Due To Staggering Investment Losses, Masa Son Owes SoftBank Over $5 Billion On Side Deals

Several years ago, roughly around the time Masa Son’s SoftBank launched a truly unprecedented, historic capital misallocation campaign (which will one day be a case study in how to vaporize tens of billions), which was nothing more than a levered bet on easy monetary policy and central banks reflating markets, and also around the time we first asked if “SoftBank was the Bubble Era’s “Short Of The Century“, his earnings presentations were filled with jolly-if-ridiculous, unicorn-riddlged slides such as these pitching the financial conglomerates ill-fated foray into “AI”:

And speaking of Artificial Intelligence, where according to SoftBank every entrepreneur in world was somehow an key cog in the AI wheel…

… and where SoftBank saw itself as the “conductor” of the “AI revolution“…

… despite burning billions in shareholder capital, Masa Son still has nothing at all to show for it, not even some woke chat (which supposedly will get people to quit Google and start using Bing, lol) and instead Masa was forced to resort to horrific charts such as this one taken from the “bank’s” earnings presentation yesterday.

Or rather, we should say Masa’s lieutenants, because the plump and jolly (former?) billionaire – who was so happy to announce billions in buybacks during SoftBank’s glory days when central banks were reflating the bubble – was nowhere to be found during yesterday’s earnings call.

Just in case the chart of cumulative losses shown above isn’t clear enough to indicate how SoftBank’s “investments” have done in recent years, here is some more data on why Japan’s (formerly) richest man opted out of his “legendary” investor presentation for the first time in decades, and it starts with a record $5.5 Billion loss for SoftBank’s Vision Funds.

As the FT recaps, the technology conglomerate posted large investment losses for the fourth straight quarter with a decline in value for 73% of its 472 investments. To brace for the shareholder shock, SoftBank also cut back on deals with its two Vision Funds investing just $300mn in two companies, compared to $9.6bn during the same quarter in 2021. For Q4, SoftBank reported an investment loss of ¥731.94bn ($5.5bn), compared with a ¥1.38tn loss in the previous quarter for its two Vision Funds and a fund investing in start-ups in Latin America.

The bottom line was horrific: during the three months ended Dec 31, one of the world’s biggest tech investors generated a ¥783.41bn net loss, which was far worse than the consensus forecast of a ¥103.59bn profit.  In the previous quarter, the company had logged a massive ¥3tn net profit, but that was mainly a result of its historic selldown of its stake in Chinese ecommerce group Alibaba.

SoftBank also said that as of Dec 31, the fair value of the $100bn Vision Fund I was down 4.4% from a year earlier due to markdowns in privately held companies despite gains in some listed holdings, such as ride-hailing groups Didi and Grab. The valuation for investments in Vision Fund II was down 6.2%.

Below are two slides showing the dire duds and dismal returns at both Vision Fund 1 and 2; pay particular attention to the latter: as FT’s Robert Smith reminds us, this was a fund launched “to facilitate the continued acceleration of the AI revolution through investment in market-leading, tech-enabled growth companies”, and suggested that it had raised $100bn from the likes of Apple, Microsoft, Standard Chartered, a bunch of Japanese banks and the Kazahk sovereign wealth fund. Oops.

With SoftBank’s bullish founder offstage, its finance chiefs repeated that its balance sheet and investment portfolio was “safe” and “resilient” to placate investors concerned by the group’s borrowing costs as interest rates rise. Alas, it was not enough and SoftBank stock tumbled and was last down about 44% from its March 2021 all time high (it would be far lower if it wasn’t for the billions in stock buybacks authorized by the bank meant to keep its stock price elevated).

Kirk Boodry, an analyst with Redex Research, said it would probably take time for market perceptions on SoftBank and its Vision Funds to improve, making it difficult for them to expand investments in the near future.

“In order to be more proactive and aggressive with investing, they need money,” Boodry said. “The initial public offering of Arm is the quickest way for them to monetise, but beyond that, there is not a lot you can sell within the Vision Fund because many of the investments are underwater.”

But there may be another reason why Masa decided to be mysteriously absent from yesterday’s call: due to the continuing investment losses, Son – once Japan’s richest man – is personally on the hook for about $5.1 billion on side deals he set up at SoftBank to boost his compensation, as losses mounted at its core Vision Fund venture capital arm.

As Bloomberg reports, Son, whose stake in SoftBank grew in recent months, also owns portions of the company’s key investment vehicles. While these holdings have sparked controversy due to corporate governance concerns, the Japanese billionaire has denied any conflict of interest (and yet, India’s Adani just lost half his net worth for something very similar).

According to Bloomberg calculations, Masa’s unrealized losses grew $400 million from three months before. The founder and chief executive of SoftBank was down $4.7 billion on the same side deals through the September quarter.

Compensation has long been a contentious issue at SoftBank. Japanese companies pay some of the lowest executive salaries in the world, reflecting a culture where job-hopping by managers is still infrequent. Son himself has kept his pay at 100 million yen, now roughly $760,000 — a rounding error in the US where CEOs routinely make more than $100 million. Of course, the bulk of Son’s net worth is in the form of equity – he owns more than a third of the company –  which was almost wiped out after the bursting of the previous two bubbles: the third time may be the charm.

Meanwhile, as SoftBank grew into a global investor – the same way Reddit’s apes grew into global investors and more or less, with the same results – Son argued the company couldn’t keep talent unless executives were allowed to cut side deals that tied compensation to the company’s performance. That’s exposed him further to the current market downturn.

Needless to say, the unwind of the bubble has not been kind to one of the biggest beneficiaries of the bubble era: the global tech investor was hit by continued mark downs in its investments in unlisted startups, which outweighed gains in its public holdings. Chief Financial Officer Yoshimitsu Goto said they applied “extremely strict” standards in writing down investment losses. SoftBank had invested in 472 companies through its venture capital arm by December.

Portfolio losses ratcheted up Son’s deficit to about $2.9 billion from his Vision Fund 2 interest, and $344 million at the Latin America fund, according to disclosures for the December quarter. His remaining deficit at SB Northstar was 246.1 billion yen ($1.85 billion). The debt totaled $5.1 billion according to Bloomberg calculations based on company disclosures.

Separately, the 65-year-old billionaire holds 17.25% of a vehicle set up under SoftBank’s Vision Fund 2 for its unlisted holdings, as well as 17.25% of a unit within the company’s Latin America fund, which also invests in startups. He has a 33% stake in SB Northstar, a vehicle set up at the company to trade stocks and derivatives.

The good news for Son is that there is no immediate deadline for repayment and the value of Son’s positions could improve in the future, and for SB Northstar, Son has already deposited some cash and other assets. The founder would pay his share of any “unfunded repayment obligations” at the end of the fund’s life, which runs 12 years with a two-year extension.

Son’s net worth stood at $12.3 billion after Tuesday’s close, after adjusting for his deficit from his interests in SB Northstar, Vision Fund 2 and the Latin America fund, according to calculations by Bloomberg Billionaires Index. In other words he can afford at least a few more quarters of SoftBank losses before he is wiped out.