Comment by mushufasa | Hacker News Reader

Comment by mushufasa | Hacker News Reader

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5% for a loan is pretty good these days if it's low risk. With yields way down and now negative, it's hard for companies to make use of cash reserves. If SoftBank has cash, and they know that employees are making way above 5% returns on average (cough Vision Fund), then it seems like a good investment.

For example,

0) SoftBank loans extra cash to Masayoshi Son.

1) Masayoshi Son invests a portion in the next Vision fund which makes 40% returns, and the rest in safer strategies (public equities, long-term debt)

2) Masayoshi Son makes a killing, has no trouble repaying the loan.

3) SoftBank just grew their cash reserves well above the market rate.

The key assumption here is 2). But since this is a loan, and Masayoshi Son invested most of the money in safe investments (and has a lot of wealth anyways), even if the Vision fund underperforms, SoftBank can be confident they can still make money back (step 3). They're using their advantages to build their own unique loan product.

Why bother with the middle man? If Softbank is so confident that its vision fund is going to make much bigger than 5% returns, it should be putting the money directly into there.

The fact that it doesn't do this is a little ominous. Why does it believe that it will get a better return by loaning out cash at 5% rather than investing in its own fund?

Because you can't just take corporate cash and invest it in a private equity fund.

Fiduciary duty requires low risk products, and liquidity. Generally that means long-term debt (e.g. t-bonds) or 'corporate paper' which are nearly risk-free. Those yields are 3% or lower, certainly less than 5%. The risk profiles are about as far away from a VC fund as can be.

Generally a personal loan would be way too risky for corporate cash -- so this is actually an incredible show of confidence in the Vision Fund!

>>"Because you can't just take corporate cash and invest it in a private equity fund." Says who? And yes you can, indeed read their financial statements, SB Holdings is a principal investor through and through. It is the directors duty and their imperative as good corporate governors (a rare phenomena in Japan) to deploy and allocate capital in the most efficient manner possible to the highest return opportunities. This reeks of cronyism. The vision fund is a mess of hand marked low/negative free cash flow generating businesses, check out their share price performance in 2001, for a preview of what's to come.

>Because you can't just take corporate cash and invest it in a private equity fund. Fiduciary duty requires low risk products, and liquidity.

I call bullshit. Specifically, what you wrote is not remotely true under US law or under Japanese law.

A company's managers have very broad leeway to spend the company's cash however they like. In fact, if the cash, treasuries, corporate paper, etc, of a company starts to pile up over the years, the markets tend to take that as a sign of managerial incompetence or at least managerial lack of vision.

Anyone that can buy and hold shares in SoftBank can also hold cash, treasuries or corporate paper directly. In other words, SoftBank's investors don't need SoftBank to hold cash, treasuries or corporate paper on their behalf; they invest in Softbank because they expect that SoftBank has a more ambitious plan than that. Creating and selling the iPhone is an example of an ambitious plan that turned out extremely well for investors in the company with that plan.

If that argument is not persuasive enough, consider this concrete counterexample to your claim: for 6 years, Google had a venture-capital arm:

https://en.wikipedia.org/wiki/GV_(company)

Specifically, although GV is currently owned by Alphabet, for a period of 6 years before that it was owned directly by Google (under the name Google Ventures I believe).

can't as in "that asset class does not meet the risk and liquidity requirements for cash management in general"

not can't as in "de-facto illegal."

dereliction of fiduciary duty is illegal, of course the circumstances matter.

I think you are conflating capex + investments with overall cash management.

They already invest a lot in the vision fund. This is a way for them to route more money into the vision fund on top of what they already invest, by tapping into an additional asset class within their portfolio allocation.

If a company's portfolio is a high percentage of cash management products, that's a bad sign of low innovation. If the portfolio is too low a percentage, that's a bad sign also because they would be unable to access liquidity to cover operations given a downturn or sudden need for capex etc... Different companies have different allocations but healthy companies (including google) have allocations into a diverse bucket of asset classes...

> consider this concrete counterexample to your claim

The fact that Google also has a VC arm is not a counter argument. Google allocates some amount of its cash into cash management products as well.

> SoftBank's investors don't need SoftBank to hold cash, treasuries or corporate paper on their behalf

Their customers do. They're still a major telecom company in Japan -- they certainly have operations they need to protect.

I agree that a company needs to make sure it has enough cash and cash-like assets to cover their expenses. Failure to do so has often resulted in the dissolution of the company although it is very rare for that to be the root cause of the dissolution of a public-traded company of SoftBank's size. But again management has broad leeway here. Can you cite one example of a company that was sued because management ran out of cash and cash-equivalents?

When you say "fiduciary duty", you imply that the company can be sued.

>Different companies have different allocations but healthy companies (including google) have allocations into a diverse bucket of asset classes

OK, but that's different from your "you can't just take corporate cash and invest it in a private equity fund". If you'd written instead, "having their employees carry some of the equity risk is a way for SoftBank to increase the size of the private equity fund while continuing to make sure that they have enough cash to continue operations", I wouldn't've felt the need to call you out.

I don't know enough about Japan to say, but if it were a US company making this move, I would be more inclined to believe that the loans are mostly intended as a perk for employees like this comment claims: https://news.ycombinator.com/item?id=20736072

A company that held ALL its cash in a back account would be failing its share holders.

I think maybe you misunderstand what "fiduciary duty" means here.

This isn't dereliction of fiduciary duty. It's not illegal for a company to go bankrupt or to spend all of it's money on highly risky investments and lose it all as long as it is done in good faith, and there aren't any magical guidelines for risk and liquidity requirements that companies have to accept legally. Management can do whatever they think is the best thing to do for the firm that doesn't break the law.

Why bother with the middle man? If Softbank is so confident that its vision fund is going to make much bigger than 5% returns, it should be putting the money directly into there.

This is a perk for employees. Stock options/RSUs on steroids. It’s nothing more complicated than that.

It’s unusual to do it this way in tech but in big accounting and law firms giving favourable loans for people to “buy into” the partnership is business as usual.

Yes, this is more convincing, but is still a little concerning. Given current interest rates, presumably these people 'gifted' the 5% loans could have already borrowed money at lower cost, they just wouldn't have had any access to throw the money into the vision fund.

Perhaps the borrowers can take the cash, invest it, then borrow elsewhere at lower rates to pay back the more expensive loan? In all, it still seems a vastly complicated scheme for the attested goals. I guess that there are tax reasons behind it all.

I find this strange too. I think they're trying to reduce risk. This basically transforms what would otherwise be an equity investment into a debt investment which lowers overall risk

And if the Vision Fund doesn't generate profitable returns? How levered are the employees?

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