Japan’s SoftBank Group  says it has secured $108bn for its second Vision Fund, which will focus on AI investments. The news arrives despite the first fund still sitting on tens of billions of uninvested cash and having yet to realise gains on most of its equity stakes. The announcement brought SoftBank’s stock up 1% by the end of 26 July. By the time the markets had closed on Monday, the stock had risen a further 4% to 5,885 Yen.
Among those that have signed memoranda of understanding to become limited partners in Vision Fund 2, are Apple [AAPL] and Foxconn , who also invested in the original fund, as well as new entrants such as Microsoft [MSFT]. Standard Chartered [STAN] and a plethora of Japanese banks are also expected to join as partners, while Goldman Sachs [GS] will provide debt financing, according to a report by The Wall Street Journal.
Notably absent from the preliminary list of LPs were Saudi Arabia and the United Arab Emirates, whose sovereign funds together accounted for two-thirds of investment in the first Vision Fund, although both governments have said they are likely to invest again.
Microsoft and Apple: paying the admission price
The Wall Street Journal’s report points out that ROI is not the only potential benefit of investing in SoftBank’s Vision Fund. Instead, businesses see it as a way of getting access to the growing companies that are in SoftBank’s portfolio.
For banks like Goldman Sachs and Standard Chartered, investment presents an opportunity to lend cash to or work on IPOs for the next big names in tech. Microsoft has reportedly been assured by SoftBank executives that the fund is encouraging its companies to shift away from Amazon’s [AMZN] Web Services cloud platform to use Microsoft’s equivalent. Apple, meanwhile, sells its iPhones to SoftBank’s mobile phone customers.
After the announcement shares in Microsoft and Apple rose as much as 0.6% and 0.9% respectively within the first hour of trading on Friday.
SoftBank puts its own skin in the game
While SoftBank CEO Masayoshi Son has contributed personal funds to the first Vision Fund, the newer vehicle will see the company itself contribute capital, to the tune of $38bn.
According to a Bernstein study of data released by SoftBank, the first Vision Fund has delivered a 62% return on the $64bn it had invested as of June, out of a total of $100bn under management. Much of those gains, however, derive from rising valuations for private companies that the fund has invested in, such as China’s Didi Chuxing, shared office provider WeWork, ride hailers Olacabs and Grab, and fintech firm Kabbage.
Even in the case of SoftBank, portfolio companies that have made the transition from privately-funded to publicly-listed – like Guardant Health [GH], Slack [WORK] and Uber [UBER] – gains for the Vision Fund have again arisen from higher valuations, rather than any exit by way of a stake sale. As for SoftBank’s investment in Uber, that proved a risky strategy: shares only recently inched back up around May’s IPO price of $45.
|PE ratio (TTM)||3.73|
|Quarterly Revenue Growth (YoY)||3.70%|
SoftBank share price vitals, Yahoo Finance, 30 July 2019
To compensate backers, to which it promised $10bn in returns by year-end, SoftBank is reportedly looking to raise $4.5bn in loans using holdings in Vision Fund as collateral.
For investors looking to benefit from SoftBank’s audacious plays, Bernstein says buying into SoftBank Group itself may be a way to gain exposure to the Vision Fund portfolio. Shares in SoftBank trade at a 70% discount to assets in the group, when Vision Fund’s investments are taken into account.
“Small investors are able to access a huge portfolio of some of the most impressive new companies on the planet without having to pay fees for the privilege,” wrote Bernstein analyst Chris Lane in June. “This is the biggest advantage of the Vision Fund.”
“Small investors are able to access a huge portfolio of some of the most impressive new companies on the planet without having to pay fees for the privilege” - Bernstein analyst Chris Lane