SoftBank could bring down the house?

https://capitalistexploits.at/hold-my-beer/

by tigerlily • 7 years ago

265 127 7 years ago

dzdt• 7 years ago

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• 7 years ago

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

bubblewrap2• 7 years ago

puts?

empath752• 7 years ago

Unless you’re privy to information the market in general is not, it’s pretty unlikely.

tim3333• 7 years ago

Seems you can shot Softbank stock http://shortsqueeze.com/shortinterest/stock/SFTBF.htm

ptx• 7 years ago

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?

dsfyu404ed• 7 years ago

Based on the sentence structure he's almost certainly being sarcastic. He could have said "opaque like glass".

zaroth• 7 years ago

But again, that’s backwards for the point being made. It should be “clear as mud” to make the point that their finances are inscrutable.

gvb• 7 years ago

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• 7 years ago

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

wellpast• 7 years ago

Pedantically... She has a dream — opens Aliens, I think — and an alien pokes out of her stomach.

mxcrossb• 7 years ago

Not to mention typos and weird grammatical mistakes....

inflatableDodo• 7 years ago

Also, the green new deal idea is not by Edward Markey and Alexandria Ocasio-Cortez. It was a term used by Thomas Friedman as far back as 2007 and the policy ideas have been bouncing around in more or less their current forms for quite some time.

Perhaps he is aiming this screed at arch conservatives who prefer the later films in the alien franchise.

KaiserPro• 7 years ago

I know I'm explaining a joke here, but look at this image: http://static1.squarespace.com/static/566a4af357eb8d39743905...

Casper is not transparent.

Fricken• 7 years ago

Casper is transparent: https://youtu.be/ISugbhXnVTU?t=112

DoctorOetker• 7 years ago

obviously he is comparing the (lack of) transparency or clarity of the company with the (lack of) transparency or clarity of the Ethereum Casper protocol...

wrong_variable5• 7 years ago

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.

yasp2• 7 years ago

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

soVeryTired2• 7 years ago

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.

naveen99• 7 years ago

Hedging is better than hope. You could sell some nontech etf puts to reduce your cost also.

mruts5• 7 years ago

Options are going to affect the returns so much in good times rhr insurance probably isn’t worth it.

A better idea would be to go long short, 30% short, and 100% long has always been popular. The leverage from the shorts lets you juice the long side while also giving you the 30% short protection. This should allow you to achieve a better Sharpe ratio than the market.

If you can’t get the leverage, consider buying a S&P ETF that has downside protection in exchange for capped returns.

i_am_proteus• 7 years ago

Assuming you currently have a portfolio of naked longs, selling covered calls and buying deep puts is an effective risk-limiting straddle.

rapsey2• 7 years ago

If SoftBank goes down, every coder loses his/her rice bowl.

Maybe for silicon valley and money burning enterprises like uber.

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

They are likely well diversified. They are anything but dumb money.

wrong_variable5• 7 years ago

They are likely well diversified. They are anything but dumb money.

I never said SWF are dumb money, in fact my argument is exactly the opposite. They are watching the Fed reduce their purchasing power through money printing and are rightly buying up growth stock as a way to maintain the value of their wealth.

empath752• 7 years ago

Those money burning enterprises raise salaries for everyone.

swoongoonz• 7 years ago

what would you suggest if you currently work for a softbank startup?

petra• 7 years ago

Why doesn't the government stops with QE already ?

With both houses prices inflating, and huge sums of money going into automation startups and investments, the future looks scary, for regular people.

Yes, automation will happen anyway. But why accelerate this very disruptive process(Although one that transfer a lot of power to the already powerful) ? Isn't it better to slow it and have it in a more controlled fashion ?

wrong_variable5• 7 years ago

Why doesn't the government stops with QE already ?

Without QE many people's retirement saving would have been wiped out, along with jobs.

You would have a period of large scale joblessness and homelessness.

In early part of this decade Ben Bernanke said that he would continue QE until unemployment rate dropped below 6.5% or inflation rose above 2%.

I agree that the easiest solution would have been a jobs guarantee or better yet print money and send everybody a cheque.

But that would have been outside the Fed's mandate.

It's not clear how the situation resolves, currently inflation is low and joblessness is also low ; so the fed seem to have done their job.

The questions you raise can only be solved through a political process, not monetary policy.

mywittyname2• 7 years ago

The US Government stopped QE in 2014.

The ECB continues QE because Europe's economy never really recovered.

The Bank of England restarted QE when Brexit was announced.

human20190310• 7 years ago

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• 7 years ago

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...).

vmurthy• 7 years ago

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...

Edit: spelling mistakes /facepalm

paganel2• 7 years ago

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).

onlyrealcuzzo3• 7 years ago

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?

docker_up• 7 years ago

Softbank is essentially a PE fund now. Their numbers don't represent the same things that they do for a regular company.

https://techcrunch.com/2018/11/06/softbanks-debt-obsession/

dskrvk• 7 years ago

Debt is a type of liability, so the second number already includes the first one. That said, their liabilities are ~3x their current market cap, and that’s assuming it is real, which the article argues is likely far from being the case. So if the portfolio valuation starts to really slide down, it’s unclear how they’ll be able to pay down the debt or convince new creditors to lend them more.

aloer• 7 years ago

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• 7 years ago

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• 7 years ago

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.

webninja3• 7 years ago

I wish lemonade would expand to more states. I’m willing to invest in them until they do.

falsedan3• 7 years ago

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

Kye2• 7 years ago

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."

rdlecler1• 7 years ago

Capitalism requires a constant increases in abundance. Tech provides that.

bubblewrap2• 7 years ago

What "rule of capitalism" are you referring to?

kjsbfkjbf3• 7 years ago

Close. There are no incentives for a government or a standards body to malign profit for the sake of anything other than longer-term profit. So, capitalism does not work... in any configuration.

If regulation truly worked we would not be so fucked with regards to our rape of the Earth.

falsedan3• 7 years ago

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

mruts5• 7 years ago

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.

lexapro2• 7 years ago

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• 7 years ago

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.

wp381640• 7 years ago

Largest single and transparent fund - the Arab funds are spread out and very opaque

mruts5• 7 years ago

The structure of the arab funds are quite opaque. The distinction between single and multiple funds isn’t meaningful for them.

osdiab• 7 years ago

There’s a (behind paywall) Quartz special on exactly this with SoftBank Vision Fund

https://qz.com/1565699/the-complete-guide-to-sovereign-wealt...

mistermann• 7 years ago

I wonder what the world would be like if (magically) the option for the top x% of people to invest their money globally was no longer available, and they were forced to find something to do with the money domestically. If wealth distribution is such that the masses lack the productivity and therefore income to buy your innovative product, perhaps then these top x% would be motivated to work together to influence society in a manner to increase individual productivity, which they could then make their larger-than-average rate of return on.

Something like the situation of the unusually high wages Henry Ford paid his workers back in the day: https://www.npr.org/2014/01/27/267145552/the-middle-class-to...

raesene9• 7 years ago

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• 7 years ago

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...

duxup• 7 years ago

That and Softbank, at least from my limited visibility seems to throw money at a lot of startup like ventures in terms of the risk reward.

Maybe overall they're far more grounded than I see but I swear I only hear about them publicly when they're taking some risky chances that most probabbly won't pay off...

If they're borrowing I wonder who goes down with them?

nikanj• 7 years ago

Japan is the third-biggest economy on the planet, after US and China. Their shopping spree sounds more reasonable than the Icelandic one.

MrRadar2• 7 years ago

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.

asah2• 7 years ago

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

DevX101• 7 years ago

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

whenchamenia• 7 years ago

As written, the bill, whatever you want to call it, is nutty. Specifically in implementation. While the idea behind it my not be nutty at all, its hard to call bs on that statement..

dangus• 7 years ago

You don't even need to analyze it that far to discard the article.

It doesn't matter whether we agree with the Green New Deal or not, the author is just outing themself as someone uninterested in looking beyond personal opinion and their political bandwagon.

dpoochieni2• 7 years ago

Please do not stop reading just like that, you are missing opportunities to know and understand more. If one only read what might fit their preconceived notions, one would live in an echo chamber, and be easily manipulated. Plus those preconceived notions will be harder to remove

MrRadar2• 7 years ago

I normally do not just stop like that, however the dig was so out of left field and so wrong it hit me like a cognitive segfault. If the sentence had been more germane to the topic at hand I probably would have continued on (though far more skeptical of the author's other points) but it was just too out of place for me to let slide.

jcfrei2• 7 years ago

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_variable5• 7 years ago

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.

jcfrei2• 7 years ago

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-... 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).

mempko• 7 years ago

country debt is a non-issue. It's private debt that you have to worry about.

whatok3• 7 years ago

40% of SOFTBK's debt is in USD and most of their larger recent issuance has been in USD.

dv_dt• 7 years ago

But that's the intent of rates that low, to try cause more activity for economic exploration to create or expand capabilities of businesses. The inflation only really becomes a concern if there is "too much" activity that yields too little lasting value creation. With too much being in quotes because that determination is a vastly complex and non-deterministic judgement call.

lucianomt• 7 years ago

If you run a root cause analysis of SB or the explosion of VC in general, low rates will be at the top of the list. And this is by design.

dhfromkorea• 7 years ago

"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-...

jodje• 7 years ago

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...

CyanLite2• 7 years ago

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.

espeed• 7 years ago

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.

atomical2• 7 years ago

What's the argument against Alibaba?

PaulHoule2• 7 years ago

See

https://www.youtube.com/watch?v=S3hA9cjBBwM

tim3333• 7 years ago

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://www.nytimes.com/1995/02/19/business/a-japanese-gambl...

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

mises• 7 years ago

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• 7 years ago

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.

SoftBank could bring down the house?

Related Stories