This article comes from the WeChat public account: East Forty Capital (ID: DsstCapital) , author: Tao Huidong, from the title figure: vision China

Tencent Technology News May 28, according to foreign media reports, according to three people familiar with the matter, Japan ’s Softbank Group (SoftBank Group) Consider a layoff of about 10% in the investment department of its Vision Fund (Vision Fund) .

The Vision Fund currently has about 500 employees, most of which are located in the London headquarters, and the remaining employees are located in San Francisco and Tokyo offices. An insider who asked to discuss the layoffs anonymously said that the layoffs will involve all levels of employees. A spokesperson for the Vision Fund declined to comment.

SoftBank founder Sun Zhengyi (Masayoshi Son) and its US $ 100 billion Vision Fund helped by making giant investments in startups Changed the technology industry. But the fund has changed from Softbank’s main profit contributor a year ago to the biggest drag today. After writing down the value of investments including WeWork and Uber, the company lost 1.9 trillion yen in the last fiscal year. (US $ 17.7 billion) .

The Vision Fund grew rapidly after its establishment in May 2017, but it fell into a difficult situation after WeWork failed to go public last year and after other investment failures or layoffs. The fund currently manages more than 80 portfolio companies, but Sun Zhengyi expects that about 15 startups of the fund may go bankrupt, and another 15 are expected to flourish.

The Vision Fund has withdrawn from certain investments, including the sale of nearly 50% of Wag’s startup Wag to the company last year. Sun Zhengyi has said that he plans to sell about $ 42 billion in assets to fund stock repurchase and debt repayment. According to reports, SoftBank is considering selling Alibaba shares and is in talks to sell T-Mobile US shares worth about $ 20 billion.

Before that, Softbank just released its fiscal year 2019 performance report on May 18, 2020. The financial report shows that Softbank Group’s operating loss in 2019 is 1.365 trillion yen , which is slightly more than the 13,500 yuan forecast in April 100 million yen.

Before the financial report was disclosed, Softbank Group also announced several major events.

First, Jack Ma, the founder of Alibaba, withdrew from Softbank’s board of directors. Ma Yun has been a director of Softbank Group for 13 years since 2007. This is the second old Sun Zhengyi comrade to leave in half a year. At the end of 2019, Univ. Liu Jingzheng, the founder of Uniqlo, who served as chairman of Softbank for 18 years, also announced his withdrawal.

In addition, SoftBank announced a new stock repurchase plan, which will invest $ 4.7 billion in stock repurchases before the end of March 2021, which is the second time that SoftBank has overweight stock repurchases in the past two months.

Vision Fund, a debt black box

Unsurprisingly, the majority of Softbank ’s losses in FY2019 will still come from the Vision Fund. The investment loss of the Vision Fund for fiscal year 2019 was 1.8 trillion yen. Softbank explained the reason for the loss. First, the fair value of Uber and WeWork dropped significantly. Second, after the outbreak of the new crown virus, the valuation of other portfolio companies also fell sharply in the latest quarter. The financial report shows that the investment loss of the Vision Fund in fiscal 2019 is composed of: Uber lost $ 5.2 billion, WeWork lost $ 4.6 billion, and other investments lost $ 7.5 billion.

“People still don’t understand that the Vision Fund has become a mess.” On April 19th, Allianz Technology Trust portfolio manager Walter Price wrote on Twitter.

For SoftBank, the huge loss of the Vision Fund ’s $ 17.3 billion in 2019 is just the beginning of trouble. Analysts on Wall Street are beginning to worry that SoftBank Group may need to pay for the Vision Fund ’s investment losses. Sun Zhengyi paid a huge price for the 100 billion scale of the Vision Fund. After the valuation bubble burst, its risks began to be exposed.

The Vision Fund with a total size of 97 billion US dollars, although it is known as a VC fund, is actually mostly a debt. According to the agreement, even if the Vision Fund ’s investment portfolio becomes worthless, it will need to be invested in Saudi sovereign funds every year. LPs pay a dividend of approximately $ 2.2 billion.

In order to enlarge the scale, the Vision Fund introduced a debt financing model similar to the leveraged M & A fund in a VC fund, which has no precedent in the United States. Of the USD 97 billion of funds raised by the Vision Fund, Softbank Group contributed USD 28 billion. Of the USD 69 billion of other LP contributions, about 62% are preferred stocks with fixed dividends, which are essentially debt. Of the 45 billion US dollars invested by Saudi sovereign investment funds, 28 billion US dollars are preferred stocks.

Proportion of equity and debt capital contribution in Vision Fund, source: FT

In the 12-year life cycle of the Vision Fund, these preferred stocks will receive a 7% annual dividend, which is approximately $ 2.2 billion per year.

Therefore, there is a view that the Vision Fund is under the banner of the VC fund, but in fact it is only a tool for Softbank Group ’s financing, and it will not drag down Softbank ’s balance sheet. Someone commented: “Sun Zhengyi has found a trick to borrow billions of dollars for mergers and acquisitions without paying any interest.”

Better yet, the Vision Fund also follows the VC fund practice to charge management fees to LPs every year. The specific fee rate differs for each LP. Softbank Group did not disclose in detail. If the industry level is 2%, then the Vision Fund is equivalent to a tool for Sun Zhengyi to borrow at a negative interest rate of 2%.

Therefore, for the Vision Fund, 7% of the income is a key, beyond this line Sun Zhengyi gambles to win, otherwise it will face big problems. This is why Sun Zhengyi insisted in the interview that even though some investments face losses, some high-quality investments of the Vision Fund will still allow the fund to achieve a return of more than 7%.

It is worth noting that the Vision Fund is also superimposed with a second layer of debt. Due to the difficulty in realizing the investment projects, the Vision Fund has been borrowing externally to supplement liquidity in the past two years, leading to further expansion of the Vision Fund ’s risk exposure. Part of the funds raised from the Vision Fund ’s debt is used to pay dividends on preferred stock, and the other part, according to Sun Zhengyi’s 2018 interview with the Wall Street Journal, is used to make more investments. How much debt did the Vision Fund borrow? A Techcrunch report estimated that the Vision Fund ’s debt could reach US $ 14.6 billion.

Financial leverage is very common in PE funds, because PE funds invest in companies with stable cash flow, which can guarantee the repayment of principal and interest. The Vision Fund is a huge VC fund, and most of the technology companies it invests in lack of profitability. The introduction of debt financing in VC funds has set a precedent for the Vision Fund.

The Empire on Debt Quicksand

Softbank’s dependence on debt is not new. Radical expansion with high leverage has always been the label of Sun Zhengyi and Softbank. From 2009 to 2018, after a series of large-scale investment and mergers and acquisitions, Softbank Group’s total assets increased by 8 times, Sun Zhengyi was shaped as the world’s technology godfather. Accompanying this is Softbank ’s increasing debt.

In 2013, Softbank Group spent US $ 20 billion to acquire US telecommunications company Sprint. This big gamble doubled the total assets of SoftBank Group and tripled the size of interest-bearing liabilities, causing both Moody’s and S & P to downgrade SoftBank’s credit rating to “junk”, which has not recovered since. In 2016, Softbank spent another US $ 32 billion to acquire the British chip design company ARM. By the end of the year, Softbank ’s debt balance reached US $ 125 billion, which was the culmination of Softbank ’s debt expansion.

Sun Zhengyi proposed to raise the Vision Fund in 2016. Regardless of the true motives, objectively, Sun Zhengyi can continue to make large investments, whileNor will it continue to increase the burden on the Softbank Group’s balance sheet because the latter is already clearly overwhelmed. However, as mentioned earlier, the Vision Fund itself actually contains a lot of debt. The entire SoftBank Empire’s dependence on debt has never been lifted.

When the market cycle is up and liquidity is abundant, debt is not a problem. However, after the risks of SoftBank Group and Vision Fund were exposed in 2019, the debt problem began to become prominent.

In March 2020, S & P and Moody’s successively lowered the SoftBank Group’s credit rating. S & P adjusted SoftBank Group’s rating outlook to negative; Moody’s downgraded SoftBank Group’s rating from two levels, from Ba1 to Ba3, and the outlook is a negative observation. SoftBank’s CDS (Credit Default Swap Contract) rose to a 10-year high. The British “Financial Times” said that the famous hedge fund Apollo Global Management has been planning to short the SoftBank Group’s bonds since the end of 2019.

Yoshikawa Nishikawa, a global rating analyst at S & P, said: “Softbank is constantly facing new fundraising needs. If the current turmoil in the credit market continues, it will be difficult to obtain funding.”

In addition, Japanese regulatory documents show that Sun Zhengyi personally mortgaged Softbank shares to multiple banks in March 2020, and the proportion of equity mortgages increased from 48% in June 2019 to 60%.

Although Softbank Group ’s debt problems have caused growing concerns, Softbank Group insists that its debt burden is controllable.

At the end of fiscal 2019, Softbank Group ’s asset-liability ratio was 72.8%. As of May 9, 2020, Softbank Group consolidated interest-bearing liabilities of 15.7 trillion yen, of which Softbank Group-level total interest-bearing liabilities were 6.7 trillion yen and net interest-bearing liabilities were 4.4 trillion yen.

Softbank Group ’s debt composition

Softbank Group ’s interest-bearing debt scale 1465