143 points by devy 5 months ago
Note that Masayoshi Son has the distinction of losing the most money in history when he lost approximately $70 billion during the dotcom crash. He still has a net worth of $23 billion.
Win big. Lose big.
Here's an ArsTechnica article with more specifics:
The article plays on the cultural anathema to the word debt in the following ways:
It mentions specific interest rates only once, which are paid to a subset of investors in the vision fund. It briefly clarifies how none of this is an insane level of debt, just a large number.
It then spends the rest of the article talking the existence of bonds and interest bearing securities, with no distinction of what they are except "hey look, a DEBT security"
It mentions how it is as large as the public debt of a nation state, after qualifying the alarm with subsets of a subset of one of the entity's balance sheets.
By this part of the article, we are actually talking about the Softbank entity's "operating basis", which was a big pivot away from what 2/3rd of the article was talking about which was the Vision Fund doing all the cool investments.
Just.... be discerning.
The general counterpoint would be that it is great that a fund structured this way is trying to back illiquid private equity. It is nice that investors get the opportunity to have exposure to the hottest deal flow on the planet, with an entity that can push for liquidity.
> The general counterpoint would be that it is great that a fund structured this way is trying to back illiquid private equity.
Sorry, I don't understand your point at all. Why would the fund's structure affect its investment mandate?
They aren't mutually inclusive aside from the fact that nobody does it, for several good reasons.
The investment mandate is written on paper and has nothing to do with the fund's structure. Nobody makes investment mandates with funds that are structured that way, except Softbank. Shrug emoji.
Typically an investment into a fund is done with shares which bear no interest. This means that no money is being pulled away from the fund while it invests in things which cannot be liquidated.
Softbank is investing in things which cannot be liquidated, all while money is flowing out of the fund to a large portion of shareholders at 7% a year.
It's a risky structure but Softbank continues to hit it out of the park with bets at a size that nobody else can match. Also the positions can be liquidated it just takes time
I sense there may be a clear point here somewhere but you've failed to state it.
There has been a lot of talk (and speculation) in the past regarding Softbank being 1. the avenue for Saudi Investment of their (est.) $Trillion++ as the hedge against oil's future and 2. The apac version of HSBC/DeutscheBank laundering schemes.
Anyone have any speculation on the veracity of these rumors?
Basically, WRT the debt risks that Softbank is taking, it suggests that they don't care about the risks, because they need to launder+invest the monies they can regardless as quickly and with as much volume as possible to legitimize and profit...
Taking massive risks is the correct play anyhow when massive failure loses other people's money. If the fund collapses to zero, it's just as bad for Softbank as if it collapses to the outstanding debt amounts. Meanwhile, if the fund randomly does better, Softbank collects 100% of the upside.
I'd like to learn more about this and their motives. It'd be a little alarming if the US government was the top investor in the top vc firm buying up massive stakes of top SV companies. But maybe im unaware of how much investments America and other countries make like this.
I don't know if the government does, but plenty of individual states have investment funds or pension funds that do VC work. Apprenda, my old employer, was partially backed by the a New York State pension fund
Does anyone know if any of the term sheets for these $1 billion+ deals have ever been made public? I'm really curious what the ins and outs are.
Alternatively, any accurate data on what market terms are for these humongous rounds?
Plainly and simple: Vision Fund is a giant LBO scheme for Saudi money. Any other interpretation does not make any sense financially.
Vision fund is knee deep in SHORT TERM debt – thus, they have to make money fast. They look for stuff they can flip quickly, and "Pets.com style" companies are ideal targets for that.
To be fair, the Saudis have so much money it's hard to place, and therefore have to accept riskier terms. So maybe this is realistically the best they could do. And so Softbank can get away with better terms.
I've never understood that argument. Can't they just sink more money into the stock market?
Sinking more money in the stock market is the same as getting a worse deal or concession in any fund.
Stocks are already bought up to levels that don't make a meaningful theoretical return if the individual companies started returning capital via dividends.
Bonds are in the same situation, they have been bought up beyond sane levels (theoretical return based on coupon and yield curve) pushing their yield to lower rates than risk and inflation would warrant. Basically, with bonds you have to accept that some issuers will go bankrupt and you get a 100% loss on that portion of the portfolio, therefore the whole portfolio of bonds has to account for that risk and it can't right now, if you keep buying more of them at higher prices
Getting out of the public markets you go into the private equity markets. There are plenty of investments to fund which nobody else is funding due to the way the deal looks or the way the team looks. You go further out on the risk curve, and also accomplish the goal of keeping money flowing in the economy.
This is what the central banks wanted to happen: assets prices and yields of everything passive is so unattractive that people are forced to make their capital more productive in the economy. Sure they didn't expect people to plow into crypto, but risk is risk and yield is yield.
It is more likely that Softbank functions as an economic stimulus backed by the Bank of Japan's economic policy decisions.
Supply and Demand. More demand is better terms for stock sellers, i.e. companies. And their investing would probably completely skew the market. So it's hard. Investing directly might put them at risk of some kind of oversight as well.
And they already have a lot tied up in those kinds of investments anyhow. They own a lot of real estate around the world as well.
It's hard to find places to park that amount of money esp. if there are political considerations. Nobody is worried about taking money from the Norwegians ...
But there's more than one stock market - there are so many around the world, surely them buying couldn't make that much of an impact?
" there are so many around the world"
Not really. Or rather, they are smaller in terms of market cap. Also - you basically have US and EU, the rest are very high risk, and subject to all sorts of shenanigans.
That's how much money the Saudis have.
We need to go clean nuclear, it would solve so many problems ...
They want it on better terms, and have access to companies not on stock markets including all those pets.coms
Giant leveraged buyout scheme for Saudi money? When you use scheme that suggests a pejorative. What do you mean?
Rephrasing that: Vision Fund is a front for Saudi Arabia doing LBO schemes in Western countries.
Saudi Arabia could already do LBOs in Western countries, well you think they can take out more leverage because of the restrictions on debt in Islamic culture?
I would say the Softbank entity shields them in case things go down, like after the things that went down.
At least nominally it does provide them a minute degree of risk isolation, and they surely want to have an executor better suited dealing with dotcom hipsters than some Saudi guy with beard and a hoodie.
> and they surely want to have an executor better suited dealing with dotcom hipsters than some Saudi guy with beard and a hoodie
Yes, but not for those reasons. The royal family stewards of any Saudi fund would have been educated in the US or Canada and very versed in these fields, and would be indistinguishable from all the people with middle easterner decent that have navigated Western institutions, like Steve Jobs.
// Oversimplified napkin math for fun, stop taking this seriously //
> Around 60% of the money promised to the Vision Fund by investors other than SoftBank takes the form of debtlike securities that earn a 7% fixed return annually.
They get $70B and have to pay 7% fixed annually. S&P rate of return on average is 9.7%. Softbank could pocket 2.7% of $70B ($1.89B a year) by just investing in an index. With $70B you could stay solvent longer than the market can remain irrational, so you're operating with very little risk. (Ignoring all the difficulties in investing that much, etc)
Maybe SoftBank likes debt because even if they have no where to invest they'd still make $2B/year.
EDIT: This isn't a serious comment, literally just throwing numbers in the air for fun. I know very little about investing.
> Softbank could pocket 2.7% of $70B ($1.89B a year) by just investing in an index.
This is totally untrue. Volatility in the short term -- one serious year down -- can sink you.
No sane actor treats S&P's average rate of return as the risk-free rate.
A serious economic downturn is likely to sink the fund entirely anyhow, so you might as well optimize for the case where that doesn't happen. This is one of the serious principle-agent problems in investing in general - equity holders and management aren't incentivized to preserve value for creditors, so they take more risk than is ideal for the overall capital structure.
Depending on how you define a "serious economic downturn". The one thing funds that invest in private companies has it that they can mark-to-model rather than mark-to-market. If it's not a prolonged downturn, private funds can much more easily ride out downturns than funds that invest in public securities and have to actually mark things in a realistic manner. Given the longer lockups of most PE funds, investors are also along for the ride.
I don't know more than the basics, my thought was if you pocket $2b/year and invest it, you have $13B+ in 10 years (plus your own $28b you've invested that I didn't include). So $40B to whether a storm every 10 years seems reasonable.
I think you are ignoring a lot of factors that come into play when you are managing assets on the scale of 70B$. It is easy to sink 1000$ in a minute into an index fund using Robinhood. It is not as easy when you are talking numbers on this scale.
99% in SPY, 1% in 80% SPY Put option should cover your downside.
I think you're going to find the 80% SPY Put option doesn't have liquidity for 700 million$ of options.
> Oversimplified napkin math for fun:
We are having fun!
I was under the impression fund money is typically locked for around 10 years or so.
Even the 10 year rate of return has variance. The risk-free rate of return for 10 years should pretty much be 10 year TIPS bonds.
Is there a strong reason as to why a 9.7% annualized return on the S&P is a correct assumption we should make about the future?
I feel like in the 21st century, a lot of folks have come to put a lot of faith in the "stocks in the long run" mantra.
But any stationary effect in the markets can be arbitraged away. If 9.7% long-term returns were guaranteed, wouldn't everyone just borrow 30-year loans on margin at 5% interest rate and invest it in S&P?
Edit: agree with sibling comment. If one loses 27% in the first year and makes 9.7% annually after that, they would be operating at net loss. So even if long-term gains were assured, volatility can still make investing on borrowed money unprofitable.
I've asked this question many times in many different formats and have never gotten a satisfactory response that's grounded in fundamentals.
I think it ultimately comes down to people trusting history to repeat itself.
How would an answer based on fundamentals even look like? Nobody can predict the future.
> How would an answer based on fundamentals even look like?
Start with demographics. Layer on productivity growth and you have a first-order approximation of national productivity. Figure gross margins and from that net margins, as well as average corporate tax rates–boom, you have the economy's profitability. Estimate a pay-out rate and you get a high-level return estimate. It's very approximate, but it's theoretically solid for any closed economic system. (Cf: natural resource inputs are not properly accounted for.)
Let's say you do this exercise and arrive at a discounted cash flow model that accurately predicts a 5-10% YoY appreciation in value for the S&P index.
How do you explain why this appreciation in value isn't arbitraged away, as suggested by GP? In his words, "if 9.7% long-term returns were guaranteed, wouldn't everyone just borrow 30-year loans on margin at 5% interest rate and invest it in S&P?" This would effectively drive up the current day price and eliminate any projected future growth in index price -- invalidating the hypothesis that the S&P price will continue growing in the future.
It's not arbitraged away because it's not guaranteed.
How would you account for central bank actions?
We can't predict the future with certainty, but we can certainly build models.
I'm basically saying I'd like a somewhat bottoms up approach to modelling the S&P index where the inputs can explain the x% YoY increase in price.
Investing in 1968, your S&P holdings would take until 1992 to regain their inflation adjusted starting value.
The S&P has not always generated positive returns relative to inflation.
Sometimes there are 30 year long dips.
That is demonstrably not true. 1968 was a positive year!
$1 of S&P500 in 1968 would be worth $1.23 in 1978, 10 years later.
There are large drops in some of the years, but they are usually followed by outsized rallies in the years afterwards.
Source: Moneychimp’s CAGR of the Stock Market calculator. http://www.moneychimp.com/features/market_cagr.htm
Inflation adjusted were the key words.
Even your link admits poor performance during periods of high inflation, and gives several other example periods.
But here was my original source:
With your link, if you're just talking about value of the stocks and controlling for inflation, one dollar of stocks in 1969 grows to only $1.03 in December 1991.
9.7% (or maybe 0.8%) is the average over the last 90 years and I don't think there is any other data points you could reasonably use to say it won't continue like that over a long enough time frame.
Well, over the last 90 years the USA moved from important regional power to the economic and military hegemon of the world. That's quite the wave to be riding as a US stock market investor. It's also quite a hard act to repeat.
To maintain the historical growth rate, you have to believe one of the following two things, or some combination of them:
1. The US will continue to amass a larger share of the world's wealth, indefinitely.
2. The economy of the world at large will begin to also grow ~10% a year, a number far in excess of the historical average or any well-informed estimate.
Personally, I wouldn't make that bet.
Sure there are; valuations are considerably inflated now compared to the average (or starting point) of the last 90 years. Percentage earnings and dividend rate are both considerably lower. The long term expected return for the market is therefore also lower.
Taxes certainly complicate that, but most people do what you're describing. People with moderate and even high net worth (that is, in financial assets) still use mortgages because it's better to borrow at 5% instead of liquidating an asset that is returning 9.7%.
As others said, if 9.7% was guaranteed enough, who would lend Softbank at 7%? Banks aren't that stupid, they'd buy S&P (feedback loop)
Even 7% is an extremely good return rate.
Softbank does these things because they have access to a lot of easy money.
'very little risk' - I think standard deviation of return on S&P is something like 15%-20%...I wouldn't define a strategy with a buffer of 2.7% very little risk when the standard deviation is that high...
Pasted from another comment:
Variance is not risk. https://www.ncbi.nlm.nih.gov/pubmed/18554271
No, but variance causes risk when you're borrowing to invest and need a certain level of return to continue servicing that debt.
If you had started such a scheme in 1999 or 2000 you would be bankrupt by now.
Not if you invested in an adapting basket of stocks (ie, an Index like the S&P 500) used dividends (2% to create a cash cushion) and had access to 0-2% short term debt (ie the Fed bank rate) during every downturn.
I was talking about taking $100 (at 01/01/99 or 01/01/00), investing them in the S&P500 (with dividends reinvested), and paying out $7 every Dec 31. You would run out of money eventually.
Of course if you add cheap additional leverage at certain moments and time the market successfully you can do better. But that’s not the original proposal.
If you think the S&P consistently returns ~9.7% per year every year, you are mistaken.
Pretty close actually. https://www.nerdwallet.com/blog/investing/average-stock-mark...
Edit: Anyone want to clue me in on what the downvotes are for here?
The Nikkei 225 is still down from 20 years ago. Its fate is a very plausible alternative history for the S&P.
Taking into account reinvested dividends, it's given an annualised return of 3.5% in the past 20 years. Source:
From that article:
"While 10% might be the average, the returns in any given year are far from average. In fact, between 1926 and 2014, returns were in that “average” band of 8% to 12% only six times."
So if you are investing on borrowed money with a guaranteed payout of 7% a year, that is not good for you.
The key is consistently.
The S&P 500 returns are wildly variant, and the 9~ % only comes from averaging a century of growth. Whole decades might see a loss.
Based on numbers here: https://seekingalpha.com/article/2789035-s-and-p-500-index-r...
So only decade with negative growth.
Add in the depression and you'll probably see a bunch more...
You need to consider inflation. In 1970, the inflation rate was 7-8%/y on average, so the "growth" these numbers imply did not exist in reality.
Good point. I think also debt’s effect is the perfect alignment for their “last” stage investing where risk and return are lower.
Aren't all of the 2.7% gains wiped out by inflation?
I wonder how are the downside-protecting elements and that unusual debt based financing structure affecting Uber and other large companies that SoftBank invests in. Is it possible that Uber collapses because of the 7% yearly coupon that SoftBank fund must produce ?
There is no risk of SoftBank's financial situation causing a collapse at one of the companies in which they hold a minority stake. The worst that could happen is they don't fund Uber the next time they need funding.
There's no chance that a collapse is immediately caused but if SOFTBK reaches a point where they closed off from capital markets, one of their best ways to raise cash is to sell their stakes in some company. I don't think it could happen with Uber just given the ownership breakdown but it could absolutely happen with another one of their stakes.
That would depend on the term sheet, wouldn't it? 7% guaranteed yearly return may require unusual conditions on the investment side.
Sure, that's possible but then you're just dealing with relatively blind speculation. I would assume there's no issues on the investment side unless there's strong reason to believe there is.
The article offers one reason to wonder:
> [...] its term sheets — from what I hear — are heavily laden with economic terms that give SoftBank huge downside protection.
How much weight you want to give that, well.
My guess would be generous liquidation preference and possibility to force IPO or liquidation event.
Virtually all companies including GOOG, MSFT, FB take on same amount of debt as their cash on hand. The thing is that even at 5-7% interest rate, it is fairly easy to find use of money that easily pays off interest and leaves money in hand. So if you have X dollars, you borrow again it to get another $X. Your net revenue would typically increases by billion or two dollars.
Is there any public, comprehensive list of SoftBank-funded startups available?
You can use Crunchbase's search functionality, but it costs money. No idea how comprehensive it is.
If you hate someone, take their money and run, I guess?
the japanese have an absolutely horrible track record of investing in overpriced risky foreign investments in the west.
the chinese are not repeating the japanese mistake in the same way, bit in a different one...