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Deutsche Bank alumni are helping Son remake SoftBank
[TOKYO] When Masayoshi Son cut the largest deal of his career - the US$40 billion sale of chip designer Arm in September - the idea didn't originate with one of his seasoned bankers or lawyers. Instead, it started with a relative newcomer to his inner circle, a former Deutsche Bank trader with a background in financial engineering.
Akshay Naheta, not yet 40, has worked on some of SoftBank Group's biggest deals since joining the company three years ago. Some, like a US$1 billion debt transaction with Wirecard, have been controversial. But they got him close enough to Mr Son that he was able to pitch him on the sale of Arm to semiconductor designer Nvidia.
Mr Naheta's rise at SoftBank - he's now a senior vice-president, providing strategic advice to Mr Son - reflects the company's move away from running technology businesses to an investment-holdings model where finance veterans with an appetite for risk and complexity hold sway.
Mr Naheta is one of a small cohort of Masa whisperers, many of them former Deutsche Bank traders and executives, who now have the founder's ear. Mr Son, in a statement, praised Mr Naheta, saying he "has helped me create significant value for our shareholders".
The group includes Rajeev Misra, Colin Fan and Yanni Pipilis, all of whom worked with Mr Naheta at SoftBank's Vision Fund and have a history of making risky bets that characterised the German lender in the years before the 2008 financial crisis. At SoftBank, they have billions of dollars at their disposal and fewer of the constraints banks have put in place since then.
"They are managing funds for an entity with deep pockets, an appetite for risk and insatiable ambition," said Christopher Wheeler, a former financial analyst who followed Deutsche Bank for two decades. "They're very smart people, but it's difficult for a company of that nature to keep an eye on how their money is being invested."
Tim Mackey, SoftBank's chief compliance officer, defended the company's controls. "SoftBank takes its regulatory obligations in each jurisdiction very seriously and has a robust legal, risk and compliance infrastructure across the group," Mr Mackey said in an emailed statement. "As our various business models evolve, management ensures that the infrastructure to support the business is subject to continuous and rigorous review."
The influence of the Deutsche Bank alumni is evident in SoftBank's evolution into a sprawling financial giant. Mr Son set up the US$100 billion Vision Fund to make venture capital investments, bought alternative-asset manager Fortress Investment Group in 2017 and this year established an asset-management arm where traders bet billions on stock options. Now, he's getting into the blank-cheque frenzy and has contemplated a management buyout of SoftBank. Mr Son will address investors Monday as SoftBank reports earnings.
Financial complexity has been a double-edged sword. Mr Naheta helped Mr Son better monetise his stake in Alibaba Group Holding by using collar transactions that took advantage of the Chinese e-commerce giant's ballooning valuation. But a structure designed by Mr Misra to give SoftBank more equity in the Vision Fund proved costly last year.
The idea, unusual in the risky world of venture capital, was to allow outside investors to put in US$40 billion as preferred shares that paid 7 per cent a year whether the fund made money or not. When the fund had to write down the value of startups like WeWork, leading to record losses, SoftBank got hit harder than other investors.
Some Deutsche Bank veterans also brought a cutthroat approach to office politics. The sharpest clash was between Mr Misra and Nikesh Arora, a hotshot Google executive Mr Son recruited in 2014 to oversee SoftBank's startup investing and who left two years later, according to people with knowledge of their relationship.
Mr Misra also collided with chief operating officer Marcelo Claure, Bloomberg News reported in May. A Vision Fund spokeperson said Mr Misra thinks highly of Mr Arora and that Mr Misra and Mr Claure have a close and collaborative relationship.
A native of Mumbai, Mr Naheta stumbled into a life in finance. He was the first in his family to choose a career outside the antique jewelry business. He won a scholarship to study engineering at the University of Illinois at Urbana-Champaign and graduated near the top of his class.
While pursuing a graduate degree in computer science and electrical engineering at the Massachusetts Institute of Technology, Mr Naheta attended a Deutsche Bank job seminar, lured by an offer of free pizza. An MIT alumnus convinced him to leave academia and give the world of finance a shot.
Mr Naheta joined Deutsche Bank in 2005 and moved to Hong Kong, where he became part of a crew of traders and bankers thriving under Anshu Jain, the hard-charging head of investment banking. Mr Jain had turned the German lender into a global behemoth rivalling Wall Street giants such as Citigroup and Goldman Sachs Group.
With the help of Mr Misra and Mr Fan, Mr Naheta's boss in Asia at the time, Mr Jain pushed into derivatives - lucrative but complex contracts linked to everything from corporate debt to wheat - and Deutsche Bank became the world's biggest fixed-income brokerage.
Aggressive and analytical, Mr Naheta moved to London, where he joined a team doing proprietary trading and structured deals. Traders at Deutsche Bank were brash, took big risks and enjoyed large bonuses, Mr Wheeler, the former analyst, said. Mr Misra helped turn the bank into one of the biggest traders of credit-default swaps, an instrument at the heart of the 2008 financial crisis.
Mr Fan left under a cloud, suing the bank for about US$13 million after it cancelled his unvested share awards because of a transaction that allegedly breached conflict-of-interest rules. The case was settled for about US$6 million. A spokesperson for Mr Fan said he had fulfilled all appropriate compliance procedures and that UK regulators investigated the transaction and found no wrongdoing.
After the financial crisis, regulators introduced new rules crimping how much risk banks could take and forcing them to hold more capital against derivatives. Years of shoddy controls and aggressive trading began to haunt Deutsche Bank, and investigations into wrongdoing led to more than US$18 billion in fines and legal costs. Charlie Olivier, a spokesperson for the bank, declined to comment.
Those post-crisis regulations made working for big banks less attractive for traders like Mr Naheta, who left in 2010. He started his own hedge fund, Knight Assets & Co, serving wealthy clients. In 2016, he travelled to Tokyo to meet Mr Son, hoping to get the billionaire to invest in his fund. That's when he found out SoftBank was about to raise the biggest pool of venture capital ever assembled.
SoftBank is a bank in name only. It started in 1981 as a distributor of software for personal computers and later expanded into broadband, telecommunications and other corners of technology. The company, which has had little experience in financial services for much of its four-decade history, isn't subject to the same regulations as Wall Street banks.
While the Vision Fund, a separate regulated entity, has its own control function, SoftBank Group is still in the process of putting its apparatus in place. It announced the creation of a dedicated risk management office earlier this week.
When Mr Son offered Mr Naheta a job, he took it, reconnecting with Mr Fan and other Deutsche Bank alumni. While their number is small, those veterans occupy top positions at the fund and have broad influence over the culture and practices of the rest of the organisation, according to employees who asked not to be named discussing internal matters.
Few ruffled more feathers in the Vision Fund's control function than Mr Naheta, according to some co-workers who described him as impatient and difficult to get along with. One senior risk officer at the Vision Fund said Mr Naheta was often prickly in his interactions, though he always listened to advice and usually followed recommendations.
Mr Naheta clashed with compliance executives trying to establish a new structure for managing securities trading, people with knowledge of the matter said. The dispute was sparked when Mr Naheta and his team began trading before the system had been finalised. The compliance group was taken aback, one of the people said, but Mr Naheta explained that it was an honest misunderstanding and that he thought the issues had been resolved. SoftBank said "the allegation is inaccurate and misleading".
Clients and founders of companies that Mr Naheta's team invested in praise him. "Intense and efficient," said Fabien Mendez, co-founder of delivery startup Loggi. "A very fast study, he learned our industry quickly," said Vivek Ramaswamy, founder of pharmaceutical company Roivant Sciences.
"Akshay is a fantastic investor and excels at structuring asymmetric bets across the capital structure," said Alan Howard, co-founder of Brevan Howard Asset Management. "His ability to put together tech and finance is rare, and this is a very special skill that he has."
Mr Naheta's investments, including Roivant, Loggi and Cambridge Mobile Telematics, have fared well compared with the Vision Fund's overall performance. The fund was a major profit centre for SoftBank at first, booking billions of dollars in paper gains, but its fortunes turned just as quickly.
It began when WeWork's initial public offering imploded in September 2019. The pandemic dried up the capital responsible for ever higher valuations and shuttered the market for money-losing startups. Last fiscal year, ending in March, SoftBank posted a record loss of almost US$18 billion.
One investment that didn't end well was Wirecard. Last year, the German payments firm announced it had signed a cooperation pact with SoftBank, which included a proposed US$1 billion purchase of convertible bonds, a deal Mr Naheta helped structure. Wirecard's shares surged.
But SoftBank didn't actually invest its own funds, a fact that became known only months later. Instead, Mr Naheta and other executives put in their own money and, along with United Arab Emirates sovereign wealth fund Mubadala Investment, financed the deal. The convertible bonds were transferred to Credit Suisse Group through structured notes that allowed Mr Naheta and the others to retain exposure on the upside, while passing the risk to other investors. Mr Naheta, Mr Claure and Mubadala earned a hefty profit on the transaction.
Then Wirecard melted down. In June, it said that 1.9 billion euros (S$3.03 billion) of assets had gone missing, prompting its chief executive officer to resign and turn himself in to police. SoftBank terminated the cooperation agreement, and the notes and the company's stock became almost worthless.
SoftBank has bristled at the suggestion that it helped prop up a fraudulent business and cost investors money. It said it had no idea of Wirecard's accounting issues at the time of its deal and pushed for the independent audit that uncovered them.
Mr Naheta took to Twitter to make clear that he faulted Wirecard's auditors. "I'm totally baffled by the lack of competence and responsibility displayed by E&Y (@EYnews)," he wrote. Ernst & Young's chairman expressed regret that the firm failed to uncover fraud at the company earlier.
In April, as the Wirecard fiasco was unfolding, Mr Naheta met with Nvidia executives to gauge their interest in Arm, which SoftBank had acquired in 2016 for US$32 billion. Mr Naheta helped Mr Son invest about US$4 billion in Nvidia in 2017, a bet that paid off thanks to a collar transaction he set up that let SoftBank ride a 2018 share rally and protected it from a slump in the last quarter of that year.
Mr Naheta surmised that Nvidia CEO Jensen Huang, despite an aversion to acquisitions, might be open to a deal, according to two people familiar with the way the transaction unfolded. After getting a nod from Nvidia, he took the idea to Mr Son, who had long talked about Arm as the centrepiece of his AI-will-rule-the-future vision for the tech industry.
Four weeks later, Mr Son came back with a response: Let's engage. By the end of July, SoftBank and Nvidia were in exclusive talks. In September, they announced the biggest acquisition in semiconductor industry history. Mr Naheta was also instrumental in securing a US$2 billion good-faith payment from Nvidia, money SoftBank gets to keep even if regulators shoot down the deal. The transaction, a spokesperson for SoftBank said, "offered the most compelling opportunity from Masa's perspective to further his vision of unlocking the true potential of AI".
The sale caps a frenzy of deals unleashed by Mr Son after SoftBank shares hit a record low in March. He sold US$13.7 billion of Alibaba stock and an even larger chunk of T-Mobile US. He slashed the stake in Japan telecommunications unit SoftBank Corp by one-third and sold a controlling shareholding in wireless-equipment maker Brightstar. The money has helped fund record buybacks, boosting SoftBank shares to a two-decade high in October.
If the Arm deal is approved by regulators - making sure of that will be Mr Naheta's job for the next year or so - SoftBank's transformation to an investment holding company will be complete. It will have about US$100 billion in cash at its disposal, Mr Misra said in an interview at the Milken conference in October.
That could mean a wilder ride. Mr Son gave a hint of things to come in August when he revealed big bets on tech stocks including Apple, Amazon.com and Facebook. The investments were accompanied by derivatives that amplified his exposure amid rising concerns over valuations inflated by mercurial individual investors. SoftBank shareholders, worried that Mr Son was off on another one of his adventures, cut the company's market value by as much as US$17 billion. While Mr Son led the effort, Mr Naheta helped assemble the team that executed the strategy. Mr Misra was also involved.
The problem, said one insider who has had direct dealings with the Deutsche Bank veterans, isn't that they are aggressive and willing to take risks. It's that SoftBank doesn't have the same robust infrastructure required of other financial institutions. The creation of a companywide risk management office is a step in that direction.
"There is no problem in principle with companies branching out and playing in the financial markets," said Haoxiang Zhu, an associate professor of finance at the MIT Sloan School of Management, who has written extensively about financial regulation. "The issue is whether they have the controls and the disclosure."