Is SoftBank’s $100B Vision Fund the largest legal Ponzi scheme in history? It sounds crazy but let’s take a look. The definition of a Ponzi scheme is a fraud whereby early investors are paid a return from the capital of later investors.
According to Axios, Vision Fund is structured such that outside LPs have a 7% preferred coupon on 40% of their capital. The fund makes semi-annual coupon payments of ~$1.2B each from capital calls when there aren’t returns to cover it. Now, Fortune estimates the recent unrealized losses on Uber and WeWork at nearly a $6B write-down. Given these losses, it raises the potential that SoftBank won’t have returns to cover the coupon payments in the future. What happens when all the capital has been called? Does capital from Vision Fund II cover the preferred coupon for earlier investors? If yes, that would fit the definition of a Ponzi scheme (early investors are paid a return from the capital of later investors).
To be clear, SoftBank has not stated how it intends to cover their preferred payments in the event they do not have capital and it is still possible that their investments have great returns in the future so we can’t judge SoftBank’s grand experiment yet. As Warren Buffet says, you only find out who is swimming naked when the tide goes out. The real question: What will the fallout be if Vision Fund implodes? Is that the catalyst for a broader market meltdown?