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The SoftBank Vision Fund is trying to expand faster than they can raise capital privately, WSJ reports they are considering an IPO to meet the need for capital.
The Vision Fund
SoftBank (TYO:9984) created the Vision fund in late 2016 from their SoftBank Investment Corporation division with the goal of creating a private venture capital unit within the company with outside funding. Since inception, the fund has grown to roughly $100 billion covering many different technology investment areas. Due to the size of the fund, when they make an investment or divestment the finance industry takes note, recently we reported their drop of NVIDIA (NASDAQ:NVDA) stock in February citing that most of the losses from the fund were attributed to that specific stock on the year. Other notable holdings for the fund include Slack, ARM, WeWork and Uber with the last two to have IPO’s of their own soon. Of the $100 billion raised about $70 billion has been invested, leaving a sizable amount still at their disposal.
The fund was created with $45 billion in funding from the Saudi Arabian sovereign wealth fund (Public Investment Fund) along with other investors including SoftBank itself. The involvement of the Saudi PIF complicated matters with the murder of Jamal Khashoggi when the fund for the first time had to hire a PR firm.
Current Situation of the Fund
Annual rates of return have varied, but since SoftBank Investment Corporation was listed on NASDAQ Japan (JASDAQ) in 2000 their annualized return is 44 percent, which any investor would be happy to have, even venture capitalists who demand high rates of return on their risky investments. The way venture capital works is that only a few investments need to pay off (but must do very well) to have these portfolios realize the massive gains they have. There are very few investors who could pull off such a feat for 19 years as they have, although with a few peaks and valleys along the way and to have done this so far is commendable.
The Vision fund itself was created to strictly invest in technology companies and has done well doing so but this fund has a short track record dating only back a few years, but with Glen Kacher saying the CEO of SoftBank Masayoshi Son is “the Warren Buffett of tech” last week. If you consider even the short term future with the two IPO’s coming up the trend will almost certainly continue for the short term, however, the reference of Son being referred to as Buffett is short-sighted. Let’s not forget that Son also holds the current record for largest personal loss in history due to the dotcom bubble bursting in 2000 taking his wealth from $78 billion to $8 billion in less than two years, prior to this period he was referred to as the “Bill Gates of Japan”.
We’ve seen a lot of macroeconomic indicators that we may be in for a tough economy for the next few years such as the United States bonds treasury bonds having an inverse yield curve and slower growth in the Chinese economy although this has obviously contrasted with strong US job growth numbers in April giving us a bit of a mixed bag. Much of the developed world is currently sitting with very low-interest rates and pressure from the President Trump to lower US rates to provide an economic lift, but there’s not much room to lower.
SoftBank Already Has Access to the Capital
The Vision Fund has done an excellent job spreading out investors globally and is expanding at a rapid rate, with management hungry to expand faster and grow the fund even further. The amount of assets has grown so fast yet they still claim they can borrow against the fund through banks and operate with $30 billion to invest if opportunities arise. Son told Bloomberg Businessweek that he would like to have a new $100 billion fund every two to three years. There have already been talks about creating a second Vision Fund, which the Saudi PIF has pledged they would invest in as well if it is created. Under the current performance of the Vision Fund, a second fund makes sense because the original Vision Fund is approaching a stage of maturity beyond what it was originally envisioned for with numerous of its major holdings either public or approaching IPO.
As we've already talked about previously (read Finance Editor Adrian Ip's piece here), IPOs and cash raises (hello Tesla!) are great when markets are high as valuations are good. Would it make sense for the retail investing public to dive in to a possible Vision Fund IPO? If you want exposure to the stunning array of technology companies the fund is invested in, possibly. Private companies are of course difficult to trade for the average person but this would give retail investors an opportunity to gain exposure to some of those private companies if they wanted them in their portfolio, however the current market bull run is now the longest in history. Conditions are ripe for a correction and early stage tech investment at the best of times is probably not for the faint of heart. Buying in now feels risky.