How SoftBank’s massive Vision Fund shares profits — and losses

By BLOOMBERG

LONDON • Partners at SoftBank Group Corp’s US$100 billion (RM410 billion) Vision Fund will share the potentially enormous profits from their investments, including on start-ups like Uber Technologies Inc. They’ll also be on the hook when those bets backfire.

SoftBank has set up an unusual compensation structure for the fund that includes a US$5 billion loan to employees. The debt is swapped for equity in the fund and will generate profit when deals make money — and losses when they don’t, scaled by seniority, according to people with knowledge of the situation.

The compensation scheme is more extreme than the typical venture capital or private equity fund because of the downside risk, as well as the record size of the investment pool. Vision Fund employees, including high-profile bankers and investors, receive base salaries and bonuses, but only get payouts when profits are booked.

“It aligns interest,” said Chris Lane, an analyst at Sanford C Bernstein & Co, who discussed the matter with officials at SoftBank.

“Effectively, they are an equity owner, like everybody else, and not in a privileged position above everyone else. I think it’s fair.”

Clawback Provision
Investors in private equity funds often push for what’s known as a clawback provision, which allows them to reclaim part of the profits taken by managers if initial gains are later wiped out. Such terms are especially sought after in funds that invest in risky assets or cyclical industries characterised by wild price swings.

At Vision Fund, partners will face a clawback of 20% and above, depending on seniority, the people said. More junior staff will be liable for about 7% of any losses out of their US$5 billion pot, including interest.

SoftBank’s billionaire founder, Masayoshi Son (picture), has been allocated the majority of the bonus pool, they said. Son has a net worth of US$13 billion, making him Japan’s third-richest person, according to an estimate by the Bloomberg Billionaires Index. A representative of the Vision Fund declined to comment because the matter is private.

Pay at the Vision Fund has been the subject of speculation ever since Son originally announced the effort in October 2016. It’s the largest investment fund in history, amplifying the potential rewards and losses. And as with most things related to SoftBank’s giant technology fund, it’s not straightforward.

The US$5 billion equity allocation to the fund’s staff is split up into tranches with various conditions attached, and payouts can vary widely depending on performance.

‘Skin in the Game’
“It’s encouraging if people are trying to make the idea of having skin in the game meaningful,” said Stefan Stern, the former head of the High Pay Centre and now a visiting professor at Cass Business School. “But you would want to be certain that the downside risk is real.”

The average venture capital fund tends to pay out 20% of any profit to workers. While many funds require managing partners to put up some of their own money, it’s usually a small portion of the total. That limits their losses.

Vision Fund is headed by Rajeev Misra, formerly of Deutsche Bank AG and UBS Group AG. Managing partners include another Deutsche Bank veteran, Saleh Romeih, Goldman Sachs Group Inc alum Michael Ronen, and Deep Nishar, who worked at Google LLC and LinkedIn Corp.

Misra’s team has backed about 67 companies so far, including Uber, Didi Chuxing and WeWork Cos. Son has said he plans to raise a new US$100 billion fund every two or three years and will invest about US$50 billion a year.

“It’s possible that hungry dogs hunt best,” said Bill Aulet, a professor at the MIT Sloan School of Management who tracks the industry. “But creating a structure that forces venture capitals to put more skin in the game might narrow the talent pool to the wealthy few who can afford it.”