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SoftBank pushes back USD 108 billion Vision Fund sequel

Son plans smaller ‘bridge fund,’ says he is in no hurry to sell Alibaba stake.

Source: Unsplash

SoftBank Group CEO Masayoshi Son on Wednesday said he is scaling back plans for another giant technology fund, at least for now, in his first public admission that a string of bad investments has hampered his fundraising efforts.

In July, SoftBank said it would create a sequel to its roughly USD 100 billion Vision Fund. It said it had signed memorandums of understanding with investors to raise at least USD 108 billion to deploy in the world’s technology companies. Son declared in August that the new fund would start investing within three months.

A dramatic turn came on Wednesday: “This time, I am thinking of reducing the size,” Son said during an earnings presentation in Tokyo, where SoftBank announced a 92% year-on-year decline in net profit for the October-December quarter.

Son said he is considering raising a “bridge fund” with a shorter duration than the Vision Fund, which runs until 2029, and “one or two years’ worth of capital.” He added that no final decision had been made, including the size of the fund.

“Many people were worried. They felt anxious,” he said.

“I want to do something smaller with a shorter period of time, give everyone a sense of relief, before officially doing a bigger one.” Meanwhile, SoftBank continues to invest on its own.

The more modest, short-term strategy marks a significant shift from Son’s ambitions of turning SoftBank into an investment juggernaut with stakes in the world’s leading tech enterprises.

The first Vision Fund, backed by the sovereign wealth funds of Saudi Arabia and Abu Dhabi, spent more than USD 70 billion in less than three years — mostly on companies with private valuations of USD 1 billion or more. But its significant loss on investments in US office-sharing company WeWork, as well as a drop in shares of Uber Technologies after it went public, spooked investors.

As returns came under pressure, the Vision Fund’s structure also attracted scrutiny. External investors were given a bond-like 7% payment for part of their commitments, requiring the fund to return cash early on.

The looming concerns have dented SoftBank’s own stock price, and have drawn in US activist hedge fund Elliott Management. Elliott reportedly amassed a more than USD 2.5 billion stake in the company and is demanding share buybacks and changes in governance.

SoftBank has about JPY 2 trillion (USD 18.2 billion) in cash on hand, nearly enough for the USD 20 billion in stock repurchases at the upper range of Elliott’s demands. But this money is intended for debt repayments over the next two years. Funding large-scale shareholder returns would require SoftBank to sell some of its 31 trillion yen in assets.

On Wednesday, Son said he had an “honest and thorough discussion” with Elliott’s management and said he agreed that SoftBank’s share price is undervalued. He plans to appoint a replacement for Fast Retailing founder Tadashi Yanai, who left his post as an independent SoftBank director at the end of last year, at the upcoming shareholders meeting.

But Son brushed off speculation that he will quickly wind down his conglomerate’s roughly USD 150 billion stake in China’s Alibaba Group Holding to fund buybacks.

“I am not saying that I won’t sell [Alibaba] forever,” Son said. “But it still has room to grow. I do not intend to sell in a hurry.”

SoftBank reported a quarterly net profit of JPY 55 billion on Wednesday, down 92%. The Vision Fund, which reports income based on changes in the value of its investments, posted a JPY 225 billion operating loss.

Son stressed positive developments at some loss-making businesses including the Vision Fund. The fund made a profit of USD 3 billion since the start of the year, he said, thanks to a rebound in Uber’s stock price.

On Tuesday, a judge ruled in favor of a merger between SoftBank’s U.S. telecom carrier, Sprint, and its rival T-Mobile, triggering a surge in Sprint’s stock price.

And WeWork on Wednesday announced a five-year business plan, aiming for positive earnings before interest, taxes, depreciation and amortization in 2021. Son said WeWork had secured USD 5.3 billion in cash and debt, which is more than enough to cover its funding needs.

“Today, I am experiencing that a severe winter is followed by spring,” Son said. “The tide has changed.”

Still, it is unclear how quickly SoftBank can turn its investments around.

“The Vision Fund has just begun,” Son said. “It is not necessary to be happy or sad with ups and downs every three months.”

To regain investor confidence, SoftBank will need to get more of its investee companies on track toward growth and improve their value.

After WeWork nearly collapsed, a number of the businesses in SoftBank’s portfolio have begun pivoting away from strategies aimed at rapid expansion, focusing instead on profitability. Indian budget-hotel startup Oyo Hotels & Homes, once cited by Son as a success story, is slashing payroll domestically and in China.

Chinese businesses are believed to account for about 40% of the Vision Fund’s portfolio by value. An economic slowdown there could add to the fund’s woes.

This article first appeared on Nikkei Asian Review. It’s republished here as part of 36Kr’s ongoing