
SoftBank could bring down the house? - tigerlily
https://capitalistexploits.at/hold-my-beer/
======
vmurthy
Interesting read. For someone who has the time and patience to gather data
_against_ the author's arguments, I would highly recommend going to the source
of the data. SoftBank's financials - FY 2018-19[1]. I had a quick skim at the
_segments_ of the company and they have some interesting sources of
revenue/profit which could provide some cushion: ARM, SoftBank itself
(telecom), Sprint!, Yahoo Japan.

Can someone more experienced than I am on financial matters check if they're
in deep shit as the article suggests?

[1][https://cdn.group.softbank/en/corp/set/data/irinfo/financial...](https://cdn.group.softbank/en/corp/set/data/irinfo/financials/financial_reports/pdf/2019/softbank_results_2019q4_001.pdf)

Edit: spelling mistakes /facepalm

~~~
paganel
> Can someone more experienced than I am on financial matters check if they're
> in deep shit as the article suggests?

I'm no financial expert but "¥15.7tn ($143bn) of interest-bearing debt" is a
lot of money, in case shit will end up hitting the proverbial fan (meaning a
recession that will make refinancing a lot harder) then I don't see an easy
way out for them. I also don't know what "¥27tn of total liabilities" really
stands for, but that doesn't sound good either.

Adding those two numbers up gives you about $300 billion that is owed by
SoftBank in one way or another (debt + liabilities), that is a lot of money
that cannot easily be covered by SoftBank's current assets in case they'll
become hungry for liquidity. And I don't think the biggest part of that sum
has a long maturity (think 10, 20 even 30 years), probably most of it it's due
in the next few years (even though I may be wrong on this one, I admit).

~~~
onlyrealcuzzo
I was under the impression most if SoftBank's loans are denominated in JPY and
have almost 0% interest. If you have $143Bn in interesting bearing debt at
like 0.1% interest -- as long as you buy anything that will inflate at the
normal rate of inflation -- you should make a killing, right?

~~~
oarabbus_
This is why Apple took (takes) out billions of dollars in loans despite having
nearly a $1 trillion market cap of which a significant portion is cash.

If you're a large corporation and have low-interest money offered to you, it's
almost fiscally irresponsible not to take the loans.

Depends of the tax laws of your home country, of course, and I don't know
anything about Japan. But in the US, if you were to get offered a 0.1%
interest loan, take the money now and figure out what to do with it later.

~~~
atomical
Buffett and Munger have said that they are having difficulty investing cash
because they have so much of it. In this case it seems irresponsible to take
loans. I don't see the point unless it's a tax dodge.

~~~
onlyrealcuzzo
I hear everyone saying this. It seems like 12-years of global QE is gonna
cause a massive spike in inflation. Everyone's valuing things as if there's
been hardly any inflation since 2007.

The reality is, there's 120% MORE narrow money (M1) today than there was in
2007. There's also 74% more board money (M3).

Has there ever been a long period (12 years, in this case) where we've had
only ~25% inflation with ~120% growth in the money supply?

Naively, it seems like there's either too much money (not sure how you solve
that) or everything is too cheap.

~~~
qqqwerty
Well the main issue is all of this money is going to the wealthy. And while I
don't have hard data to back this up, it feels like 'inflation' is rampant in
the things that wealthy people throw money at, e.g. stock market, real estate,
art, etc...

~~~
Terretta
High end real estate in greater NYC area is deflating.

------
jcfrei
I didn't see it mentioned in the article but I think it's an important factor:
The massive intervention by the BoJ in the corporate bond market of Japan. The
BoJ is even buying bonds with negative yield. There's just so much Yen printed
by the BoJ it's no surprise that some of it ends up in a venture capital fund,
driving up valuations of startups around the globe. After all this is what
everyone is warning about: Zero or even negative interest rates will distort
valuations and capital allocation.

~~~
wrong_variable
BoJ's money printing is dwarfed by Fed's and ECB's money printing. Japan has
been doing it since 1989, Softbank cant be explained by Japan alone.

> Zero or even negative interest rates will distort valuations and capital
> allocation.

interest rates policy ( monetary ) has little to do with capital efficiency.

Central banks have rightly figured out a few things :

\- Their respective countries have taken on too much debt, and we need to do
something to reduce it.

\- Market forces ( globalization + technology ) are having tremendous
deflationary effects that is pushing down interest rates, their job is to find
out that number.

~~~
jcfrei
> BoJ's money printing is dwarfed by Fed's and ECB's money printing. Japan has
> been doing it since 1989, Softbank cant be explained by Japan alone.

BoJ's money printing is on the same level as ECB and Fed. Most recent data I
could find is here: [https://www.valuewalk.com/2019/05/gundlach-g4-central-
banks-...](https://www.valuewalk.com/2019/05/gundlach-g4-central-banks-
balance-sheets/) Both ECB and BoJ hold around $5trn in assets, Fed is third
with around $4trn.

> interest rates policy ( monetary ) has little to do with capital efficiency.

I don't know what you mean by capital efficiency. The BoJ corporate bond
purchasing program lowers interest rates for all issuers on the Yen bond
market, including the ones issued by SoftBank. Because SoftBank itself invests
into the fund (around $28bn) and raised capital with bond issuance the link
between BoJ open market interventions and startup valuations should be clear.

> Central banks have rightly figured out a few things :

> Their respective countries have taken on too much debt, and we need to do
> something to reduce it.

In the case of the ECB and the Fed (don't know about BoJ) the reason is
actually the opposite. Fiscal expansion has been very unpopular politically in
both the US and the EU (there mainly due to the fiscal austerity demanded by
Germany). Because there was no political will to increase national debts, the
central banks stepped in and started to directly purchase bonds (both
governmental and private) in order to rekindle growth after the financial
crisis. If governments started massive infrastructure projects or otherwise
expanded their balance sheets, then this central bank intervention would have
been much smaller. As a result of central bank interventions - which has
reduced interest rates for gov. bonds - countries have started to issue more
debt once again.

> Market forces ( globalization + technology ) are having tremendous
> deflationary effects that is pushing down interest rates, their job is to
> find out that number.

As far as I know there isn't a consensus for an explanation why the current
low inflation environment persists (the "New Normal"). Globalization and
technology might well be an explanation but global demographic shifts could
also be an important factor (ageing populations and declining birth rates in
most industrialized countries).

~~~
wrong_variable
Here is a much better graph showing the same data:

[https://www.zerohedge.com/sites/default/files/images/user330...](https://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/06/01/20170601_CBs.jpg)

You are right, since 2013 BoJ has bee busy with the printing press.

> I don't know what you mean by capital efficiency. The BoJ corporate bond
> purchasing program lowers interest rates for all issuers on the Yen bond
> market, including the ones issued by SoftBank. Because SoftBank itself
> invests into the fund (around $28bn) and raised capital with bond issuance
> the link between BoJ open market interventions and startup valuations should
> be clear.

Soft Bank has assets that allows them to borrow, if Soft Bank didn't exist,
somebody else would have taken advantage of the lower interest rate.

My point is that even when a lot of money is printed, capital goes to who is
able to convince the bank the most. BoJ, Fed does not have much control in
where the money is allocated.

> ... Because there was no political will to increase national debts, the
> central banks stepped in and started to directly purchase bonds ...

The problem here is that those bonds were about to lose a large amount of its
value - as private debt repayment was not possible. So yes, private debt was
high. CB's had no choice but to buy them , or else face a severe contraction
in the money supply.

------
raesene9
Softbank kind of reminds me of the Icelandic banks in the last bubble, in that
in both cases I was wondering how they managed to get all the money they had.

Just before it all went off that time, these icelandic banks were buying up
everything in sight, and I was thinking "where are these banks from a small
country getting this kind of money"

Softbank seems similar, in that the scale of its funds is absolutely massive
for a single company (vision fund one at $100b and suggestions of a second
$100b vision fund in the offing). If there's a lot of fancy debt going on,
it's the kind of that seems like it could blow up in spectacular fashion (as
the icelandic banks did last time)

~~~
dashundchen
Saudi Arabia and MBS are reported to have invested heavily in SoftBank,
especially the vision fund.

[https://www.nytimes.com/2018/11/05/business/softbank-son-
sau...](https://www.nytimes.com/2018/11/05/business/softbank-son-saudi-arabia-
khashoggi.html)

------
human20190310
There's a chart that says "Morgan Stanley caught red handed with a massive
short book" \- but isn't this exactly what they're supposed to do with the
"greenshoe"? I.e., oversell the offering by taking a short position
themselves, then buy it back later to move up the price?

~~~
venantius
They went further than the greenshoe - Matt Levine has a great post breaking
it down (see the second section of his post here:
[https://www.bloomberg.com/opinion/articles/2019-05-15/wework...](https://www.bloomberg.com/opinion/articles/2019-05-15/wework-
separates-buildings-and-beer)).

------
dhfromkorea
> "SoftBank routinely selling assets to its Vision fund."

Can anyone help me understand the real reason Softbank does this and whether
investors of VF are okay with it? One case I know of is Coupang [1], a Korean
E-commerce company, recently "priced" by VF at $9B. Last year, Softbank sold
its 20% shares in Coupang to VF at a 30% loss (down-valuation) and then VF
poured in an additional $2B to Coupang. It appears Masa did double down on
Coupang but why bother to sell its long position at a loss? Not a domain
expert on this, so I wonder what is really going on...

[https://www.bloomberg.com/news/articles/2018-11-20/softbank-...](https://www.bloomberg.com/news/articles/2018-11-20/softbank-
to-invest-2-billion-in-korean-e-commerce-site-coupang)

------
dzdt
I am curious if there are any counter-views published out there. Softbank is
undeniably big and heavily invested in the VC basket. Is there public analysis
on how well the larger entity is protected to down-valuation of their
portfolio of startups?

~~~
chid
I just wonder how one can make money if they believe that Softbank will crash
in the 5 year horizon

~~~
bubblewrap
puts?

~~~
nradov
Puts on what?

~~~
theWheez
I would think on a variety of companies fitting the description the author
makes. Consuming large amounts of capital with plans mostly being "growth"

------
tim333
>How SoftBank got here is a story as old as man itself. You see, thanks to QE,
pushing investors out the risk curve fanned the largest venture capital boom
in all of history. Trust me, I know this. I built, then sold a VC firm because
I could see what was happening.

I feel he's projecting his own experience setting up and flipping a small VC
firm ("Between July 2012 and April 2016 led the investment of $35M into 32
early stage venture...") onto SoftBank.

Mr Son "invented an electronic translator that he sold to Sharp Corporation
for about $1 million" when he was 19, around and has a pretty good record of
tech investment over the 42 or so years since, with Softbank started in 1981,
and plans to be around a while ("... SoftBank Group, which aims to keep
growing for the next 300 years")
[https://group.softbank/en/corp/about/philosophy/value/](https://group.softbank/en/corp/about/philosophy/value/)
[https://www.nytimes.com/1995/02/19/business/a-japanese-
gambl...](https://www.nytimes.com/1995/02/19/business/a-japanese-gambler-hits-
the-jackpot-with-softbank.html)

I don't think they got here as a response to QE.

------
jodje
Before burning down the house How Son Made 62% Return on SoftBank's $64
Billion in Tech Deals

[https://www.bloomberg.com/news/articles/2019-06-06/how-
son-m...](https://www.bloomberg.com/news/articles/2019-06-06/how-son-
made-62-return-on-softbank-s-64-billion-in-tech-deals)

------
CyanLite2
Problem #1: Uber is already a public company and borrowing against owned stock
in the company (as OP says Softbank is doing) isn't newsworthy. Article says
$4bn from "Uber and two other SV groups". Even if we assume the entire $4bn is
borrowed from Uber holdings, that's only 10% market cap of Uber.

Problem #2: Morgan Stanley shorting Uber for its IPO is more FUD. This is
routine in the investment banking world. Underwriter knows they will have to
do this to provide liquidity. Haven't seen a popular IPO in the last decade
where the underwriter doesn't hedge.

Problem #3: Softbank having a large corporate debt load isn't that big of a
deal since interest rates are so low (sometimes negative) in Japan. You're
going to PAY me millions to borrow billions? Yes, I'll take that deal every
day of the week. SoftBank makes enough in revenue to more than make up for
their debt load.

Problem #4: I think everybody and their dog knows Uber, Lyft, WeWork, etc. are
all overvalued and will struggle to find a path to profitability in the near
term. However, we could still see a 30-50% drop in public valuations on those
companies. But they make up a very tiny slicer of the overall venture capital
in tech right now. The largest companies are tech and they're making money
hand-over-fist. Microsoft is at a trillion dollar valuation but they make
$35bn a year in profits and still have $130bn in cash in the bank. It's not
systemic risk as in the GFC of 2008.

TLDR: SoftBank is starting to unwind their positions and you may see a dip in
the valuations for Uber, Lyft, WeWork, Tesla, and other non-profitable tech
companies.

------
mises
When I read things like this, I start to wonder: when wealth inequality is
discussed, how is it measured? I recall hearing that Jeff Bezos regularly
loses billions due to fluctuations in Amazon stock. How much of the "wealth"
in wealth inequality is actually based on paper gains? In other words, it
seems that the richer you are, the more exposure you might have to the
vagaries of the market. Maybe you are rich enough that you can afford to take
that hit, but you will also likely lose more in dollars, I would assume.

~~~
N_trglctc_joe
one commonly used measure of inequality is the Gini coefficient, which isn't
perfect but is great for getting a "big picture" view of things. The increased
exposure of the rich to the vicissitudes of valuations doesn't really get
accounted for, even in more detailed analyses. I'm guess that's because it
would be horribly impractical to measure; you'd have to take a detailed look
at the finances of almost everybody.

------
aloer
Semi related to this: Have there already been noticeable changes in
investments in the valley since the last big round of unicorn IPOs?

Since we can assume many VCs got a lot of cash back in a relatively short time
I guess they will either double down and reinvest even more in tech/startups -
or they will stay out of tech for the foreseeable future.

Or is it too early to tell because new funds would have to be set up first?

~~~
CSMastermind
I'm not sure about new investments but I'd say that the author of OP's article
is onto something here.

Softbank backed Lemonade is about to IPO in 6 months with a 2 billion dollar
valuation. Neither their valuation nor an IPO makes sense to anyone in the
industry. Lemonade is 99% marketing hype. Both the insurance book and the tech
at the company are suspect at best.

The other one that's hit my radar recently is Compass, another Softbank backed
company looking to IPO in the next 2 years at a stupid high (I've heard $5b)
valuation. But they're cash flow negative with no path to profitability and
they're increasing their spend rate instead of lowering it. So why would your
average investor buy the stock?

Neither of those are mentioned in the article but it does seem like companies
backed by Softbank are behaving pretty strangely.

~~~
mrnobody_67
Giving any entrepreneur $300m or $1b (in the case of Nuro) and not expecting
"strange behaviour" would be weird.... that's private jet, Four Season suites
for conferences with butlers, and Thomas Keller catering for company Xmas
party type money.

------
PaulHoule
See

[https://www.youtube.com/watch?v=S3hA9cjBBwM](https://www.youtube.com/watch?v=S3hA9cjBBwM)

------
espeed
Yes. One incident and a house of cards comes falling down. Too big to fail is
one thing. Setting it up to fail is another. How did we get inflated
valuations during the housing bubble. Fraudulent comps.

------
mruts
A large part of the Vision fund is arab money. For Americans, the investment
strategy pursued by most of the Middle East can seem counterintuitive, or even
stupid. But let me tell you a story.

I worked as a quant at a portfolio analytics firm and had access to the
portfolio data of thousands of different funds: hedge funds, fund of funds,
endowment funds, and sovereign wealth funds. Many of our clients were in the
Middle East, probably due to the founder being Palestinian (I am also half
Palestinian if it matters).

These national investment authorities have _massive_ amounts of capital,
larger than any hedge fund or endowment. We’re talking about trillions of
dollars in a single fund invested all over the Western world.

With that kind of money, you need to pretty much invest in anything and
everything. Billions in T-notes, corporate bonds, commodities, equities,
whatever.

The amount that needs to be invested is so large that you need to invest in
things no sane person with 50m would invest in. This is the purpose of the
SoftBank Vision fund: to provide capacity for seemingly infinite Middle
Eastern oil money. They desperately need to diversify out of their incredibly
volatile oil cash flows.

This pressure results in a glut of arab money into VC and everything, because
all they want is to create a true market portfolio. And by market portfolio, I
mean allocations into everything: VC, PE, REITs, bonds, equities.

~~~
lexapro
>We’re talking about trillions of dollars in a single fund invested all over
the Western world.

I find that hard to believe. The Government Pension Fund of Norway is said to
be the world’s largest sovereign wealth fund with just over US$1 trillion in
assets.

~~~
nabla9
I agree. Norwegian fund seems to be the biggest single fund.

Saudis have three separate funds that are bigger combined. UAE has multiple
wealth funds that are > $1 trillion together.

------
ptx
> Now, if this wasn’t bad enough, consider that this is a company as opaque as
> Casper.

I'm not sure I get this simile. Is he saying that the company is actually
_not_ particularly opaque, but rather as transparent as a ghost?

Or is Casper the ghost known for being unusually opaque for a ghost?

Or is he talking about Casper the mattress company?

~~~
gvb
He has several mixed up metaphors.

Another one is "the term “corporate governance” is as foreign as that thing
that came out of Sigourney Weaver’s stomach." The alien came out of Executive
Officer Kane's stomach (John Hurt).

~~~
tedeh
To be fair the alien did come out of her once in Alien 3, and several times in
Alien Resurrection (4)

------
MrRadar
> But the real reason it’s as nutty as a AOC’s Green Deal ...

I hit this and immediately stopped reading the article. First, it's the "Green
_New_ Deal". Second, it's not solely AOC's work (though she is probably its
most prominent proponent). Third, it's not nutty; it's, if anything, a _down-
payment_ on the work we need to do to address the climate crisis. Not to
mention the rest of the article (up to that point) has nothing to do with the
GND, so the author had to go out of their way to make themself look like an
idiot.

~~~
asah
consider: it's "nutty" because it's politically infeasible, not because it's
wrong.

~~~
DevX101
The New Deal was politically infeasible until it wasn't.

~~~
nradov
The original New Deal only became politically feasible when the country was on
the verge of a violent socialist uprising.

~~~
kjsbfkjbf
So we know what we must do.

------
wrong_variable
SoftBank is playing a game that is way above any hedge fund's pay grade, let
alone some blogger.

\- If SoftBank goes down, every coder loses his/her rice bowl. The pain
inflicted on Son, Tim Cook and MBS is minimal, compared to your average tech
worker.

\- Valuation are not isolated beasts, the nominal value looks high because of
the extraordinary financial alchemy that is going on the Fed. Large pool of
capitals are betting the Fed is going to continue with QE4, QE5, .... QEn.

Imagine how it feels to be a sovereign wealth fund, watching the Fed print
almost a trillion dollars / yearly in good times ! You must be terrified of
what happens when the ball stops rolling.

\- Owning growth stocks is an amazing way to hedge against many possible
future outcome, both good and bad.

~~~
yasp
Should tech workers consider buying deep out of the money puts on tech ETFs as
a form of insurance?

~~~
soVeryTired
You should only do that if you believe the crunch is coming in three months or
so.

Unless you can time the crunch exactly, put options are a mug's game. They
bleed value over time (negative theta in industry parliance).

If you really want to protect yourself, just plan your finances as if your
high income was temporary rather than permanent.

~~~
yasp
Can't you get options whose expiry is a year or two out (LEAPs), or is the
time premium not worth it?

~~~
maxxxxx
I used to do options in the end 90s and back then long term options were crazy
expensive. You need a lot of capital for such a strategy.

~~~
teambayleaf
Did you profit from that strategy?

~~~
maxxxxx
I lost money. Which would make a successful startup these days :)

------
atomical
What's the argument against Alibaba?

------
falsedan
> _It’s the classic Ponzi scheme. You always need fresh new capital to pay off
> the old capital in order for the scheme to continue. When there is no fresh
> new money, everything reverses and folks quickly realise the value of
> positive cashflow._

That's... just economic growth in capitalism

~~~
Kye
You're on the verge of a breakthrough.

Capitalism as typically practiced works like a Ponzi scheme. It's not
sustainable without someone, like a government or a standards body, setting
boundaries. For example: Banks destroy economies without a government saying
"you need to have _x_ cash for _y_ loans" and "you need to pay into this fund
to insure you against bank runs."

~~~
falsedan
here's a breakthrough for ya: telling people tediously obvious facts and
assuming their position so you can condescendingly patronise them will not get
you far in any economic system

~~~
Kye
What happens when you condescendingly patronize someone who you think is being
patronizingly condescending?

~~~
falsedan
close, Bub. if you observe these posts just a little more carefully, you might
work out _it has already happened to you_. namaste

