SoftBank Vision Fund loses $2b on murky portfolio performance

FILE PHOTO: Japan's SoftBank Group Corp Chief Executive Masayoshi Son attends a news conference in Tokyo, Japan, November 5, 2018. REUTERS/Kim Kyung-Hoon/File Photo

In a sign of continuing struggles with its startup investments, SoftBank Group Corp. lost money again in its Vision Fund, one quarter after the Japanese company posted a record loss driven by the meltdown at WeWork.

The Vision Fund lost 225.1 billion yen ($2.05 billion) for the three months ended in December, the company said in a statement Wednesday. SoftBank Group reported a slim operating profit of 2.6 billion yen, compared with the 344.7 billion yen average of analyst estimates in the September quarter.

The past 12 months have been a roller coaster for SoftBank and founder Masayoshi Son. A year ago, the company unveiled a record buyback, sparking a rally that pushed shares to the highest since its dot-com peak in 2000. Uber Technologies Inc.’s disappointing public debut and the implosion of WeWork wiped out the gains over the next few months. But SoftBank surged again in the past week after activist investor Paul Singer took a stake and Son won approval to sell his Sprint Corp. to T-Mobile US Inc.

Son focused on the positive in a presentation to shareholders and the media in Tokyo. He said the Vision Fund is on track to return to profit in the current quarter. The eight portfolio companies that are publicly trading, including Uber, Slack Technologies Inc. and Guardant Health Inc., have added $3 billion in paper profit in the current three months, he said.

“At the last earnings briefing I used the words ‘I regret’ 20 times. But after a difficult winter always comes spring,” Son said. “The tide is turning,” he added, standing in front of a slide with the same words and a crashing wave.

The most dramatic change in portfolio value since the quarter closed was Uber, whose shares have climbed more than 35% this year. That, Son said, means the Vision Fund’s stake is now worth $1.5 billion more than its investment, compared with $1 billion less at the end of December.

The Vision Fund’s overall performance was murkier. SoftBank said the fund’s portfolio remained unchanged from the previous quarter at 88 investments. It reported a gain in valuation for 29 companies in the December quarter, while 31 saw their worth decline. The unrealized gain on the investments, or the difference between the cost at which it acquired the stakes and their present fair value, shrunk to $5.2 billion. That’s less than a third of the paper profit SoftBank reported six months ago.

“Vision Fund is still going to have a lot of problems,” Amir Anvarzadeh, a market strategist at Asymmetric Advisors Pte in Singapore, said in an interview on Bloomberg Television before the earnings announcement. “They really need to focus on profitability rather than sales growth.”

SoftBank also said it is introducing new governance standards for its portfolio companies that cover corporate governance standards, including the composition of the board of directors, founder and management rights, rights of shareholders, and mitigation of potential conflicts of interest. The new rules will “enhance value creation and liquidity” at SoftBank’s portfolio companies, it said in a statement.

Singer’s Elliott Management Corp. took a stake of almost $3 billion in SoftBank, saying the Japanese company’s shares are woefully undervalued compared with assets like its stake in Alibaba Group Holding Ltd. Singer’s agitating for another buyback, arguing it could spend as much as $20 billion by trimming investments in companies like Sprint and Alibaba.

“A share re-purchase seems more likely, now that Elliott is involved,” Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co., said prior to the announcement. “Investors need Son to start showing some results with his investments, because at this point it sounds like it’s just Alibaba.”

Elliott wants SoftBank to set up a special committee to review the investment process at the Vision Fund, which it thinks has dragged on the share price despite making up a small portion of assets under management, people familiar with the matter have said.

At least one of Son’s bets continues to deliver consistently: Alibaba. SoftBank said it booked a 331.9 billion gain from the e-commerce giant’s listing in Hong Kong.

Son’s investment in Alibaba two decades earlier is still the best bet the billionaire has made to date. It turned $20 million into a stake worth over $130 billion, a spectacular return that cemented Son’s reputation as an investor and helped him raise the $100 billion Vision Fund. But the track record since then has been spotty. In addition to the WeWork fiasco, he suffered setbacks at portfolio companies, including Wag Labs, Zume Pizza and Brandless Inc.

Still, Son is determined to raise a second Vision Fund, originally targeting at least $100 billion. Major backers of the first fund, Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment Co., have remained on the sidelines so far. But SoftBank has weighed contributing $40 billion to $50 billion, people familiar with the matter have said.

“Masa will strongly resist selling any more Alibaba,” Chris Lane, an analyst with Sanford C. Bernstein, said prior to the announcement. “But the company will struggle to fund both Vision Fund II and buybacks unless they get a large outside commitment to VF II.”

SoftBank’s last share re-purchase was announced about the same time a year ago, a record 600 billion yen. SoftBank closed 12% higher in Tokyo before the earnings announcement, buoyed by news that the sale of Sprint to T-Mobile US Inc. won approval. The shares are up 21% this year.

The company’s own sum-of-parts calculation puts its total value at more than 12,000 yen a share. That’s more than double SoftBank’s actual share price, which values the company at about $110 billion. Elliott thinks SoftBank’s net asset value could be about $230 billion, people familiar with the discussions have said.

Son urged investors to focus on SoftBank’s shareholder value, which would include its stake in Alibaba, rather than operating profit, which is swayed by share price fluctuation in investments like Uber. To illustrate, he showed a slide with a 19th century visual illusion that can look like a duck or a rabbit depending on perspective.

“The only measure by which SoftBank, an investment company, should be evaluated by is whether shareholder value rises or falls,” he said.

Bloomberg

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.