Macaskill on markets: SoftBank’s Vision Fund moves into DCM and ECM

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By:
Jon Macaskill
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SoftBank and its roughly $100 billion Vision Fund face growing questions about their use of leverage and the size of stakes built in technology-related companies.

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The failed IPO of WeWork and a fall in the value of Uber – two big holdings for Softbank's Vision Fund – is likely to complicate the closure of a second Vision Fund, which was announced by SoftBank in July with an expected capital of $108 billion.

The existing Vision Fund is nevertheless pressing ahead with plans to boost its ability to provide debt and equity capital market services to the companies in which it invests. The fund – the biggest single investment vehicle of its type – will accordingly join other investors, such as KKR, in effectively bringing some capital markets functions in-house.

This trend could threaten the future advisory fee income of banks, especially mid-tier firms, which are already suffering from an erosion of their ability to profit from providing trading services to clients.

John Pipilis, until recently the head of fixed income at Deutsche Bank, will lead a move to boost DCM services for the Vision Fund; while Mark Agne, a one-time head of securities for Japan and co-head of Asian equity trading at Goldman Sachs, will run ECM functions, Euromoney understands.

Pipilis and Agne are joining the Vision Fund at a time of turmoil. 

Pipilis, in particular, could be forgiven for wondering if he is jumping from the frying pan into the fire as he signs up with an array of former colleagues from Deutsche, led by Vision Fund chief executive Rajeev Misra.

The Vision Fund is unusually structured for a large investment vehicle, with a heavy reliance on debt-like preferred securities that pay a coupon. Both the existing Vision Fund and the planned second fund also encourage employees to take large personal stakes, often via loans.

Gamble

A move to align the interests of partners in an investment firm with outside investors is not uncommon. But the appetite of SoftBank chairman Masayoshi Son for enormous bets on individual companies in volatile sectors, combined with his willingness to use stakes as collateral for debt financing, are likely to create some nerve-shredding moments for junior partners in the Vision Fund and its planned successor.

Son’s habit of announcing his investment plans before they are fully fledged may exacerbate tensions, although new hires cannot say they were not warned by his previous actions.

The announcement of the target for the second Vision Fund represents another gamble. 

SoftBank said on July 26 that the expected total capital of the new fund had reached $108 billion, based on signed memorandums of understanding. It added that SoftBank group intends to contribute $38 billion and listed a series of companies that are expected to participate, including Apple, Microsoft, Standard Chartered and an array of Japanese banks. 

Insiders at the firm say that Son faced considerable scepticism when he announced the formation of the original Vision Fund 

The statement closed on an upbeat note by declaring that discussions were ongoing with additional participants and saying that the total anticipated capital for the fund was expected to increase.

The announcement raised multiple fresh questions, however. It failed to detail any commitment from the biggest outside investors in the original Vision Fund – the sovereign wealth arms of Saudi Arabia and Abu Dhabi – which immediately set off speculation that they might be balking at adding more money. 

Observers also noted the lack of information about firm commitments of capital from the listed participants. Insiders at the firm say that Son faced considerable scepticism when he announced the formation of the original Vision Fund but went on to raise almost $100 billion within a year.

Another set of former Deutsche employees who now work at Centricus and Cantor Fitzgerald continue to act as placement agents for the second Vision Fund, and the challenges faced in the current market environment are not preventing a move to increase debt and equity capital market services to companies in which the fund holds stakes.

It is not clear how much the Vision Fund initiatives headed by Pipilis and Agne will overlap with services traditionally provided by banks.

Competition

Private equity firms have a mixed record of competing with banks in an effort to cut their own payment of fees and create additional revenue streams.

Blackstone made an ambitious move into advisory investment banking when it hired John Studzinski – a veteran of Morgan Stanley and HSBC – in 2006, along with other mergers bankers. 

Just under a decade later, in 2015, Blackstone spun off its investment banking business to PJT Partners, a boutique firm led by Paul Taubman, another Morgan Stanley veteran, however. 

Blackstone founder Stephen Schwarzman said at the time that conflicts of interest were hampering the efforts of its bankers to win business from clients that were competitors of the firm’s bigger investment operations.

KKR, by contrast, has maintained a presence in capital market service provision that includes competition for business from firms outside its own portfolio of companies. KKR Capital Markets, which is run by Adam Smith, had over 55 front-office staff across its debt and equity financing business in the middle of this year.

Large investors ranging from KKR to the SoftBank Vision Fund that seek to provide debt and equity capital markets services are unlikely to pose much of a threat to the dominant global investment banks, with their specialist coverage and ability to fund hefty bridge loans. But they may well chip away at the franchises of mid-tier banks, which have a less compelling value proposition.

The squeezed middle class has become an area of study for economists in recent years, as rising income inequality affects the prospects and outlooks of people who formerly felt relatively prosperous.

A version of this trend could be coming to the financial markets, as a squeeze on the firms in the middle of the investment banking pack leads to more employment fallout, unless individual bankers can adapt to changes in their own ecosystem.