Charlotte Street Partners

DAILY BRIEFING

DAILY BRIEFING

Soft(Bank) Reboot

Written by Iain Gibson, associate partner 
Edited by Kevin Pringle, partner
9 September 2020

Good morning,

In a room full of princes and serious global power players, those two stood out.
 
It was May 2017 in Riyadh, and the inaugural Saudi-US CEO Forum at the Four Seasons hotel. I was there, in my previous working life, lucky enough to munch on the five-star food with the other gophers on the periphery, whilst the men and women of destiny strolled about.
 
BlackRock’s Larry Fink, US commerce secretary Wilbur Ross and then secretary of state Rex Tillerson were amongst the illustrious guests, as businesses flocked to Saudi Arabia at the invitation of Mohammed bin Salman. Donald Trump was also in Riyadh, albeit not at this forum, and you may remember the highlight of his visit was that strange photo op when he held a shining orb with King Salman and President Sisi of Egypt.
 
But the two stars of the day were Masayoshi Son, CEO of Japanese conglomerate SoftBank, and Rajeev Misra, the man overseeing SoftBank’s $100bn Vision Fund. The fund, the largest ever of its kind, had just secured $45bn backing from Saudi Arabia’s Public Investment Fund, as it ploughed record amounts of cash into technology firms. Uber, WeWork, Arm – the list remains impressive in size and scope.
 
In 2020, to say that things haven’t quite panned out as people thought is being charitable. The problems became evident with WeWork’s aborted IPO last year, adding to mounting concerns, including from Masa’s Saudi partners, that the fund was overpaying for its stakes.  The long and the short of it – SoftBank reported a record operating loss of $17.7bn for fiscal year 2019-20, with those losses driven by the Vision Fund.
 
Masa and Misra remained bullish, noting that their average investment span was 14 years. Plenty of time to iron things out, despite investor nerves. Nevertheless, a soft reboot was needed, and this week we saw it what it looks like.
 
As first reported by the FT, SoftBank has been driving aggressive bets on equity derivatives in the US, focusing on tech stocks and helping move them to record highs last week. It netted the company trading gains of around $4bn, with Masa’s actions taking on a notional exposure of about $30bn. He has hedged in some areas to protect these bets, but the strategy is a significant risk, especially as markets are contracting now the secret is out.
 
Some feel that this isn’t a strategy at all, and are deeply unimpressed by the revelation that SoftBank is the ‘Nasdaq Whale’. One unnamed source told the FT this was all little more than “a levered punt on the market…just momentum buying”. The paper’s editorial board noted that “far from acting like a visionary technology investor, the group is behaving like a hedge fund”.
 
There is certainly an argument for institutional investors to move away from a crowded private market and help make public markets more welcoming for start-ups, although this doesn’t entail placing huge bets that artificially drive up said market’s value.
 
Maybe SoftBank hoped that the midst of a pandemic was a good time to fly this shift under the radar. The unnerved response from investors suggests otherwise,  as the company’s market value fell by $9bn on Monday, with a further, smaller fall yesterdayand a significant plunge of seven per cent earlier this morning, taking more than $15bn off its total valuation. The aforementioned tech stocks are also currently being routed (see today’s ‘Markets’ section).
 
For Masa and the company he founded almost 40 years ago, this looks like one reboot that won’t reset properly.

News

The UK government announced last night that social gatherings of more than six people will be illegal in England from next Monday. This follows evidence that the infection rate is now sitting at 20 per 100,000 people.
 
Northern Ireland secretary Brandon Lewis admitted in the House of Commons that UK government plans to rewrite part of the Brexit withdrawal agreement were unlawful in a “very specific and limited way”. Jonathan Jones, the head of the government’s legal department, resigned yesterday ahead of the publication of the Internal Market Bill later today.
 
AstraZeneca has paused global trials of its coronavirus vaccine because of an unexplained illness in one of its volunteers. The company is developing its vaccine with the University of Oxford.

Business and economy

The US will block key exports from China’s Xinjiang region due to allegations that they are produced using forced labour. The proposed bans include cotton and tomato products and is being enacted due to China’s poor treatment of Xinjiang’s Uighur Muslim population.
 
Warren Buffet’s Berkshire Hathaway is set to invest more than $570m into cloud database company Snowflake. It is Berkshire’s first venture into the enterprise technology market since a failed bet on IBM. (£)
 
Investment bank JP Morgan Chase is investigating employees and customers who may have misused federal funds from the US government that were meant to help small businesses struggling due to lockdown. An internal memo seen by Reuters said that JPM had found cases of customers misusing benefits and that “some employees [had] fallen short too.”

Columns of note

In the Financial Times, Jamil Anderlini looks at China’s gradual building up of influence in the Middle East, which has been undertaken in the near two decades since the second Iraq war. The country’s “friend to everyone but allies with none” approach has raised it to a position where almost every Muslim-majority nation has supported its incarceration of Uighur Muslims. Anderlini concludes: “Whoever wins the US presidential election in November will face the uncomfortable reality that competition with and containment of China now runs through the Middle East”. (£)
 
In The Times, Danny Finkelstein notes that the ties that bound the Republican party in the US and the Conservative party in the UK, most strong during the time of Ronald Reagan and Margaret Thatcher, are waning. He cautions that an instinctive Conservative party dislike of the more woke elements of US politics – who are generally behind the Democrats – should not blind them to the fact that four more years of Donald Trump is not in the interests of the transatlantic alliance. (£)

Cartoon source: The Times

Markets

What happened yesterday? 

As noted in today’s briefing, US tech stocks suffered their worst sell-off since March, with the Nasdaq Composite down four per cent, led by a 21% fall for Tesla. The S&P 500 slipped nearly three per cent, and in Europe all major indexes bar the FTSE 100 declined by around one per cent.
 
In Asia this morning at the time of writing, the US tech rout has extended to regional exchanges, with the Topix, CSI 300 and the Hang Seng all in retreat.
 
In currencies, sterling slipped 0.1% to $1.2971 amid tensions over a disorderly Brexit.
 
In company news:

Deloitte is eyeing the sale of its restructuring arm, ahead of a crackdown by regulators to split audit operations from the other parts of consulting firms.
 
Royal Mail said it may seek to end Saturday deliveries, as the pandemic accelerates long-term declines in volume. It warned it would make a “material loss” in the current financial year.

What’s happening today?

Finals
Frontier Dev

Interims
Anpario
Aquis Exchange
Computacenter
Emis
Inspired Energy
Sanne Group
Tullow Oil

AGMs
Aew Uk Reit
Down. 4 Dp67
Mobeus l&g 2
Petrotal Corpo
Sdv 2025 Zdp
Solid State

Int. economic announcements
(12:00) MBA Mortgage Announcements (US)

Source: Financial Times

did you know

In order to enforce prohibition properly, the US government ordered the poisoning of industrial alcohols, which were regularly stolen by bootleggers. It is estimated that this killed at least 10,000 people between 1926-33.

Parliamentary highlights

House of Commons

Oral questions
Scotland
 
Prime Minister’s Question Time
 
Ten Minute Rule Motion
 
Houses in Multiple Occupation – Ian Levy
 
Opposition Day Debate
Protection of jobs and businesses; The personal role and involvement of the Prime Minister and Secretary of State for Education in this summer’s exams fiasco
 
Adjournment
 
Detention of Uighur Muslims in Xinjiang – Shabana Mahmood

House of Lords 

Oral questions
Benefits and risks of AI in recovering from COVID-19 in light of AI Barometer report by the Centre for Data Ethics and Innovation – The Lord Bishop of Oxford
 
Steps taken by Office for Veterans’ Affairs to support veterans – Lord Polak
 
Future of Britain’s railways – Lord Bradshaw
 
Legislation
Immigration and Social Security Co-ordination (EU Withdrawal) Bill – Committee stage (day 2) – Baroness Williams of Trafford

Scottish Parliament 

Parliamentary Bureau Motions
 
Portfolio Questions: Environment, Climate Change and Land Reform; Rural Economy and Tourism
 
Scottish Conservative and Unionist Party Debate: Justice
 
Legislative Consent Motion: Fisheries Bill
 
Business Motions
 
Parliamentary Bureau Motions
 
Approval of SSIs (if required)
 
Decision Time

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