The biggest force behind the startup bubble in the United States has been SoftBank Group, the Japanese publicly traded conglomerate. It has been the biggest force in driving up valuations of money-losing cash-burn machines to absurd levels. It has been the biggest force in flooding Silicon Valley, San Francisco, and many other startup hot spots with a tsunami of money from around the world — money that it borrowed, and money that other large investors committed to SoftBank’s investment funds to ride on its coattails. But the scheme has run into trouble, and a lot is at stake.
The thing is, SoftBank Group has nearly $100 billion in debt on a consolidated basis as a result of its aggressive acquisition binge in Japan, the US, and elsewhere. This includes permanently broke Sprint Nextel which is now trying to merge with T Mobile. It includes British chip designer ARM that it acquired in 2016 for over $32 billion, its largest acquisition ever. It includes Fortress Investment Group that it acquired in 2017 for $3.3 billion. In August 2017, it acquired a 21% stake in India’s largest e-commerce company Flipkart for $2.5 billion that it sold to Walmart less than a year later for what was said to be a 60% profit. And on and on.
In May 2017, Softbank partnered with Saudi Arabia’s Public Investment Fund to create the Vision Fund, which has obtained $97 billion in funding – well, not actual funding, some actual funding and a lot of promised funding, which made it the largest private venture capital fund ever.
Saudi Public Investment Fund promised to contribute $45 billion over the next few years. SoftBank promised to contribute $28 billion. Abu Dhabi’s Mubadala Investment promised to contribute $15 billion. Apple, Qualcomm, Foxconn, Sharp, and others also promised to contribute smaller amounts.
Over the past two years, the Vision Fund has invested in over 80 companies, including WeWork, Uber, and Slack.
But the Vision Fund needs cash on a constant basis because some of its investors receive interest payments of 7% annually on their investments in the fund. Yeah, that’s unusual, but hey, there is a lot of unusual stuff going on with SoftBank. (...)
SoftBank uses a leverage ratio that is based on the inflated “valuations” of its many investments that are not publicly traded, such as WeWork, into which SoftBank and the Vision Fund have plowed $10 billion. WeWork’s “valuation” is still $47 billion, though in reality, the company is now fighting for sheer survival, and no one has any idea what the company might be worth. Its entire business model has turned out to be just a magnificent cash-burn machine.
But SoftBank and the Vision Fund have already booked the gains from WeWork’s ascent to that $47 billion valuation.
How did they get to these gains?
In 2016, investors poured more money into WeWork by buying shares at a price that gave WeWork a valuation of $17 billion. These deals are negotiated behind closed doors and purposefully leaked to the financial press for effect.
In March 2017, SoftBank invested $300 million. In July 2017, WeWork raised another $760 million, now at a valuation of $20 billion. In July 2018, WeWork obtained $3 billion in funding from SoftBank. In January 2019, SoftBank invested another $2 billion in WeWork, now at a valuation that had been pumped up to $47 billion.
With this $2 billion investment at a valuation of $47 billion, SoftBank pushed all its prior investments up to the same share price, and thus booked a huge gain, more than doubling the value of its prior investments.
Now, I wasn’t in the room when this deal was hashed out. But I can imagine what it sounded like, with SoftBank saying:
We want to more than double the value of our prior investments, and we want to pay the maximum possible per share now, in order to book this huge gain on our prior investments, which will make us look like geniuses, and will allow us to start Vision Fund 2, and it will get the Saudis, which also picked up a huge gain, to increase their confidence in us and invest tens of billions of dollars in our Vision Fund 2.
In these investment rounds, the intent is not to buy low in order to sell high. The intent is to buy high and higher at each successive round. This makes everyone look good on paper. And they can all book gains. And these higher valuations beget hype, and hype begets the money via an IPO to bail out those investors.
By this method, SoftBank has driven up the “value” of its investments, which drives down its loan-to-value ratio. But S&P and Moody’s caught on to it, and now the market too – as demonstrated by the scuttled WeWork IPO – is catching up with SoftBank.
The thing is, SoftBank Group has nearly $100 billion in debt on a consolidated basis as a result of its aggressive acquisition binge in Japan, the US, and elsewhere. This includes permanently broke Sprint Nextel which is now trying to merge with T Mobile. It includes British chip designer ARM that it acquired in 2016 for over $32 billion, its largest acquisition ever. It includes Fortress Investment Group that it acquired in 2017 for $3.3 billion. In August 2017, it acquired a 21% stake in India’s largest e-commerce company Flipkart for $2.5 billion that it sold to Walmart less than a year later for what was said to be a 60% profit. And on and on.
In May 2017, Softbank partnered with Saudi Arabia’s Public Investment Fund to create the Vision Fund, which has obtained $97 billion in funding – well, not actual funding, some actual funding and a lot of promised funding, which made it the largest private venture capital fund ever.Saudi Public Investment Fund promised to contribute $45 billion over the next few years. SoftBank promised to contribute $28 billion. Abu Dhabi’s Mubadala Investment promised to contribute $15 billion. Apple, Qualcomm, Foxconn, Sharp, and others also promised to contribute smaller amounts.
Over the past two years, the Vision Fund has invested in over 80 companies, including WeWork, Uber, and Slack.
But the Vision Fund needs cash on a constant basis because some of its investors receive interest payments of 7% annually on their investments in the fund. Yeah, that’s unusual, but hey, there is a lot of unusual stuff going on with SoftBank. (...)
SoftBank uses a leverage ratio that is based on the inflated “valuations” of its many investments that are not publicly traded, such as WeWork, into which SoftBank and the Vision Fund have plowed $10 billion. WeWork’s “valuation” is still $47 billion, though in reality, the company is now fighting for sheer survival, and no one has any idea what the company might be worth. Its entire business model has turned out to be just a magnificent cash-burn machine.
But SoftBank and the Vision Fund have already booked the gains from WeWork’s ascent to that $47 billion valuation.
How did they get to these gains?
In 2016, investors poured more money into WeWork by buying shares at a price that gave WeWork a valuation of $17 billion. These deals are negotiated behind closed doors and purposefully leaked to the financial press for effect.
In March 2017, SoftBank invested $300 million. In July 2017, WeWork raised another $760 million, now at a valuation of $20 billion. In July 2018, WeWork obtained $3 billion in funding from SoftBank. In January 2019, SoftBank invested another $2 billion in WeWork, now at a valuation that had been pumped up to $47 billion.
With this $2 billion investment at a valuation of $47 billion, SoftBank pushed all its prior investments up to the same share price, and thus booked a huge gain, more than doubling the value of its prior investments.
Now, I wasn’t in the room when this deal was hashed out. But I can imagine what it sounded like, with SoftBank saying:
We want to more than double the value of our prior investments, and we want to pay the maximum possible per share now, in order to book this huge gain on our prior investments, which will make us look like geniuses, and will allow us to start Vision Fund 2, and it will get the Saudis, which also picked up a huge gain, to increase their confidence in us and invest tens of billions of dollars in our Vision Fund 2.
In these investment rounds, the intent is not to buy low in order to sell high. The intent is to buy high and higher at each successive round. This makes everyone look good on paper. And they can all book gains. And these higher valuations beget hype, and hype begets the money via an IPO to bail out those investors.
By this method, SoftBank has driven up the “value” of its investments, which drives down its loan-to-value ratio. But S&P and Moody’s caught on to it, and now the market too – as demonstrated by the scuttled WeWork IPO – is catching up with SoftBank.
by Wolf Richter, Wolf Street | Read more:
Image: Issei Kato/Reuters via
