket of asset classes...
> consider this concrete counterexample to your claim
The fact that Google also has a VC arm is not a counter argument. Google allocates some amount of its cash into cash management products as well.
> SoftBank's investors don't need SoftBank to hold cash, treasuries or corporate paper on their behalf
Their customers do. They're still a major telecom company in Japan -- they certainly have operations they need to protect.
>Different companies have different allocations but healthy companies (including google) have allocations into a diverse bucket of asset classes
OK, but that's different from your "you can't just take corporate cash and invest it in a private equity fund". If you'd written instead, "having their employees carry some of the equity risk is a way for SoftBank to increase the size of the private equity fund while continuing to make sure that they have enough cash to continue operations", I wouldn't've felt the need to call you out.
I don't know enough about Japan to say, but if it were a US company making this move, I would be more inclined to believe that the loans are mostly intended as a perk for employees like this comment claims: https://news.ycombinator.com/item?id=20736072
This isn't dereliction of fiduciary duty. It's not illegal for a company to go bankrupt or to spend all of it's money on highly risky investments and lose it all as long as it is done in good faith, and there aren't any magical guidelines for risk and liquidity requirements that companies have to accept legally. Management can do whatever they think is the best thing to do for the firm that doesn't break the law.
I agree that a company needs to make sure it has enough cash and cash-like assets to cover their expenses. Failure to do so has often resulted in the dissolution of the company although it is very rare for that to be the root cause of the dissolution of a public-traded company of SoftBank's size. But again management has broad leeway here. Can you cite one example of a company that was sued because management ran out of cash and cash-equivalents?
When you say "fiduciary duty", you imply that the company can be sued.
>>"Because you can't just take corporate cash and invest it in a private equity fund."
Says who? And yes you can, indeed read their financial statements, SB Holdings is a principal investor through and through. It is the directors duty and their imperative as good corporate governors (a rare phenomena in Japan) to deploy and allocate capital in the most efficient manner possible to the highest return opportunities. This reeks of cronyism. The vision fund is a mess of hand marked low/negative free cash flow generating businesses, check out their share price performance in 2001, for a preview of what's to come.
So what superlative do we use when the entity you are borrowing money from is the same company you are investing that money back into!?!?? Most worst? überbad? Ponzi?
Their last Uber investment is under water... wouldn't be surprised if the $2b in WeWork stock they purchased is crushed as well at IPO time -- but at least they didn't follow through with the $8b they initially promised to Adam.
During private fundraising, investor (vs founder) stock generally has preferred rights when the company is sold and/or liquidated. There might also be restrictions on who and how someone can sell their common shares. This depends on the investors and the terms that were negotiated during fundraising.
So common stock generally is sold at a discount because it doesn't have any of these protections, and it's basically last in line to receive any payout.
However during IPO, often preferred stock converts into normal common stock so that it can be sold to Joe Smuck (or their pension fund institutional) investor.
Hence it's an arbitrage play; you purchase common at say a 30% discount in a late round and then sell it on the market for full price.
Unless Softbank is willing to lend said money unsecured to a limited liability SPV without a personal guarantee. I can't imagine that all these people are taking on personal debt to invest in the vision fund.
- they have tons of illiquid assets (equity in startups and early stage companies - hard to shed - see later)
- SoftBank Vision Fund "borrows" from its huge illiquid assets (Uber + other SV stuff) in order to make the market by throwing around insane amounts of cash ($billions); in other words, they make their own markets in order to pump up their valuations but the underlying thing is fantasy-land VC goop (see any problems here?);
- the only way to shed many of these assets are with buyouts or IPOs and the most recent ones haven't been great (the 'big names' of which [UBER, LYFT] were treated like hot garbage even shorted by IPO underwriters in case of UBER) so it's not like this garbage can be punted to someone else
- SoftBank routinely sells assets to its Vision Fund and uses shady stuff like this in order to provide non-standard accounting; we have no idea what their financial health is due to a maze of non-standard reporting
- SoftBank owns over half (!!) of Japanese corporate bonds
- they have insane amounts of debt - "¥15.7tn ($143bn) of interest-bearing debt and ¥27tn of total liabilities, far greater than its ¥11.6tn market capitalisation"
as best i can tell this is approaching Ponzi territory. once more greater fools wake up to the fact that VC isn't all the rage, get the hell out of the way of anything that SoftBank touches.