SoftBank’s vision funds are clouded by weak IPO market
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4 min read . Updated: 07 Apr 2022, 08:20 PM IST Firm’s technology investment funds may have fewer avenues to exit stakes after many rough market debuts
Raising capital with public listings “drives a virtuous cycle of growth and progress," according to SoftBank’s investor deck for its two technology-focused Vision Funds. Except when the market craters.
Vision Fund 1 was launched in 2017 as a 12-to-14-year investment vehicle, but 59% of its invested capital was in investments that it has exited or firms that have already listed as of Dec. 31, according to its investment materials—not even five years into its lifespan. Nearly a third of its public listings as of last year came in the fourth quarter of 2021.
The push proved timely. The tech-heavy Nasdaq Composite soared 58% last year, but fell 15% in the first quarter of 2022. You can hardly blame an investment firm for striking while the iron was hot. Then again, the 22 companies in Vision Fund 1 to have gone public as of Dec. 31 had racked up an average loss of nearly 38% from their respective opening prices as of Wednesday, according to data from S&P Capital IQ.
Consider some high-profile Vision Funds holdings: Chinese mobile transportation company DiDi last year moved to delist from the New York Stock Exchange because of Chinese regulatory concerns just six months after it raised billions of dollars in an initial public offering. Its shares plunged 44% in a single day last month after the company said it suspended preparations for a Hong Kong listing. Shares in synthetic biotechnology company Zymergen have fallen more than 90% from where they opened in last year’s IPO, after the company said revenue this year would be “immaterial."
Vision Funds doesn’t mark its investments against a listing price but rather against the prelisting price at which it originally purchased a stake. As such, even investments that have experienced sharp market-value declines in the public markets can be nicely profitable for SoftBank overall.
But the younger Vision Fund 2, launched in 2019, could have a rockier road. With just 13 public offerings of the 209 investments it has made in Vision Fund 2 so far, SoftBank still has a lot riding on public investors’ appetites for future offerings. While SoftBank also uses debt, public listings provide a key source of cash Vision Funds can put back into new investments. In a November Wall Street Journal interview, Vision Funds Chief Financial Officer Navneet Govil discussed SoftBank’s ability to “effectively recycle" funds from “so many companies going public" as crucial in enabling Vision Fund 2 to exclude outside investors.
SoftBank is a minority investor in its Vision Funds companies and, as such, says it encourages them to pursue public listings when the time is right. With that in mind, it seems likely 2022 will be a slower year from an IPO standpoint, given deteriorating market conditions. It is also reasonable to suggest that Vision Funds will make fewer investments this year in turn.
Chief Executive Masayoshi Son has a considerable personal stake in the outcome. As of Dec. 31, Mr. Son held more than 17% of the total equity interests in Vision Fund 2, which had a total commitment of $51 billion.
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SoftBank itself is also more indebted than it might appear. Bloomberg Intelligence estimates the company’s loan-to-value ratio is already above target: Excluding prepaid forward contracts from loan and asset value and including contingent liabilities and net debt at SoftBank’s internal hedge fund SB Northstar and Vision Fund 2, the firm’s analysis shows SoftBank’s ratio was recently over 36%. SoftBank says its policy is to manage this ratio “below 25% in normal times in financial markets, with an upper threshold of 35% even in times of emergency."
Fewer public offerings for Vision Funds’ investments in the near-term makes the performance of those that do go public important. Global hotel platform OYO has already filed for a public offering, and SoftBank has said semiconductor-design company Arm will pursue a public offering by March of next year after its purchase by Nvidia was quashed by antitrust concerns. The Journal reported Nvidia’s purchase of Arm could have been worth $80 billion to SoftBank, which owns Arm but transferred roughly a quarter of its stake into Vision Fund 1.
SoftBank has to hope the underperformance of its recent listings hasn’t soured public investors on bidding up Vision Funds’ future public offerings. Vision Fund 2 investments that have gone public thus far are down an average of 51% from their respective opening prices as of Wednesday, data from S&P Capital IQ shows.
The company that boasts a virtuous flywheel risks becoming a fly on the wheel.
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