SoftBank’s almost $100bn-sized Vision Fund was set to pave the way for new innovations and turn tech investing into alchemy. “If I am going to do a fund it has to be big enough to disrupt the whole technology world”, promised Son Masayoshi. So much for a vision. Despite prominent investments in Uber and ByteDance, as well as tech stocks’ good performance overall, the returns on investment of VF were insufficient, and WeWork’s setback showed weaknesses in strategy concentrated on spoiling entrepreneurs. Although SoftBank could not live up to its declaration, VisionFund helped the world get a broader perspective and proved that American capital and startups no longer pull all the strings.
From a vision to a $100 Billion Vision Fund
The SoftBank Group’s presence on the Private Equity and Venture Capital markets is realized by the subsidiary SoftBank Vision Fund L.P (SVF) under the management of the General Partner SoftBank Investment Advisers (SBIA) – another wholly-owned subsidiary. The SBIA currency manages several private equity funds including the SoftBank Vision Funds I-II. Out of these two, the SVF1 carries the main weight as the world’s largest private equity fund with 88 portfolio companies and a total commitment of $98.6bn. So what is all the rage?
In the joint belief in the power of Artificial Intelligence and its capabilities beyond human capital, SoftBank founder Masayoshi Son and The Crown Prince of Saudi Arabia, Mohammed Bin Salman, formed a relationship in 2016 to what would unveil to be a disruptor on the Private Equity market. Son who had originally asked for a $100bn Saudi Investment secured $45bn, and leveraged this to persuade additional investments from names like Apple, Qualcomm, and Abu Dhabi’s Mubadala. Also, the SBG went in with $28bn. A common denominator was that few of the major investors had experience in technology, and fewer as limited partners in Private Equity Funds.
Selling and profiting on the vision
The Vision Fund’s investment philosophy consists of identifying AI-innovators across a variety of sectors and investing in “the visionaries” – their preferred term for portfolio companies. The goal of the SVF1 is to make large-scale investment in AI-driven companies with a valuation of over $1bn that possesses high-growth prospects to maximize returns on a medium- to long-term basis.
So what persuaded investors to open their pockets? The capital that the investors committed to the SVF1 deferred from standard practices due to the two equity types used in the deal. For the external [Non-SBG] limited partners, around 40 percent of their investment was distributed as preferred equity whilst the remaining 60 percent was distributed as common equity. Using this capital commitment distribution, investors were essentially guaranteed an annual coupon payment of 7% regardless of SVF1 liquidity. In other words, a sweet deal for its investors.
Surviving on the market
As the Saudi-backed SVF1 was launched in 2017, it embarked on a period of strong investor appetite with record closing [highs] on the global public markets and heavy investment volume on the private markets. During its three years in operation, approximately 85% of the committed capital has already been invested among its 88 portfolio companies.
Some of the largest single investments of the SVF1 is found among the Transportation and Real Estate segments, where American companies such as Uber Technologies and WeWork have long dominated in both investment volume and reported losses, leading to scrutiny on the SVF1 for its weak performance. On the other hand, the publicly traded Health Tech companies such as Guardant and Relay have both gained significantly post-IPO, balancing the portfolio.
At the moment, the SVF1 portfolio is primarily weighted on the Asian market (46%) followed by the Americas (36%), and EMEA (18%) in terms of the portfolio valuation. As of June 2020, the SVF1 carries a large exposure on Transportation and Logistics at 42% of the total portfolio, followed by Consumer Services (19%) and Frontier Tech (16%). Main losses were noted in Real Estate (-41%) and Consumer (-21%), and moderate gains were found in Enterprise (6%), Health Tech (6%) and Frontier Tech (7%) during the COVID-19 crisis.
SoftBank is likely aiming to redefine its investment approach in the SVF2 with a more conservative approach in regards to the selection of companies. Currently, 58% of the companies in the SVF2 are Health Tech companies specializing in either diagnostics, pharmaceuticals, or opticals. SoftBank states in its 2020 Annual Report that East Asian countries are on the scope for a further investment opportunity. Furthermore, 28% of SVF1-2 investments are made in China, and the SBIA expects to further increase this figure to capitalize on digital services following the success of the Chinese portfolio companies Alibaba Local Services, Beike, ByteDance, Ping, An Good Doctor, DiDi, and Zuoyebang.
What happened with the Vision Fund, where did it diverge from the primary goals and aims? What are the consequences of this divergence?
SoftBank’s Vision Fund has received a lot of negative press in 2020. The fund’s corporation was lauded a technological pundit for its foresight in Alibaba, which returned them a whopping $60bn when Alibaba went public in 2014 – from a $20m investment 14 years prior. Following the momentum caused by this return, Masa Son has tried to convert SoftBank into an investment firm, far from its software distribution beginnings in 1981.
With the primary aim of the Vision Fund being for SoftBank to show to the world that part of the future in technology lies in Asia, and not only Silicon Valley, they have certainly played their part in investing in the field, but what does their strategy look like, and how may it have strayed from its aims?
Raising capital, the first real challenge, has not been an issue for Masayoshi Son’s Vision Fund, as has been true of most SoftBank funds – raising $98.6bn prior to their May 2017 launch.
Returns, however, have proven to be more than sluggish, trailing behind the Nasdaq. The fund’s strategy of investing in tech startups has been challenging at best. Private takeovers of young tech companies does not establish the discipline often required to generate positive returns, which was seen with Uber Technologies Inc. and WeWork, two of the fund’s flagship investments. Investors have shown concern that the fund lacks a clear statement of what the fund’s strategy and objectives are.
SoftBank’s fund has shown positive returns, although slim, but some high profile losses led to investors questioning the strategy it operated by. WeWork is the prime example of this: financial analysts could not understand its business model, and were more than reluctant to invest in the company, yet SoftBank and WeWork still decided the best plan was to go public. The rest we all know: a drop in valuation from $47bn to just $3bn in under a year, resulting in a valuation below SoftBank’s $4.4bn investment. Further still, the $9.5bn rescue package was a bigger blow to Vision’s reputation.
When launching the Vision fund in 2017, SoftBank disposed of $45bn from the a Saudi fund, $15bn from a UAE fund, $1-3bn each from Apple, Foxconn, Larry Ellison’s family office, Qualcomm, Sharp, as well as contributing $28bn of its own capital. Vision Fund was unique in many respects: the will to compete with US-based VCs through private acquisitions rather than turning startups public, and a 12 year horizon with a potential 2 year extension (much longer than the traditional 5-10 year fund horizon). The fund was set out to make investments in AI-related companies, which was a major selling point, and a manifestation of SoftBank’s global strategy. Vision Fund, however, built a portfolio of highly capital-intensive startups – think WeWork and Uber, that generated no profits, and were far from the high flung promises initially laid out.
SoftBank was quick in its spending, slowly escalating through investments in firms such as Flipkart, Nvidia, Ola, Paytm, Uber, and WeWork. Vision currently holds investments in approximately 90 companies, and is behaving increasingly similar to a tech oriented hedge fund.
SoftBank reported a substantial operating loss of about $13bn in April 2020, mainly due to write downs in many of its investments. In that time, Vision Fund became the biggest contributor to that loss.
The takeaway from Vision Fund’s lackluster performance is that large amounts of committed capital do not yield investment success. SoftBank has rested on the laurels of their previously successful returns to generate a lot of buzz surrounding Vision Funds I and II, but recent performance has not been indicative of a continued success. Son apologized publicly for this poor performance, and we can only hope SoftBank will turn around and re-establish themselves as technological investment pundits.
Authors: Calum Welstead, David Sigant-Båtman, Joanna Przadka