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SoftBank’s debt obsession

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Today, we are focused on SoftBank .
The Wall Street Journal and others reported that Masayoshi Son, the founder and CEO of SoftBank, will take into account the killing of Saudi Arabian journalist Jamal Khashoggi when considering whether to receive additional investment from Saudi Arabia in future Vision Funds. Saudi Arabia is the largest investor in the current Vision Fund, having pledged $45 billion of the $98 billion fund.
The political risk surrounding the Kingdom made us curious: why the obsession with Saudi money, beyond the obvious that they write monster checks?
The answer turns out that it’s not just that the country can write large checks, it is that they are willing to write large checks to one of the most heavily levered companies in the world. SoftBank — including its Vision Fund — has engorged itself on massive levels of debt in order to increase returns — often at the expense of operational stability.
First, take the Vision Fund. According to PitchBook, most of the fund is underwritten by SoftBank itself ($28 billion), Saudi Arabia ($45 billion) and Abu Dhabi ($15 billion). But, the fund has also been on a huge debt binge in order to juice returns. As reported by Mayumi Negishi and Phred Dvorak at the WSJ:
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. That is an unusual structure for a fund that backs young, unprofitable companies, where it is unclear when—or if—investors will make money.
On top of that, the Vision Fund and its affiliate have been borrowing money: They had around ?636 billion ($5.6 billion) in debt as of the end of September, up 28% in the past six months, according to SoftBank filings. That money has partly been going to pay the returns promised the funds’ investors, the filings say.
And SoftBank is planning to have the Vision Fund borrow an additional $9 billion or so to boost the fund’s returns further and make more investments, Mr. Son told The Wall Street Journal after the press conference.
That’s $14.6 billion in debt for a $98 billion fund.
That’s not insane by any measure, even if the use of debt is relatively unusual for venture firms (unlike in private equity, where debt is very standard). The Vision Fund invests at a much later stage than most startup investors, and its term sheets — from what I hear — are heavily-laden with economic terms that give SoftBank huge downside protection. It’s hard to believe that the GPs could invest $98 billion, and not find at least $14.6 billion in returns to cover their debt repayments.
Here is the thing though: SoftBank is the second largest LP in the SoftBank Vision Fund, and that contribution itself is also funded by a balance sheet that is staggering in its debt load.
SoftBank’s debt obsession
Image: Koki Nagahama/Getty Images
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