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SoftBank Talent Drain Worsens, Adding Pressure on Son to Deliver

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(Bloomberg) -- Masayoshi Son is losing a growing number of top executives at SoftBank Group Corp., putting more responsibility on the founder’s shoulders just as the outlook for the Japanese conglomerate turns increasingly ominous.

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Two more managing partners at the company’s Vision Fund, Yanni Pipilis and Munish Varma, are leaving, Bloomberg News reported last week, bringing the number of top level departures from the world’s largest investment fund to at least 10 since March of 2020. Rajeev Misra, the long-time head of the Vision Fund, is giving up most of his titles and responsibilities as he starts his own investment fund. Chief Operating Officer Marcelo Claure left earlier this year, while Chief Strategy Officer Katsunori Sago, who had been on SoftBank’s board with Misra and Claure, resigned in 2021.

That leaves Son increasingly on his own as he plots a new course for the company he founded four decades ago. The 64-year-old is shifting focus away from the Vision Fund after steep losses and toward fresh opportunities, particularly the UK chip firm Arm Ltd., according to people familiar with the matter. Son is planning to reposition the chip designer and cut costs to boost profits in order to increase its appeal as he prepares to take it public next year, said the people, asking not to be identified because the discussions are private.

Son has struggled to retain executives ever since he began remaking his telecom conglomerate into an investment holding company five years ago. As he set up the original $100 billion Vision Fund in 2017, he declined to provide the kind of profit sharing or deal-by-deal “carry” that venture capital firms give partners to compensate for big winners. Losses at the Vision Fund in recent years have aggravated the problem, leaving little overall profit to entice top performers.

“Masa gets all the glory, the team behind him gets breadcrumbs” said David Gibson, senior research analyst at MST Financial Services.

SoftBank Group declined to comment.

There hasn’t been much glory for anyone since Son repositioned his telecom conglomerate into the world’s biggest technology investor. It’s suffered missteps at portfolio companies like WeWork and Greensill, as well as a broad downturn in technology stocks that hit holdings such as Alibaba Group Holding Ltd. and Coupang Inc.

The internal rate of return for the first Vision Fund’s limited partners was 11% through March of this year, compared with an average of about 38% for the industry, according to the investment data firm Preqin. The second Vision Fund’s IRR is 0%, compared with an average of 45%.

“They had too much money and not enough discipline,” says Steven Kaplan, co-founder of the entrepreneurship program at the University of Chicago Booth School of Business.

SoftBank is essentially back where it started in 2017. Its stock has averaged a 5.2% return over the last five years, far short of Japan’s benchmark Nikkei 225 at 9% and the Nasdaq’s 16% gain.

SoftBank is scheduled to report earning Aug. 8 and it may report another loss after the 2.1 trillion yen in red ink from the last fiscal quarter, according to Bloomberg Intelligence analysts Marvin Lo and Chris Muckensturm.

SoftBank has raised as much as $22 billion in cash through the sale of prepaid forward contracts using Alibaba shares, the Financial Times reported, citing filings it has seen. SoftBank has used such derivatives to boost cash since at least 2016, though the amount would be up from the $13.17 billion SoftBank disclosed in its earnings report published in May.

While top executives in Japan earn modest paychecks by global standards, the finance industry’s stars are among the highest paid in the world. Venture capital firms often allocate 20% of their profits to partners, which can mean tens of millions of dollars apiece.

Son’s own compensation was 100 million yen in the most recent fiscal year, a mere $733,000. Misra earned $8.4 million in the most recent year for which his compensation was disclosed, among the highest in Japan but far below successful venture investors.

SoftBank’s board members have warned the company isn’t doing enough to compete for talent.

“The best venture firms have little turnover because they understand the importance of retaining rainmakers, or excellent deal makers,” Lip-Bu Tan, founder of venture capital firm Walden International, wrote in his June departure letter when he stepped down as external board director at SoftBank.

Instead of boosting official renumeration, SoftBank has offered up side deals for executives to enrich themselves, according to the people and company disclosures. These included huge loans to senior staff that often carried little downside for the borrowers.

Misra, for example, borrowed $463.5 million from SoftBank to invest in T-Mobile US Inc., the telecom firm that bought SoftBank’s Sprint Corp. in 2020. Claure also borrowed $515 million, according to company filings. Both men made significant profits from their T-Mobile stakes. Misra paid back the loans in early 2022, according to company filings.

Much of this attitude comes from the top. Son took a personal stake of 33% in a SoftBank vehicle to bet on risking tech stocks, only to lose money as the investments soured. He also set aside 17% of the second Vision Fund equity to compensate senior executives, including himself.

An existing $1.5 billion compensation pot for Vision Fund staff made its first payments last year, but the cash came too late to keep most of the fund’s key staff, the people said. The pay structure for the second Vision Fund -- dependent on performance -- was finalized in early 2022.

Other recent departures include two of three managing partners at the Latin America Fund and Silicon Valley veteran Deep Nishar, who helped oversee SoftBank investments into Grofers, Improbable and Mapbox. Michel Combes, who took over as the head of SoftBank Group International after Claure’s departure, left after only five months. Ronald Fisher, a long-time lieutenant of Son’s, stepped down from his role leading the Vision Fund’s US arm.

The departures will make it tougher for SoftBank to recover, especially in the tough market of today, said Amir Anvarzadeh of at Asymmetric Advisors.

“Not a great atmosphere as you can imagine,” he said. “Now they will be fully focused on the disastrous investments rather than picking new ones.”

Son used to liken SoftBank meetings to a zoo where he would get beaten up by the others, attributing the company’s decision-making success to its unruly debates. But few remain among SoftBank’s senior staff or on its board to meaningfully challenge Son.

Board members including Alibaba co-founder Jack Ma, Fast Retailing Co. founder Tadashi Yanai and Nidec Corp. founder Shigenobu Nagamori all have left in recent years. Yanai and Nagamori publicly disagreed with Son’s decisions. The company’s first female director Yuko Kawamoto resigned from the board last year after clashing with Son over governance issues.

Son “still needs people to provide safeguards, give him advice and make him even more successful,” Walden’s Tan wrote in his departure letter. “Poor choices made too quickly can have negative consequences for the company.”

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