‘Vicious circle’: SoftBank financial innovation fails at Greensill

The logo of SoftBank Group Corp is displayed at SoftBank World 2017 conference in Tokyo, Japan, July 20, 2017. Source: REUTERS/Issei Kato

SoftBank’s $100 billion Vision Fund loves financial innovation as much as the technological kind. Yet as Greensill Capital’s collapse demonstrates, byzantine funding structures can backfire.

The investor’s senior ranks are stuffed with financiers. Vision Fund boss Rajeev Misra previously headed fixed income at Deutsche Bank, and nine of 12 managing partners listed on its website are former bankers.

It’s, therefore, no surprise that financial engineering permeates the Saudi-backed fund. About 40% of its capital comes from debt-like preference shares. Misra also used asset-backed finance and equity derivatives as part of bets on taxi app Uber Technologies and chipmaker Nvidia.

Though transactions in the Greensill nexus were simple, the resulting web of cash flows was anything but. The Vision Fund invested $1.5 billion of equity in the supply-chain financier in 2019. By early 2020, Greensill was lending to other Vision Fund-backed startups like Indian hotelier Oyo. Those loans were ultimately financed by four funds managed by Credit Suisse Asset Management.

In theory, the arrangement allowed the Vision Fund to benefit from Greensill’s rising value while the startup supplied finance to its other portfolio companies. But when the pandemic hit and investors fled, Greensill faced a squeeze. As a result, SoftBank stepped in, injecting $1.5 billion into the Credit Suisse funds in March 2020, according to the Wall Street Journal.

In the end, everyone lost. Greensill was last year forced to forgive $435 million of credit to struggling Vision Fund-backed construction startup Katerra, receiving a 5% equity stake in the company. The Vision Fund responded by investing $400 million in Greensill through convertible debt, the WSJ reported. That investment, along with the original equity, is probably now worthless. Meanwhile, Vision Fund startups like Oyo face a scramble to replace supply chain financing provided by Greensill.

Though many details remain unclear, the Greensill saga echoes recurring themes in the Vision Fund’s short but turbulent history: a love of financial complexity, myriad potential conflicts of interest, and a fuzzy line between the fund and its Japanese parent company.

Financial engineering offers a few apparent benefits. The investor’s hits, like recently floated South Korean e-commerce group Coupang, have come from using its firepower to back fast-growing companies. Usually, simple is best.