The Bank Inside SoftBank
Masa Son's Financial Alchemy
As I approach the fifth anniversary of Net Interest (more on that next week), I realize there’s one significant financial institution I haven’t written about. It calls itself a bank, but its founder insists it isn’t one. “I am Masayoshi Son, and SoftBank is not a bank,” Son declared at a press conference following a meeting with then-President-elect Trump in 2016.
The name ‘SoftBank’ reveals more about the company’s origins than its function. In the early 1980s, Son started as a software distributor in Japan, and according to Lionel Barber’s biography, Gambling Man, he named his company to “encapsulate the notion of a store of value as well as the software product itself.” Son’s ambition was evident from day one. Standing on a tangerine box in a tin-roofed office in Fukuoka, he delivered a rousing speech to his workforce (comprising one full-time employee and one part-timer): “You guys have to listen to me because I am president of this company. In five years, profits have to be 10 billion yen, then in ten years 50 billion. Eventually I want to count profit in trillions of yen.” Son’s challenge at the time was finding enough working capital to pay for inventory – a difficult hurdle for an untested outsider.
This week, SoftBank Group (SBG) reported just over a trillion yen of profit for its latest financial year – fulfilling Son’s tangerine-box prophecy. It’s not the first time SoftBank has crossed this threshold, but the journey has been anything but linear. Son transformed the company multiple times: from software distributor into an internet-media conglomerate in the late 1990s, then into a broadband and mobile operator in the 2000s, and finally, by the mid-2010s, into one of the world’s largest technology-investment groups. Through all these shifts, Son’s reliance on debt and other forms of leverage remained the constant factor, resulting in significant volatility in the company’s earnings and net asset value.
“He borrowed a shit ton of money,” recalls a long-time associate interviewed by Barber. “It's like a drug. When you enjoy the benefits of leverage with all this upside, you can’t get off it.” This addiction to leverage became a defining characteristic of SoftBank’s strategy.
In recent years, Son has turned to an even more direct form of leverage: mimicking banks themselves. Earlier this month, the company completed its largest retail bond issuance ever: ¥600 billion in 5-year bonds at a 3.34% coupon. In its earnings presentation, the company boasts that “SBG retail bonds [are] now on par with major regional banks’ time deposits.” With ¥4.5 trillion in retail bonds outstanding (equivalent to $30 billion), SoftBank’s funding base rivals that of established financial institutions like SBI Shinsei Bank and Fukuoka Financial Group. Through its substantial retail bond program, SoftBank has built a financing operation that functions much like a traditional deposit-taking institution – without the regulatory burden.1
His launch of the Vision Fund in 2017 introduced another strand of leverage. The fund raised $98.6 billion in committed capital to invest in private technology ventures, with SoftBank contributing around a third. “A critical differentiating factor of the Vision Fund was its embedded leverage in the form of ‘preferred equity,’” one of its architects, Alok Sama, writes in his own SoftBank memoir, The Money Trap. “In this the Vision Fund represented the convergence of two worlds that were hitherto a continent apart – Wall Street-structured finance and Bay Area technology. Over a private dinner a few months later, Goldman Sachs CEO David Solomon described this financial engineering as ‘pure genius.’”
Over the years, SoftBank’s leverage has been dialed up and down depending on market conditions. The latest results suggest Son is once again increasing his financial bets. SoftBank’s self-defined leverage ratio rose from 8.4% to 18.0% over the last financial year and is projected to reach 22% once newly announced investments are funded. These include an $8.5 billion investment in OpenAI (out of a promised commitment of $30 billion) and $6.5 billion to acquire semiconductor designer Ampere – both strategically positioned at the center of the AI boom. Yet the company’s true leverage exposure may be even greater.
To explore how SoftBank’s intricate financial engineering works, why its true leverage exposure may be substantially greater than reported, and the complex financial architecture behind Son’s bold multi-billion AI gamble, read on.
