Masayoshi Son, left, and Mohammed bin Salman © FT montage

As the global business elite deserted a Saudi Arabian investment summit a year ago, after the killing of journalist Jamal Khashoggi by Saudi agents, the founder of Japan’s SoftBank slipped into Riyadh for a discreet meeting.

Masayoshi Son and his chief lieutenant, Rajeev Misra, were there to see Mohammed bin Salman, the crown prince who had helped to make them the world’s most influential technology investors. Almost half of SoftBank’s $97bn technology-focused Vision Fund — the biggest pool of private money ever raised — came from the young royal’s sovereign wealth fund. 

Their message for Prince Mohammed was clear: SoftBank, they said, would not abandon him, people briefed on the conversation told the Financial Times. The crown prince pledged never to forget their loyalty.

One year later the strength of those bonds is being tested and plans for a long-awaited sequel to the Vision Fund are in serious doubt. 

Armed with Gulf capital, SoftBank poured into every corner of the digital economy and fuelled some of the world’s most richly valued private companies. Following Mr Son’s advice, many burnt cash in feverish pursuit of scale and market share above all else. 

Masayoshi Son, chairman and chief executive officer of SoftBank Group Corp., speaks during a news conference in Tokyo, Japan, on Thursday, Sept. 12, 2019. Yahoo Japan Corp.’s surprise plan to buy a majority stake in Zozo Inc. sent investors scrambling to pick potential winners and losers in Japan’s online retail and payments fields. Photographer: Akio Kon/Bloomberg
Following Masayoshi Son’s advice, many burnt cash in feverish pursuit of scale and market share above all else © Akio Kon/Bloomberg

But the near-collapse of SoftBank’s biggest gamble, co-working group WeWork, and the plummeting valuation of its other holdings have dramatically shaken faith in Mr Son’s investment genius and his bets on disruptive technology. 

If the troubles at SoftBank and its Vision Fund escalate into a crisis, as some fear, it would resonate from Silicon Valley, Mumbai and Beijing to the financial centres of the City of London, Wall Street and Tokyo. 

Returning to Riyadh last week for the latest Future Investment Initiative, known as “Davos in the Desert”, Mr Son was met by an almost-empty room for his panel discussion. The weary-looking billionaire, who at one point appeared to fall asleep, insisted he would keep offering capital to start-ups so they could “grow much bigger and quicker”. 

“We identify the entrepreneurs who have the greatest vision to solve the unsolvable,” he said. “They need to have the strongest passion. And then we provide the cash to fight.”

The downfall of WeWork has been a humbling experience. “It’s been embarrassing for him,” says a person who works closely with Mr Son. “He has to rethink his approach.” 

SoftBank shares have plummeted 26 per cent in the past three months. This week, Mr Son is expected to reveal multibillion-dollar writedowns, along with efforts to strengthen governance standards across its holdings. SoftBank declined to comment.

The struggles have laid bare a sharp-elbowed culture within the Vision Fund, which is led by Mr Misra and seen as rife with mistrust, managerial disorganisation and clashes between executives.

Despite efforts at scaling and maturing its investment arm, SoftBank has been unable to shake off a “wild west” culture at the London-based fund, where power struggles have contributed to high-level departures, including Mark Schwartz, the company’s longtime independent director.

All eyes were on the floor of the New York Stock Exchange. It was May 10 and Uber, the ride-hailing company, was about to begin life as a public company and mark a triumph for SoftBank, which had bought a 13 per cent stake and helped replace Uber’s reckless founder. 

There was one problem. Even before its shares started trading formally, they were falling. By day’s end, Uber had suffered one of the worst opening day drops for a US company raising over $1bn from an initial public offering. 

A coming-of-age moment for a Silicon Valley “unicorn” turned into a rude awakening about the public market’s attitude to lossmaking start-ups, which the Vision Fund had loaded up on. 

Saudi Arabia's Crown Prince Mohammed bin Salman poses for a selfie during the Future Investment Conference in Riyadh, Saudi Arabia. October 23, 2018. REUTERS/Stephen Kalin - RC13EF7C7C10
Saudi Arabia's crown prince Mohammed bin Salman poses for a selfie during the Future Investment Conference in Riyadh, Saudi Arabia, last October © Stephen Kalin/Reuters

Uber is now down 31 per cent from its listing price, with the Vision Fund sitting on more than $800m in paper losses since its investment. Other investments have suffered too: office messaging group Slack has dropped nearly 45 per cent since its first day of trading in June, while Vir Biotechnology has fallen 30 per cent since its mid-October listing. Only two Vision Fund-backed companies, Guardant Health and 10X Genomics, are trading above their IPO price.

“If SoftBank says this is the value, how much of that should you believe?” says Kirk Boodry, a tech analyst at Redex Holdings who publishes on research platform Smartkarma. One hedge fund investor says backing from the Vision Fund is “an immediate cue to sell”.

The steady procession of IPOs was intended to validate the Vision Fund’s late-stage bets and lay the groundwork for juicy returns that would make big-money investors clamour to pour money into its next Vision Fund. The group would look to list at least two portfolio companies per month by 2020, Mr Misra said earlier this year. 

Suddenly, with the wisdom of that model in question, support from the rest of the market is not a given.

The biggest blow, however, came from a company whose founder Mr Son has praised and lavished with billions of dollars since 2017, saying it would be worth a few hundred billion one day. 

The close bond between Mr Son and WeWork founder Adam Neumann had begun to sour long before its disastrous attempt to list in September. The turning point came late last year. 

Teams from SoftBank and WeWork had been toiling in secret since Thanksgiving on an audacious plan they called Project Fortitude, which would have seen SoftBank and the fund buying out every WeWork shareholder bar Mr Neumann for $10bn and injecting a total of $10bn into the company.

SAN FRANCISCO, CA - MAY 10: Adam Neumann Founder of WeWork speaks on stage at the WeWork San Francisco Creator Awards at Palace of Fine Arts on May 10, 2018 in San Francisco, California. (Photo by Kelly Sullivan/Getty Images for the WeWork Creator Awards)
The bond between Mr Son and WeWork founder Adam Neumann had begun to sour long before its disastrous attempt to list in September © Kelly Sullivan/Getty

As the negotiators broke up for the Christmas holidays, however, Mr Son called Mr Neumann to say they would have to rethink: the Vision Fund had backed out, and with SoftBank’s own shares falling he would ultimately only commit $2bn of additional capital in January. In theory, the new deal pumped WeWork’s valuation up to $47bn. But the company’s rapid cash burn meant it would need to hasten plans for an IPO.

Months later WeWork ditched its IPO plans after failing to fetch even a $15bn valuation from investors. The shelved IPO left it on track to run out of money by mid-November, requiring a $9.5bn rescue package from SoftBank to save the business. The deal valued WeWork at just $8bn, although Mr Neumann, whose special voting rights gave him the leverage, negotiated a controversial $1.7bn exit package even as 4,000 WeWork employees are to be fired. 

“We created a monster,” Mr Son has told colleagues. “We gave him all the capital.” 

The rescue also included terms that treated the Vision Fund favourably, giving it the chance to recoup losses from its investment in WeWork faster than SoftBank. One SoftBank executive and others close to the company described the treatment as “a bailout”. 

That has startled SoftBank investors, raising the prospect that the Japanese company’s own cash may be deployed to benefit the Vision Fund ahead of its own shareholders.

There are concerns about other privately held companies in the Vision Fund portfolio. “WeWork is not the only one weak asset,” says Atul Goyal, an equities analyst at Jefferies. “We suspect there are many such questionable investments or assets within SoftBank Vision Fund’s 80-plus investments.”

One company that has raised eyebrows is India’s Oyo, in which the Vision Fund owns a 50 per cent stake. The hotel chain’s most recent $2bn investment round was led by Ritesh Agarwal, Oyo’s 25-year-old founder, in an unusual deal that doubled its valuation to $10bn and saw him tap into loans from Japanese banks with close ties to SoftBank.

The logo of OYO Rooms, operated by Oravel Stays Pvt, is displayed outside a hotel in Ooty, Tamil Nadu, India, on Friday, June 8, 2018. Most Asian markets were in the red on June 18 as concern that the row between U.S. and China may turn into a full-blown trade war. Most Asian markets were in the red on June 18 as concern that the row between U.S. and China may turn into a full-blown trade war. Photographer: Dhiraj Singh/Bloomberg
The logo of OYO Rooms, operated by Oravel Stays Pvt, is displayed outside a hotel in Ooty, Tamil Nadu, India © Dhiraj Singh/Bloomberg

Concerns about passenger safety at Didi Chuxing, China’s answer to Uber, have held back its growth in the last year. The knock-on effects of Uber’s poor performance have also reportedly hurt its valuation in secondary markets. 

Other bets, such as a $500m investment into UK virtual simulation start-up Improbable, are not expected to generate any returns. Fair, the car subscription start-up that partners with Uber, recently revealed plans to cut 40 per cent of its workforce as it struggles to become profitable. Wag, the dog-walking company backed by a $300m Vision Fund cheque, has been earmarked for sale. 

“Money in the right hands, right founders and right potential long-term platforms works,” said Nikesh Arora, Mr Son’s former heir apparent, who abruptly resigned in 2016, at a CNBC event last week. “But it doesn’t work willy-nilly on every pet-walking and hotel room-renting website.” 

It is hard to formulate a cohesive picture of SoftBank and the Vision Fund, in part due to Mr Son’s incessant dealmaking, and also because of the extreme levels of financial engineering employed by Mr Misra.

One of the most powerful credit traders from a pre-crisis generation of Wall Street bankers, the Indian former Deutsche Bank executive is considered by some as a pioneer of modern finance.

He was feted in April by Michael Milken, the junk bond king of the 1980s who was convicted of securities fraud and later imprisoned for two years. Talking to Mr Misra at a conference, Mr Milken, now a self-styled philanthropist, said: “There is no one that has the understanding of financial markets and capital markets and the hundreds of different types of instruments that you do.”

Graphic showing the unorthodox structure of SoftBank’s $97bn Vision Fund ($bn)

To others, however, Mr Misra is a source of chronic instability who has stuffed the senior ranks of the Vision Fund with former Deutsche Bank colleagues and financial complexity. 

“SoftBank and the Vision Fund are layers of leverage upon leverage,” says one banker who has worked closely with both. This person and others see parallels to what took place at Deutsche Bank, the now struggling lender whose lack of oversight and controls saw its balance sheet laden with risky products of the sort Mr Misra specialised in. 

SoftBank is saddled with $160bn of interest-bearing debt and its bonds are rated non-investment grade. The Vision Fund has a unique structure — created by Mr Misra — where roughly $40bn of outside investor funds are in the form of preferred shares that work like debt and pay an annual coupon.

When Mr Misra looked to return capital to the Vision Fund’s backers earlier this year, he added yet more leverage, taking out a $3.5bn loan mortgaged against stakes in companes including Uber

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Under Mr Misra’s watch, the fund’s ranks have grown to more than 400 employees, while it tries to shed its unruly image. It has tightened control functions in areas such as compliance, accounting and legal.

“I’ll tell you the biggest change in two years. We are learning so much. It’s becoming sixth sense. We transfer that learning to our portfolio companies,” Mr Misra told Mr Milken, highlighting best practices shared across its holdings. 

The growth inside the Vision Fund belies an environment where Mr Misra and his allies have jostled with those outside their inner circle. Critics say the toxic culture, which Mr Son has overlooked, could imperil the future of the fund. 

Two senior SoftBank executives have had fierce run-ins with Mr Misra that have had an impact on the balance of power in the Vision Fund and the company. One, Alok Sama, SoftBank International’s former chief financial officer who was a critic of the WeWork investment, left in April. His rise within SoftBank had earlier been complicated by an anonymous shareholder campaign that left him unable to work on the Vision Fund. 

BEVERLY HILLS, CA - APRIL 29: Michael Milken, Chairman, Milken Institute (L) and Rajeev Misra, CEO, SoftBank Investment Advisers, participate in a discussion during the annual Milken Institute Global Conference at The Beverly Hilton Hotel on April 29, 2019 in Beverly Hills, California. (Photo by Michael Kovac/Getty Images)
Michael Milken, Milken Institute chairman (L) and Rajeev Misra, CEO, SoftBank Investment Advisers, at the annual Milken Institute Global Conference at The Beverly Hilton Hotel in April © Michael Kovac/Getty

The other, Marcelo Claure, moved to Tokyo a year ago to work more closely with the Vision Fund, but was quickly blocked from having a direct say in its operations. The self-made Bolivian billionaire who is SoftBank’s chief operating officer relocated to Miami to run a smaller Latin American fund. Mr Claure, whom Mr Son has often turned to when his deals face trouble, has been brought in to lead SoftBank’s efforts to turn around WeWork.

SoftBank tasked Mr Schwartz, a former Goldman Sachs banker, with overseeing an investigation into whether the campaign against Mr Sama was led by someone inside the company. A SoftBank spokesperson said the investigation concluded with no evidence of wrongdoing discovered. 

Still, Mr Schwartz left SoftBank’s board in May after 18 years.

Former Goldman colleagues and others described Mr Schwartz as a “moral compass”, who became fed up with the changing culture within SoftBank and concerns over governance at the Vision Fund, as well as its reliance on money from Riyadh. He declined to comment. 

Members sit around a communal working table inside the WeWork Ocean Gate Minatomirai co-working office space, operated by The We Company, in Yokohama, Japan, on Friday, Oct. 11, 2019. WeWork formally withdrew the prospectus for an IPO this month, capping a botched fundraising effort that cost its top executive his job. The defeat places urgency on WeWork to find new sources of capital to keep its business running Photographer: Kiyoshi Ota/Bloomberg
A WeWork centre in Yokohama, Japan © Kyoshi Ota/Bloomberg

One person who has so far steered clear of the infighting is Katsunori Sago, SoftBank’s chief strategy officer and a former top Japanese banker at Goldman Sachs. Mr Sago has made at least 10 hires from Goldman Sachs, including veteran banker Hiroki Kimoto, who has been working to rein in SoftBank’s bloated balance sheet.

Operating separately from Mr Misra’s team, his team runs a unit that focuses on offering Vision Fund companies cheaper financing options to purchase assets such as property and cars using SoftBank’s credit and equity. 

People close to SoftBank suggest Mr Sago’s team could act as a hedge against Mr Misra by bringing more discipline to the way the Vision Fund companies and their assets are managed. 

“Over the past two years we’ve fostered major improvements in our culture,” says a Vision Fund spokesperson. Others close to the fund’s executives dispute that.

A second Vision Fund would help Mr Son silence his critics. A rollout this summer of those plans were designed to showcase SoftBank’s ability to attract blue-chip investors such as Microsoft. But no outside investors have formally signed up yet. 

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Nearly half of the $108bn SoftBank hopes to raise is set to come from the Japanese company itself and senior employees. However, some of these employees have balked at what that entails: a “loyalty test” that involves taking SoftBank loans equivalent to as much as 15 times their annual salary. 

Executives within and close to SoftBank concede that renewed commitments from Saudi Arabia and its neighbour Abu Dhabi are crucial if there is to be a second fund. Both have been slow to commit, even as SoftBank executives are counting on Prince Mohammed to reinvest up to $30bn with them. 

“I don’t see how you could do it without them,” says one person involved. 

Advisers to the crown prince have urged him to reduce his exposure to SoftBank. But he is said to want to honour his promise to Mr Son. 

Additional reporting by Andrew Edgecliffe-Johnson in New York

The article was updated on November 4 to reflect that the Vision Fund is sitting on about $800m of losses from its Uber investment, not $2bn

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