This article is written by guest author Jack Wright. All opinions expressed here are his.
Daily Fintech very seldom looks at one-off guest posts and never look at ones that are promotional. However this one caught my eye as a) Greensill is such a big complex story b) I was keen to get the perspective of a senior banker. This post focussed on the connection between Greensill and SoftBank, a subject that the author Jack Wright is qualified to write about as he worked for JPMorgan Chase where he was responsible for the distribution of JPM’s Asian equity capital markets and equity research product to hedge funds in New York.
When you begin to scratch the surface, the number of red flags on show in the lead up to Greensill Capital’s declaration of bankruptcy last month is quite bewildering. As if Greensill’s related-party laden client list, it’s list of government procurement deals under parliamentary inquiry, or it’s murky syndication of subprime debt weren’t enough, Softbank were an investor.
By now, the market should not only be questioning the wisdom of following an investor with seemingly unlimited cash benchmarked in Japan, a negative interest rate jurisdiction where economic returns have been throttled by consumer price deflation since the mid 1990’s. It should also ask whether Softbank’s Vision Fund – the vehicle used to inject billions into Greensill and other high-profile failures like WeWork – exists solely to enrich the fund’s investors, or if it serves a different purpose for Softbank’s founder, Masayoshi Son.
A thorough examination of those questions has been wanting since early 2019 when Softbank pumped an astonishing $10 billion into WeWork at more than twice the richest valuation paid by any other investor. Betting on their perceived edge in valuing tech companies, the Vision Fund expected to profit handsomely in WeWork’s IPO, planned by Goldman Sachs, JPMorgan Chase, and Morgan Stanley for eight months later.
It didn’t. At the time, I was an Executive Director in JPMorgan’s markets division based in New York City, and watched the investor education process unfold. Instead of affirming Softbank’s egregious valuation, the process run by the banks executing the initial public offering revealed what in retrospect looks glaringly obvious: WeWork is not a tech company.
In fact, to investors the shared office space operator looked a lot more like a Real Estate Investment Trust (REIT) than it did a high-growth tech start up. The only real difference between WeWork and any other corporate landlord was their customer base looked worryingly unstable, an unavoidable reality of their business model. The investment banks pulled the deal.
As WeWork called in favors from the syndicate of banks who underwrote its IPO, Softbank ploughed another $3 billion into the company in a bid to stem the bleeding. In late March this year, 18 months after the IPO debacle, WeWork announced they will go public via a Special Purpose Acquisition Company (SPAC) merger.
The deal values WeWork’s equity at $7.9 billion, less than a fifth of the valuation paid by Softbank in their 2019 investment. The deal is effectively a backdoor listing, circumventing the normal due diligence process that accompanies a traditional IPO in favor of an expedited transfer of WeWork’s equity to a small group of friendly investors.
Softbank’s investment in Greensill Capital was smaller than WeWork in dollar terms. The details which continue to emerge however, look shadier.
Absent the hype in the lead up to its unravelling, Greensill reminds one of WeWork for a single specific reason. It is a payday loans operation masquerading as a tech company.
Greensill’s business model was simple. They would acquire receivables from the balance sheet of a company at a discount, being made whole on the full amount when the receivables were paid by the ultimate debtor. The only new innovation they brought to the centuries old banking practice of working capital finance, was that they were willing to acquire potential future receivables that hadn’t actually transacted.
With that innovation Greensill ceased to be a supply chain finance company and became an unsecured creditor. Instead of holding that risk on their own books though, they securitized it and hocked it to a select group of friendly investment funds, mostly based in Switzerland.
The bundling of large tracts of receivables into securitized products meant the credit risk underlying the instruments that Greensill on-sold was almost impossible to assess. The parallels with the subprime mortgage crisis of 2008 are impossible to ignore.
In 2020, one of Greensill’s major clients, Silicon Valley based construction technology company Katera, defaulted on $400 million of receivables it was due to deliver to Greensill. At that moment, Softbank injected $400 million into Greensill. Soon after Greensill agreed to forgive Katera’s debts in exchange for five percent of their equity. Softbank was an investor in both companies before the fact.
The implosion of Greensill Capital was triggered later, by a special late-night hearing at the Supreme Court of New South Wales in Australia on March 1 this year. According to court filings, Greensill sought an injunction forcing Insurance Australia Group (IAG) to continue insuring its exposure to defaults by its customers.
Greensill stated IAG was obligated to provide 180 days’ notice in terminating their arrangement but had only given 179, thus they were required to roll Greensill’s policy forward for another period. The court refused the injunction.
Greensill sought to force IAG to continue insuring against its customer liabilities because two of its largest clients were in the process of defaulting. The first, Bluestone Resources, a mining company owned by West Virginia Governor Jim Justice (and run by his son), is now suing Greensill in the U.S. District Court of New York. The suit alleges Greensill perpetrated a “continuous and profitable fraud” upon Bluestone Resources.
The second, GFG Alliance, is now asking the British Government for a bail out to reopen the dozen steel mills it operates in the U.K. It is in similar discussions in other countries where it operates.
In what feels like a large scandal brewing, new details of how Greensill’s influence proliferated throughout British politics continue to emerge. It is widely reported that former Prime Minister David Cameron accepted millions of pounds in stock options in return for lobbying Chancellor Rishi Sunak on Greensill’s behalf. Several other uncomfortable questions remain about how Lex Greensill, the company’s founder, inserted himself and his business so deeply into the bureaucracy of government procurement.
There are two clear takeaways from all of this. Firstly, Softbank may not only be a bad investor, but an underhanded one. The string of less-than-arms-length transactions on show throughout the Greensill ordeal plainly suggest deep conflicts of interest between Softbank’s obligation to run the Vision Fund for its investors, and Softbank for its shareholders.
Secondly, the private capital markets in particular remain woefully inefficient at allocating capital. The private market appears nowhere close to weaning itself off its addiction to “tech stocks,” and the hero worship of entrepreneurial investors who have gotten lucky continues to obscure normal investment fundamentals for much of the market.
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