Lionel Barber is former editor of the Financial Times. He is author of "The Powerful and the Damned: Private Diaries in Turbulent Times."
The history of SoftBank under its founder Masayoshi Son has been marked by spectacular wagers on the future, from the earliest days of the internet to today's unicorns in fintech, ride-hailing super apps and artificial intelligence. As SoftBank has grown, so too have the bets, culminating in the launch in 2017 of the $100 billion SoftBank Vision Fund principally backed by Saudi Arabia.
Son has boasted of "drowning" his portfolio companies in capital, giving them more cash than they need so they can grow as fast as possible, along the lines of Alibaba Group Holding, one of his most successful investments. This is the "halo effect," the theory being that first-mover advantage will give the next generation of Alibabas the muscle to crush the competition. In practice, things have not always turned out that way.
After the dramatic implosion in 2019 of WeWork, the U.S. commercial real estate company, an equally colorful story is unfolding in the U.K. with the collapse of Greensill Capital, a SoftBank-backed startup specializing in supply chain finance which advertised itself as "the Amazon of the working capital world."
The saga has embroiled former U.K. prime minister David Cameron, a paid adviser to Greensill, amid controversy over the company's lobbying and access to the cabinet office, the heart of the U.K. government. But the company's collapse also raises awkward questions about the circular relationship Greensill enjoyed with SoftBank and its other principal venture capital backer, U.S.-based General Atlantic.
Lex Greensill, a former Morgan Stanley and Citigroup banker, set up his eponymous company in 2011. He offered a beguiling story about "democratizing" supply chain finance based on his youth growing up on a sweet potato and watermelon farm in Bundaberg in Queensland, where, by his account, his family business often had to wait months to be paid.
Greensill's startup was based on an old idea: invoice factoring. In essence, a supplier needing money gets the invoice paid quickly by the factor, albeit at a slight discount. The factor gets the full invoice paid later by the purchaser. The difference is profit.
Greensill's conceit was to turn the model upside down, offering "reverse factoring." This involved taking a cut from the purchaser, in this case the U.K. government or blue-chip companies like Vodafone, the U.K. telecoms group.
A U.S. private equity executive who met Greensill several times says the Australian was a charismatic presence, fast-talking and fluent in numbers. "He sounded like he had a bulletproof model."
Bulletproof, because Greensill clients were seemingly highly creditworthy -- the U.K. government does not go bust. Greensill was able to package up the debts his company was owed into short-term bonds, which he could sell profitably to investors at investment grade via specialist funds managed at Credit Suisse.
These bonds were in turn underwritten by insurance companies, notably The Bond & Credit Co., an Australian insurer acquired in 2019 by Japan-based Tokio Marine. But last summer, Tokio Marine halted coverage, apparently unnerved by the scale of leverage or perhaps the quality of debt Greensill was taking on.
There followed a frantic search for alternative financial backing, including a $440 million infusion of capital from SoftBank into Greensill to pay off investors in the Credit Suisse funds. But the cash never made it to the Swiss bank. Greensill put it in his own German bank, according to multiple reports.
The SoftBank rescue operation was understandable, given its 15% to 20% stake in the company. But aside from being a part owner of Greensill, SoftBank was also lending through Credit Suisse funds, and acting as a borrower through its Vision Fund.
SoftBank did redeem its position in the Credit Suisse funds in July 2020, but the Financial Times and other news organizations have reported that four SoftBank portfolio companies were among the Top 10 exposures of a Credit Suisse fund that extended finance to Greensill. Son, it seems, wears many hats.
On the other side of the ledger, there are many questions regarding related party transactions or so-called "circular financing." For example, Greensill lent money to either the funds or portfolio companies of both SoftBank and General Atlantic -- an unusual activity for a startup. In one instance, General Atlantic received a 300 million euro ($360 million) loan which it used to fund the purchase of shares in a joint venture with Deutsche Boerse. (GA has since repaid the loan, after securing a high-interest loan from Goldman Sachs).
In 2019, Greensill claimed to have provided $150 billion of financing to more than 8 million suppliers and customers in 165 countries in the world. Among those was Sanjeev Gupta, an Indian-born British businessman who ran a steel empire to which Greensill was heavily exposed, and which is now teetering on the brink of collapse.
Yet, just two years ago, thanks to the SoftBank and General Atlantic backing, Greensill was on track for an initial public offering with a valuation of up to $7 billion, which would have been a life-changing event for David Cameron, who held 1% of the stock.
With hindsight, Greensill's heady valuation was based in part on a single investment, the initial $800 million provided by SoftBank's Vision Fund, (later supported by a further $700 millon). Whether or not that investment encouraged Greensill's reckless dash for growth is open to dispute.
Son and his Vision Fund appear set to secure billion-dollar gains from South Korea's Coupang and Singapore's Grab as the one-time startups float on U.S. stock markets. But after the WeWork debacle, the Greensill affair shows that SoftBank's "halo effect" has lost a little more of its magic.