Circular Investing 101: Softbank To Lend Billions To Founder, Employees To Invest In Second Fund

The Soft Bank Vision Fund Pt. II is supposed to pick up whee is predecessor left off. With some $108 billion from a smattering of corporate giants, pension funds and sovereign wealth fund already committed, the VFPt2 is expected to start putting money to work as soon as October, at which point it will likely be the largest pool of private capital ever raised. 

The timing is particularly important since, due to obligations and disbursements to its early investors, the original fund is almost officially tapped out.

Soft Bank's Masayoshi Son

But in an unusual strategy intended to juice Pt. 2's AUM, the FT and WSJ both reported over the weekend that the company is planning to lend money to the firm's founder, Masayoshi Son, and several other high profile employees to the tune of some $15 billion to $20 billion so that they, in turn, can invest in VFPt2.

In other words, Soft Bank is doing everything it can to push the leverage for its latest Vision Fund to ensure that its debut is as grandiose as possible.

To describe this strategy as unusual is an understatement. Typically, investment firms reward employees for their hard work on assembling and marketing a fund by bequeathing them a share of the profits. Instead, Soft Bank is setting up a different system that will doubly expose both the company and its employees to the fund should returns head south.

At $20 billion, the employee pool would represent nearly 20% of the money that Soft Bank said it had raised last month for its second Vision Fund. Of course, this money comes on top of the $38 billion in Soft Bank's own money that it's planning on investing in to the fund (following the completion

On top of that, Soft Bank has committed $38 billion of its own money for the fund (much of which will ideally come from the T-Mobile Sprint merger). This, combined with the employee loans, means that more than half of VFPt2 will consist of Soft Bank's own money, leaving the company, and its employees extremely exposed should its returns go south. Then again, despite high-profile flops like the Uber IPO, Vision Fund Pt.1 still posted blockbuster returns of roughly 50%, or more, according to Masayoshi Son.

A similar arrangement whereby the company lent money to employees for the explicit purpose of them buying into the fund, adding even more leverage than most investors realize. According to the FT, employee contributions to funds like this typical range around 5% of total AUM, and the money typically doesn't come in the form of loans that boost the company's exposure. All told, Soft Bank's position into the fund is already being financed by debt, and these employee loans will only increase the leverage ratio.

Still, the company hasn't finished raising money for VFPt2 yet. SoftBank is aiming to announce a first close of its latest Vision Fund by October, so that Masayoshi Son can continue his spending spree. In the mean time, he's continuing to try and recruit Saudi Arabia and the UAE to commit more capital to the second fund.

Other investors in the fund include a Kazakhstan sovereign wealth fund, which is likely to contribute about $3 billion, and several banks, including Goldman Sachs Group Inc., Standard Chartered and Japan’s Mitsubishi UFJ Financial Group. SB's bankers are still hard at work trying to win more capital.

Underscoring all of this is the WeWork IPO, which is expected to drop in September. Vision Fund Pt. 1 invested $2 billion in the 'community lifestyle' company.

Just like it did with its first Vision Fund, many expect Soft Bank will IPO Vision Fund Pt. 2, allowing early investors the opportunity to exit early.