At $100 billion, the SoftBank Vision Fund is both the largest private equity fund ever raised and one of the most complicated.
On the heels of some public wounds with the likes of WeWork and Uber, I wondered why the keen interest in supply chain finance (SCF).
Recently, the fintech firm C2FO raised $200 million in financing led by the SoftBank Vision Fund, valuing C2FO at $1.3 billion, post-money. Back in May 2019, Greensill announced an $800 million investment by the SoftBank Vision Fund. Following this initial $800 million investment, the SoftBank Vision Fund invested an additional $655 million in Greensill in October 2019, making a total of $1.455 billion.
According to Financial News, Greensill deployed Softbank’s first $800 million investment in the following manner: $300 million went to pay off investors, $439 million to beef up capital in the bank, and the rest ($61 million) for working capital. Lex Greensill at the time cited concerns he and his board had of a bearish economy and hence wanted to beef up capital to be used as a warehouse to hedge against trade credit demand.
Given we are long in the tooth in the credit cycle, a credit market that has been prompted up by permanent qualitative easing from the Fed, Japan, ECB, etc., you wonder why now? How are these supply chain finance companies raising cash from SoftBank?
Maybe an illustrative slide used by SoftBank to show how they will turn around WeWork tells all. This one was the most eye-catching and was titled “Hypothetical Illustration of EBITDA.”
So my guess with the pitches for supply chain finance went something like this. (Note: I am borrowing from Bob Solomon’s piece.)
The opportunity for early pay is staggering, considering that:
- The global economy is $80 trillion.
- Days payable outstandings (DPOs) are at record highs, especially large corporates (Note: According to Hackett’s 2019 survey, large companies paid suppliers 1.6 days faster in 2018, and appear to have stopped lengthening payment terms to suppliers, but who knows).
- On any given day, U.S. suppliers have $3.1 trillion in accounts receivable.
- A significant portion of that credit is with companies that have high costs of capital.
I would also add that all the noise you hear about funding gaps creating haves and have nots. For example, according to the World Bank, more than 50% of SMEs lack access to finance, which hinders their growth. The Asian Development Bank (ADB) uses a survey to estimate the trade finance market gap and claims that financial institutions failed to provide $1.6 trillion in needed capital.
So you see, you don’t need much in the way of a pitch to get your hands on significant money. There’s even a behind-the-firewall story on Business Insider how C2FO did this with no pitch deck.
Part of the answer may lie in just how SoftBank is constructed. According to Dan Primack, business editor for Axios, sovereign wealth funds from Saudi Arabia and Abu Dhabi control $75 of the $100 billion, and their commitments are structured in two parts:
- Common, whereby limited partners (LPs) receive a percentage of any positive investment returns.
- Preferred, whereby LPs receive the 7% annual coupon on invested capital, plus a percentage of any positive investment returns.
7% is a pretty big nut to hit in any day, but especially in this time of ZIRP and NIRP. That kind of structure is attractive to anyone. Primack went on to say that of the $1.6 billion in coupon payments to date, only $400 million has come from distributions (Flipkart and Nvidia). The rest came from capital calls from outside LPs (that’s the equivalent of paying yourself).
Could supply chain finance returns be part of the future answer? Perhaps. Especially if the Vision Fund can’t meet future coupon obligations due to their portfolio underperforming. When there is no transparency, there is only guesswork. But $1.65 billion invested in supply chain finance is certainly a strong bet on this space. What few people seem to understand is that there are many flavors of supply chain finance, meaning there are many bespoke solutions each running their own sausage factory, and as usual, the devil is in the detail.
In sum, I am not trying to say that SoftBank should not invest in supply chain finance, and am only surmising the reasons why above. I reached out to them to try to better understand what due diligence they have done to make these substantial investments and am still waiting for a reply. The Business Insider article certainly implies a limited amount, and the presentation on WeWork post IPO disaster was also not a good data point. But these investments could prove to be incredibly valuable over the next few years, as access to liquidity tightens up as many believe.
Interesting space to watch for sure, especially when the Big Boys enter.
