Softbank Vision Fund highlights how investors should analyse structures

A Financial Times article recently described the structure of the SoftBank Vision Fund.

The details reveal breathtaking audacity in terms of SoftBank laying claim to investor returns without transfer of an equivalent level of risk. To avoid competing accounts, I will use the FT as my source of information, as I am not so much interested in what SoftBank is doing as I am in how investors might analyse such structures.

The tech and innovation focused fund has gained fame due to its size, currently a reported US$93 billion in commitments. Less broadcast is that SoftBank’s 44 per cent internal rate of return over the past 18 years is driven predominantly by two investments, Alibaba and Yahoo Japan. But the issue is not about investment ability, it is about whether the structure is fair.

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Avoiding the Hannibal Lecters of the Investment World

Portfolio managers and investment analysts like to say that due diligence, a deep review or audit of a potential investment, is an integral part of their business. They are most probably lying, or if we want to be charitable, they are deluded.

Due diligence is not considered sexy. It involves legal, financial and operational reviews. Where are the six screens with hundreds of flashing numbers? Where are the bank of telephones with people shouting orders into them? Where are the oak-panelled boardrooms? The late nights at Cipriani’s and Harry’s? Where, when all is said and done, are the … well, let us not get too carried away.

Portfolio managers and investment analysts rarely perform due diligence personally. They rarely even lead the process. Just look at all the professionals taken in by the Madoff scandal. This is a shame, as due diligence is the only way to consistently make money.

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Disinformation in the Investment World

The main documents pertaining to the state of a business are either legally notarised, such as the memorandum and articles of association, or are heavily regulated, such as the audited financial statements and analyst reports. This information, however, is not enough to understand the business and quite often colour needs to be added in the form of written and verbal commentary from management. Regulation of this commentary is either light or easily circumvented allowing management to present a picture that is at best optimistic and at worst fraudulently manipulative. I had the unfortunate experience of being exposed to several such companies. Continue reading