SoftBank Expects Nearly $17 Billion Loss on Tech-Focused Vision Fund

The investment loss means the $100bn fund, the world’s biggest tech investment vehicle, is likely down since its launch three years ago. That would erase the billions of dollars in gains that the fund touted after investments like Uber Technologies Inc. and WeWork soared.

SoftBank blamed the loss on a “deteriorating market environment” that undercut the valuations of the Vision Fund’s portfolio companies. The downturn also helped push the Japanese company into an expected operating loss of $12bn and net loss of $7bn for the year ended 31 March, SoftBank said Monday, adding that the results could change as figures are finalised.

The collapse of returns is one of the biggest blows yet for the Vision Fund as well as its charismatic creator, Softbank chief executive Masayoshi Son.

SoftBank shares are down nearly 30% over the past year. They traded recently as low as one-third the value of its assets, according to Sanford C. Bernstein analysts.

Son last month agreed to sell billions of dollars of those assets to buy back up to $18bn in stock and $23bn of SoftBank’s debt, aiming to boost its share price and clean up its balance sheet. Analysts say the asset sales could generate as much as $41bn, including from selling part of a stake in Alibaba Group Holding Ltd. that is worth more than $100bn.

Son started the Vision Fund in 2017 with dreams of making it the first in a series of big-ticket investment vehicles that would pump money into the world’s most-promising startups and revolutionise the tech industry. He got billions of dollars from the sovereign-wealth funds of Saudi Arabia and Abu Dhabi, touting investment successes like its early stake in Chinese e-commerce giant Alibaba.

For two years, the Vision Fund poured money at a blistering pace into high-profile tech companies like ride-hailing company Uber and the parent of office-share firm WeWork—sometimes cutting multibillion-dollar checks for money-losing businesses. As of June 30, the fund had earned $6.4bn in realised gains since its inception.

The fund´s struggles predate the coronavirus pandemic. Last year, SoftBank wrote down the value of its holdings by billions after failures at some of its investments, including WeWork, whose IPO plans imploded spectacularly last fall amid mounting losses and apparent lapses in corporate governance. Now the virus has battered many other big investments, including ride-sharing and travel companies like Uber and Indian budget hotel chain Oyo.

The Vision Fund had booked nearly $7bn in losses in the nine months through December, and had around $9bn  in gains from asset sales as well as increases in the value of portfolio companies.

Another nearly $10bn in investment losses would wipe out those gains, and bring the value of the Vision Fund’s assets down to less than what the fund paid to acquire them, estimates David Gibson, an analyst at Astris Advisory Japan.

With the coronavirus pandemic threatening the already fragile operations of many Vision Fund portfolio companies, “we all knew this was going to happen,” Gibson said.

The Vision Fund’s strategy piled risk on top of risk, leaving itself little margin of safety to weather a downturn.

Of the $100 billion committed to the fund, 40% came via preferred stock sold to the Saudis and Abu Dhabi, constituting a debtlike security that pays an annual interest rate of 7% and allows the holders to get their money back before other Vision Fund investors including SoftBank. That structure can juice positive returns, but also magnify losses.

Meantime, the fund may not be able to backstop its cash-burning companies with follow-up investments because cash intended for that purpose might have to go toward paying interest to the preferred investors.

Vision Fund has spent more than $80bn on 91 companies, ranging from a robot pizza maker that is no longer making pizzas to messaging-software maker Slack Technologies. But it is vulnerable because a handful of huge investments have an outsize role in determining the fund’s returns; the top-seven portfolio companies account for about half of its invested capital.

These include Uber and Chinese ride-hailing company Didi Chuxing, which saw their business evaporate as governments locked down cities to halt the spread of the disease. Shares of Uber, in which the Vision Fund has a nearly $8bn stake, are currently trading at around 20% less than the price the fund paid for them.

Of the Vision Fund’s top-seven investments, three are ride-hailing companies.

Revenue fell by half at Oyo, another big investment, as countries closed their borders and travelers disappeared. The hotel company has laid off thousands of workers and is furloughing potentially thousands more. WeWork, also in the top seven, is seeing business dry up as office workers are asked to work from home when possible.

Son had big plans to raise a second, $108bn Vision Fund after blowing through the first one’s capital in two years. Investors disillusioned by poor returns from the initial fund balked at providing additional capital for the second fund.

Source: Wall Street Journal