News of the potential purchase of a 33% stake in Swiss Re prompted the vague but optimistic talk of potential technological synergies that accompanies any SoftBank deal.
Swiss Re played along with this narrative in its full-year 2017 earnings announcement on February 23 by highlighting the work it is doing on technology solutions, such as a machine-learning pricing platform for insurance policies.
“This platform can be leveraged for multiple parametric insurance products, such as those covering earthquakes or delayed airline flights,” Swiss Re said.
A key question for followers of SoftBank is how traditional financial leverage will be deployed by a company that has also gone long the complex structuring abilities of a huge team of bankers led by Rajeev Misra, former head of credit at Deutsche Bank.
It could be argued that the potential stake in Swiss Re will provide Misra with influence over around $250 billion of investment firepower – before application of additional leverage.
Misra heads the $100 billion SoftBank Vision Fund that is the largest technology investor in the world. Some $93 billion of the total has already been committed by investors including Saudi Arabia’s sovereign wealth fund and Apple, so that money is effectively in the bank.
Misra also played a role in the $3.3 billion purchase last year of Fortress, the New York-based investment group where he briefly worked after stints at Deutsche Bank and UBS.
Fortress cut its balance sheet by roughly half ahead of closure of its sale to SoftBank by off-loading a low-margin fixed income asset manager called Logan Circle to MetLife. That deal left Fortress with $36.1 billion of private equity and hedge fund assets.
A stake of a third of Swiss Re will not give SoftBank access to the premium float from insurance policies that Warren Buffett has deployed through the years as owner of Berkshire Hathaway. Buffett’s insurance premium float hit a record of $114.5 billion at the end of last year, and in a recent investor letter he fuelled speculation that he may soon use funds for a massive deal.
Swiss Re wrote premiums of around $35 billion in each of the last two years, but has to use proceeds to run its core businesses and, like any reinsurer, must maintain strong capital and a high credit rating.
'WeWork is working to create a world where people make a life and not just a living,' is an example of a recent glib and virtually meaningless Adam Neumann pronouncement
Swiss Re also has an investment portfolio of around $116 billion, however. SoftBank won’t get direct control over those funds either with a minority shareholding in Swiss Re, but it will at least get an opportunity to push for co-investments as it searches for growth opportunities.
A similar approach could be taken with Fortress, which is now fully owned by SoftBank, even though it has pledged to leave the asset manager with functional independence.
The ultimate success of SoftBank – and its Vision Fund – will depend on whether or not it can find investments comparable to its stake in Chinese internet provider Alibaba.
That early purchase remains Masayoshi Son’s main unalloyed investment success, and the value of its current roughly 28% holding in Alibaba underpins SoftBank’s ability to fund its other activity.
Some of SoftBank’s technology investments make strategic sense, albeit with enormous associated risk. The recent $7.7 billion investment in Uber has obvious potential synergy with SoftBank’s stake in DiDi, by linking the biggest car-hailing app firms in the US and China, for example.
Other investments seem to be based on a bet that simple rebranding and application of technology sloganeering will bring sustainable growth. Putting $4.4 billion into WeWork may fall into that category.
WeWork is an office co-working business that is targeted at young customers; founder Adam Neumann’s relentless repetition of buzzwords might have reminded Masayoshi Son of his own talents for the art of the elevator pitch.
“WeWork is working to create a world where people make a life and not just a living,” is an example of a recent glib and virtually meaningless Neumann pronouncement, and the firm could be viewed as simply a very highly valued (around $20 billion) real estate rental play based on luring millennials with the promise of free beer.
So this could prove to be either a stake in a transformation of the future of working, or an investment that quickly brings its own headaches, like SoftBank’s stake in troubled online US lending firm SoFi, where Euromoney highlighted the risks of buying into the sales pitch of an aggressive company founder.
Some investments are reminiscent of the internet bubble at the end of the 1990s. SoftBank recently committed $300 million to a firm called Wag! (‘A dog’s best friend’), which bills itself as the number one on-demand dog walking app in the US, for example.
Students of investing history will recall the fate of Pets.com, which collapsed less than a year after its IPO in 2000, and at the least Wag! appears perilously exposed to the risk of the emergence of an app called Sit! that undercuts its business model.
Question of pay
While SoftBank places bets of different sizes, there is also the question of how it will pay the team of bankers it has gathered under Misra.
He and subordinates like Colin Fan – a former co-head of investment banking at Deutsche Bank – came of age in the pre-2008 crisis era, when bankers with a talent for structuring could earn annual bonus payments over $10 million and there were lucrative opportunities for co-investment in certain deals.
Misra noted in a recent speech to a Goldman Sachs conference that “we have to pay our employees based on carry” created by the SoftBank Vision Fund. That will be ultimately determined by the value of investments but can be impacted by use of leverage, an area where he and his team of former bankers are experts.
Working out how this will affect returns for SoftBank shareholders and investors in its Vision Fund will be extremely challenging for outside analysts.
SoftBank hedges its presentations to investors with qualifications about potential changes to treatment of different holdings.
The Uber stake is currently held by SoftBank group but might in the future be offered to the Vision Fund, while the DiDi stake is held in the Delta Fund, which is run alongside but is technically separate from the Vision Fund, for example. And while the Vision Fund and Delta Fund segment currently has a relatively modest amount of attributed debt at just over $3 billion, that could change.
Derivatives trades on equity holdings could also affect returns. In its results for the nine months to the end of 2017, SoftBank had an accounting loss of around $4.5 billion due to a collar on a prepaid forward contract designed to monetize Alibaba shares, which is a reminder of how financial engineering can affect reported earnings. The Vision Fund has already pledged some equity holdings as collateral for borrowing, which could affect the liquidity of stakes.
Masayoshi Son has compared himself to Warren Buffett in justifying his stake building. The complexity and uncertainty in SoftBank’s portfolio probably explains why investors aren’t buying into that pitch so far.
Buffett’s Berkshire Hathaway trades at a premium of roughly 50% to the reported value of its assets, while SoftBank shares are often at a similar discount to the portfolio that Son built.