August 19, 2019 / 10:43 AM / a month ago

Breakingviews - SoftBank skin in the game risks major organ damage

Japan's SoftBank Group Corp Chief Executive Masayoshi Son attends a news conference in Tokyo, Japan, November 5, 2018.

LONDON (Reuters Breakingviews) - SoftBank is stretching the concept of “skin in the game” to breaking point. The Japanese technology group wants to lend up to $20 billion to employees, including Chief Executive Masayoshi Son, to buy into its $108 billion Vision Fund 2, the Wall Street Journal reported. Son’s backers, like Apple and Microsoft, will welcome the move to align staff’s incentives with their own. But it magnifies SoftBank’s losses if the vehicle blows up.

It’s normal for venture capital staff to eat their own cooking: investors sleep easier in the knowledge that the people managing their money are investing on their own account. It’s particularly reassuring in the case of SoftBank. Son’s group has a habit of buying highly valued startups on its own balance sheet and transferring them to the Vision Fund at a higher value. If Son has a large chunk of his $22 billion net worth in the fund, he’s less likely to abuse this conflict of interest.

Yet the reported magnitude of the SoftBank staff commitment is unique. At $20 billion, it would account for 19% of Vision Fund 2’s putative size, compared with an average staff commitment of 2-3% for most funds, according to Investec. Because not even Son would have that kind of cash to hand, SoftBank plans to lend its staff the money at a 5% rate, the Wall Street Journal reported. 

Imagine the fund falls in value – not impossible, since one of its biggest investments Uber Technologies is down 18% in three months. The staff’s portion of the equity would be less than the face value of their loan. Son, who may account for more than half the employee loans according to the Wall Street Journal, could sell down his 22% SoftBank stake to pay back the company he founded. But SoftBank could take a hit on the other employee loans, adding to losses it would have already suffered on its own $38 billion contribution.

So why do it? Having spent most of the first fund, another acquisition machine could help maintain toppy tech valuations. Yet Son’s main Vision Fund 1 backer, Saudi Arabia, has yet to lend its firepower and validation for the sequel. In its absence, SoftBank is effectively bootstrapping its way to $108 billion - and risks tripping itself up in the process.

Breakingviews

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