SoftBank Group’s [9984.T] Vision Fund became a clear worry to investors in September, after office-sharing firm WeWork’s aborted initial public offering. Earlier this year, though, things had looked much rosier for the Japanese conglomerate’s investment fund, and its share price.
But based on the inaugural fund’s missteps, many are now trying to gauge how investments made by SoftBank’s second Vision Fund might pan out.
At the end of June, the fund had invested $71.4bn of its $100bn war chest in 83 fast-growing and largely unproven firms, recording $20.2bn in investment gains and distributing $6.4bn to investors, according to a Reuters report.
Amount invested of SoftBank's $100bn war chest
A dash to success
Before the problems with WeWork, Softbank’s bets had achieved some notable successes. For example, delivery platform DoorDash’s value has climbed from $1.4bn last March to $12.6bn in May, giving SoftBank a 62% return on its investment.
Yet the the plunging valuations of many of the newly listed portfolio firms that SoftBank invested in have put the company’s paper gains in doubt, Reuters reports. Ride-hailing company Uber’s [UBER] share price is down by 31% from its year-to-date high of $47.08 in late June, while Slack Technologies [WORK], which was at $38 in July, closed at $22.99 on 16 October.
Meanwhile, SoftBank Group’s [SFTBY] own share price has dropped during the turmoil from $27.94 in July to $19.41.
“The Vision Fund has bid up the values of its portfolio companies with reckless abandon and, consequently, now faces a harsh choice,” states GuruFocus.com.
“It can either accept on the valuations of its bloated portfolio companies or it can keep injecting capital by itself. While unpalatable, the former option is preferable, as the latter is simply unsustainable.
“Kicking the can down the road can save embarrassment for a while, but it will only be that much more costly when reality forces its way in. The Vision Fund now threatens to drag significantly on SoftBank's finances,” GuruFocus.com adds.
Sanford C. Bernstein has estimated that Vision Fund’s write-down could be as much as $5.93bn including $3.54bn in the value of its Uber stake, $350m in Slack and $1.24bn from its investment in WeWork.
Mitsubishi UFJ analyst Hideaki Tanaki said there would be more pain and volatility ahead for the SoftBank Group with full year operating profit forecast to slip from $14.8bn to $9.4bn.
Neil Campling, analyst at Mirabaud Securities said: “This calls into question how SoftBank values their investments. Investors will question what the internal rates of return really are.”
“Investors will question what the internal rates of return really are” - Neil Campling, analyst at Mirabaud Securities
Despite stating that he was “embarrassed” by the failings SoftBank Group chief executive Masayoshi Son is reportedly still planning to go ahead with his Vision Fund 2 although analysts believe it is likely to miss the $108bn target set out in July.
Reuters reported that Son was struggling to raise the cash given the problems connected with its high-profile investments and the blow it has had on his reputation as a savvy investor.
It says that major investors such as reportedly Apple [APPL], Microsoft [MSFT] and Standard Chartered [STAN.L], had yet to come on board and that Japanese investment bank Nomura Holdings [NMR] had already decided not to put any cash into the fund. That would leave a $38bn pledge from SoftBank Group as the only significant commitment.
Analysts remain optimistic
However, analysts are still largely in the SoftBank camp with a Buy consensus driven by its profit producing telecoms and internet media unit.
|Quarterly Revenue Growth (YoY)||2.80%|
|Quarterly Earnings Growth (YoY)||257.60%|
SoftBank share price vitals, Yahoo finance, 16 October 2019
Ibrahim Ajami, head of ventures at Abu Dhabi state fund Mubadala Investment, also remains open-minded about the potential of Vision Fund 2. “We are evaluating it and we will continue to evaluate it. I can’t answer yes or no whether we will invest. WeWork is one investment amongst many,” he told a Bloomberg conference. “Unicorn is not a dirty word.”
Mubadala invested $15bn in SoftBank's first Vision Fund.
Son is also relatively bullish declaring that although WeWork and Uber are struggling now “in 10 years they’ll be making substantial profits”.
His vision is clear, but will investors share his optimism?