SoftBank and WeWork Are as Bad as Each Other(bloomberg.com)
Wow, it's high leverage on top of unusual leverage on top of high leverage. Quoting from the OP:
"Boil things down and WeWork is a leveraged real estate company[a] propped up by a leveraged pool of late-stage venture capital (the Vision Fund)[b], which is in turn controlled by a leveraged telecoms and technology company (SoftBank).[c]"
It's like Peter borrowing a large amount of money to invest with Paul, who then, unusually, borrows on top of Peter's investment to invest with Mary, who then borrows another large amount of money on top of Peter's investment to invest in her own scheme. What happens if Mary can't pay back?
[a] WeWork has borrowed and wants to borrow more to finance operations, both in the form of corporate debt and in the form of long-term lease commitments: https://www.sec.gov/Archives/edgar/data/1533523/000119312519...
[b] The Vision Fund has borrowed money on top of Softbank's investment: https://archive.is/o/9I97g/https://www.ft.com/content/b6fe31...
[c] Softbank has borrowed money to invest in the Vision Fund: https://archive.is/o/9I97g/https://www.bloomberg.com/news/ar...
As far as the debt in the vision fund is concerned, that all seems to be held by investors who already have skin in the game. For the company this seems to be fundamentally safe? the interests of shareholders and bond holders are aligned, bond holders won't be clamouring to wipe out the shareholders and visa versa.
I'm sure you'll find some leverage if you look at Softbanks debt holders also.
I find good parallels in how today's "high finance" begins to resemble late Soviet Union's economy.
There was an extreme amount of pointless and doomed enterprises, but given just how much "national capital" was invested, and how much credibility economic planners had at stake for their imagined economic theories, an absolutely ridiculous amount of self-deception was made.
And from that on, lies and economic data falsification went into a downward spiral. The amount of "funny money" being going around state institutes in a convoluted scheme of mutual bailouts, reciprocal investment deals, capital parking arrangements, "kickback backed credits," and LBOs (Yes! The Union had LBOs, at least on paper) began to outnumber the amount of cash going exchanged in the tiny real economy by triple digits.
Ignoring the last paragraph, you just seem to be describing a bubble, which the vision fund could well turn out to be.
Its just human nature, no political or economic system is immune.
What the grandparent poster described in the first two paragraphs is a typical large company. You could replace the words 'late Soviet Union' with 'almost any Fortune 500 firm', and it would be an accurate description of its internal economy.
It seemed to me like he was describing China exactly.
Between WeWork and Uber (which is trading at a valuation below its raise in May 2016), SoftBank's Vision Fund isn't looking so hot. How will this affect other companies who took money from SoftBank?
I wonder if some of these companies have painted themselves into a corner by accepting such high valuations. Each round of financing is coming from greater and greater fools...except the public markets are not as foolish as SoftBank and sovereign wealth funds. This isn't going to be good for the employees who want some liquidity.
They also own close to a majority stake in OYO, with pretty much the same story. OYO is also entering coworking now after Softbank had to scale back on their planned wework investment. The common thread seems to be that real estate has a massive market size, in trillions, making it easier to tell a bigger and bigger story and boost valuations.
OYO is baffling. They entered the vacation rental (Airbnb) market out of the blue in a massive way via acquisitions and partnerships and it's not clear how they plan to execute.
I'm looking at them and I'm completely at loss.
It certainly feels like the decisions are driven by finance and not value creation. Still, I'm trying to keep an open mind.
It stopped being cool hiring 10 engineers and a nice space in San Francisco, burning $250k / month.
Or maybe there's so _much_ VC money that it's someone's job to invest _all_ of it. And you can't do that $250k at a time.
Someone surely is incentivized to make these investments outside of any long-term payback. Perhaps they fear investors will take their millions back if it stays fallow too long?
I think a reason these valuations "seem" out of line to most people is because there is simply so much money sloshing around. No one has time to write million dollar checks anymore. Almost anyone who has that much capital has so much capital that it doesn't make sense. More and more capital is focused on a smaller and smaller sets of companies.
" Son may turn out to be the Victor Frankenstein of the cheap-money era. He’s helped create a monster that could do him serious harm."
Why is it that all Frankenstein metaphors are poor? This one at least doesn't confuse the monster and the creator. In the story it's Frankenstein trying to destroy the monster, not the other way around.
In the spirit of productive discourse I'd suggest the sorcerers apprentice as a better comparison.
Not only that, but the Creature was rather intelligent and civilized to an extent, it's actions the result of the abandonment by its creator that it suffered at a critical moment. An abandonment cause by horror at a physical appearance, which in turn caused the Creature to be horrible in actions as well as appearance.
I'm not sure I've ever seen it adequately used as a metaphor that rose above the "Oooh, it's a monster!" level.
In this metaphor, it’s unlikely that either WeWork or Uber could be taken aback by suddenly viewing their reflections in a mirror. The horror is common knowledge to everyone, excepting perhaps the money blinkered investors.
Excerpts from the wiki page below; seems like the monster did plenty harm to cause Frankenstein pain.
> He [the creature] traveled to Victor's [Frankenstein ] family estate using details from Victor's journal, murdered William, and framed Justine.
>Should Victor [Frankenstein] refuse his request, The Creature also threatens to kill Victor's remaining friends and loved ones and not stop until he completely ruins him.
> The Creature demands that Victor [Frankenstein] create a female companion....Fearing for his family, Victor reluctantly agrees.
> the Creature had strangled Clerval to death and left the corpse to be found where his creator had arrived
> The night following their [Victor [Frankenstein], Elizabeth] wedding, ... the Creature strangles Elizabeth to death
I'm not making the case for Frankenstein's Monster being an angel, just comparing Softbank to Frankstein is a poor comparison. We can get into the weeds of the book if you want, but I don't think that's going to shed any light on Wework or Softbank.
When the reanimated corpse of Wework starts murdering Softbanks friends and relatives, I will of course stand corrected.
Using your excerpt, I read it as the monster being Softbank. > " Son may turn out to be the Victor Frankenstein of the cheap-money era. He’s helped create a monster that could do him serious harm."
Son's creation (Softbank) is doing plenty harm by investing vast amounts of money in businesses which "have no discernible path to profitability"
I worry that once WeWork fails, it will discourage other companies/innovators from getting into the realestate sector which desperately needs more innovation and progress.
It might also discourage other companies from getting into the fraud/scam sector, which would be great.
That seems optimistic.
Even if WeWork "fails" and IPOs at 15-20B it will be a resounding success for almost everyone except late investors (softbank), and recent hires.
Could its failure actually create opportunity? I'm not quite sure what and what level of failure is necessary, but if WeWork is the market leader and its influence drops, that would make space for innovation?
If WeWork fails unexpectedly quickly, it'll be a nice opportunity for other players in the workspace market to increase their occupancy. Probably less to do with innovation and more with having nice enough real estate near WeWorks.
The market is functioning as expected, to me.
Failure is not the worst thing in the world. For example, fake success is worse.
Fake success is simply failure waiting to happen at best. At worst, it's fraud.
Apart from showing the market viability of short-term lease/rentals (which is something I guess) what has WeWork really innovated?
Branding, marketing, sketchy corporate governance.
Yea, I'm baffled by this. By that standard, Starbucks is the world's most innovative coffee company.
What the realestate sector needs is fewer rent-seekers, squatters, speculators, and stakeholders with a vested interest against seeing more development, but I strongly doubt VC startups are going to do anything about any of those issues.
The article states: >"Neumann bought properties and rented them to WeWork"
Does anyone know where the money to buy properties came from? Was this his own money? VC money?
Loans backed by his shares in WeWork, and by promises of rental cashflow from letting the properties out to WeWork.
This makes a fantastic amount of money for everyone involved, as long as WeWork stock is valued > the price of toilet paper, and as long as demand for shot-term office real estate continues to be high. If either of these assumptions fail to hold, there are going to be very serious problems.
There's no conflict of interest in this sort of self-dealing, none whatsoever...
Wow - borrowing from Peter to pay Paul. I'm curious if you or anyone else knows who underwrote such a loan? I'm guessing it wasn't a commercial bank? Where does the money come from to do the debt servicing on those loans?
The debt servicing comes from the rental income. You submit to the lender a business plan of how you are going to use the borrower money, how your shares act as collateral, and how you will use the cash flow of the rental income to make interest payments.
It's no different then any other corporate loan.
"fair value of holdings" ... yikes ... magic pixie dust.