Macaskill on markets: SoftBank strides into the shadows
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Macaskill on markets: SoftBank strides into the shadows

SoftBank’s $3.3 billion purchase of Fortress Investment Group could mark a shift into shadow banking that is as important as its much-hyped plan for a $100 billion technology fund.

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Illustration: Kevin February

The agreed bid for Fortress took most investors by surprise, with the notable exception of whoever made a profit of around 400% from trading options in the firm’s stock in the hours before the sale to SoftBank was announced.

SoftBank is a Japanese telecom and technology firm with an eclectic assortment of subsidiaries, but even the announcement last October by founder and CEO, Masayoshi Son, of a $100 billion technology fund had not prepared observers for the purchase of private equity and asset manager Fortress. 

Longstanding contacts between senior managers at SoftBank and Fortress explain the genesis of the deal, while expansion as a lightly regulated shadow bank may be key to the post-purchase future.

Fortress has struggled at times as an investor but it has always had a knack for tapping into the financial zeitgeist, and its sale to SoftBank could help it profit from two of the biggest opportunities in global markets today: accessing funds from sovereign wealth investors and expanding in shadow banking.

It was founded in 1998 as a private equity firm by former BlackRock partner Wes Edens and UBS veterans Randy Nardone and Rob Kauffman, before expanding into real estate finance and hedge fund investing with the addition of former Goldman Sachs partners Pete Briger and Michael Novogratz

Aggressive proponent

Fortress was the first private equity and hedge fund manager to list publicly in the US and is an aggressive proponent of the view that a macro hedge fund would provide diversification in earnings to balance the long-only exposure inherent in private equity and real estate deals.

Both these steps ultimately left junior investors in Fortress badly bruised, while causing little long-term harm to its principals. 

Fortress went public almost exactly a decade ago in an IPO led by Goldman Sachs and Lehman Brothers, when the latter bank was only 19 months away from the collapse that precipitated the global credit crisis.

Fortress had its own near-death experience in 2008. Its shares floated at $18.50 in February 2007 and briefly almost doubled, before falling below $1 during the crisis. They never subsequently recovered their IPO level. In later years, its macro hedge fund appeared to have developed a sustainable investment strategy, but made a series of trading missteps beginning in 2014 and was closed in late 2015 after substantial losses.

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These blows for end investors did not stop the firm’s principals from continuing to amass assets and it currently has around $70 billion under management. The principals never saw the need to risk more of their own money by taking the firm private after its stock slumped, either. 

This blithe approach was vindicated when SoftBank bought the firm for $3.3 billion in cash, which at $8.08 per share was a premium of around 50% to the average recent Fortress stock price, although little more than 30% above the level that was seen after some highly suspicious trading just before the deal was announced on February 14. 

Deutsche Bank did not win a slot as a co-lead on the Fortress IPO in 2007 but it put a lot of effort into cultivating Fortress as a client at the time. Novogratz, who headed macro hedge fund trading for Fortress until his departure in 2015, was a VIP guest at a derivatives conference for clients that Deutsche Bank held in Barcelona in June 2007, featuring a now-infamous performance at dinner by the Rolling Stones, at a cost to the bank of over €4 million.

Briger was also a coveted client, which may explain why he hired Rajeev Misra, a former head of credit trading at Deutsche, as a Fortress employee in 2014.

Misra, who had a stint at UBS after leaving Deutsche in 2008, only stayed with Fortress for a few months before joining SoftBank in November 2014. That appears to have been long enough to give him an insight into Fortress and a bond with Briger that was key to SoftBank’s purchase.

SoftBank says that Fortress will operate as an independent business but an expansion of some of its shadow banking activity would make a more obvious fit for Misra’s background than his current role as head of the planned $100 billion SoftBank Vision Fund, with its stated aim of technology investments.

Misra was one of the sharpest elbowed practitioners of credit structuring before the financial crisis. 

A recent Fortress deal to take a major stake in a €17.7 billion ($18.6 billion) portfolio of non-performing Italian loans from UniCredit is more the type of transaction in which Misra specialized when he was a banker than any decision on a new technology investment.

Technology sector specialists have been wondering where exactly SoftBank hopes to invest the $100 billion planned for the Vision Fund. A gradual blending of activities with Fortress and its $70 billion of assets may provide a partial answer.

After all, the word technology can be interpreted loosely. Fortress already operates in areas of shadow banking that are being transformed by technology. It owns one of the largest mortgage servicers in the US, for example. It would not be too much of a stretch for SoftBank to make substantial investments in other areas of shadow banking under the guise of technology, rather than focusing on competing with Silicon Valley specialists and established technology giants such as Alphabet or Facebook to find the next great innovation. 

Middle East

One area where SoftBank – and now the Fortress principals – have an advantage is in access to Middle Eastern sovereign wealth.

The Vision Fund that SoftBank announced last October was able to meet its eye-catching target of $100 billion because of a non-binding commitment to invest up to $45 billion by Saudi Arabia’s Public Investment Fund, which is chaired by deputy crown prince Mohammed Bin Salman.

Two former Deutsche managers who have connected SoftBank to Middle Eastern sovereign wealth – Dalinc Ariburnu and Nizar Al-Bassam – were also credited with “arranging” the purchase of Fortress in the recent deal announcement.

It is not clear what they contributed operationally to the deal, given that Misra already knew Briger and the set-up at Fortress.

It nevertheless seems that their contact with Middle Eastern money was significant, as the deal announcement noted that SoftBank “can bring in partners for a portion of the investment” in Fortress and that Al-Bassam and Ariburnu “will continue to advise SoftBank with respect to Fortress”. Ariburnu and Al-Bassam’s firm FAB Partners was unavailable for comment.

With access to sovereign wealth, an effectively unconstrained investment mandate and very little of the pesky regulation that slows down lumbering old banking giants, the principals of Fortress and SoftBank can now set out on the next leg of their adventures at the cutting edge of finance. 

SoftBank shareholders will have to hope that everyone is a winner this time round.

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