SoftBank Vision Fund loses US$2b on portfolio struggles

[TOKYO] In a sign of continuing struggles with its startup investments, SoftBank Group Corp lost money again in its Vision Fund, one quarter after the Japanese company posted a record quarterly loss driven by the meltdown at WeWork.

The Vision Fund lost 225.1 billion yen (S$2.84 billion) for the three months ended in December, the company said in a statement on Wednesday. SoftBank Group reported a slim operating profit of 2.6 billion yen, compared with the 344.7 billion yen average of analyst estimates and 704.4 billion yen loss SoftBank reported in the September quarter.

The past 12 months have been a roller coaster for SoftBank and founder Masayoshi Son. A year ago, the company announced a record buyback, sparking a rally that pushed the price to the highest since its dotcom peak in 2000. Uber's disappointing public debut and the implosion of WeWork wiped out the gains over the next few months. But SoftBank surged again in the past week after activist investor Paul Singer took a stake and Son won approval to sell his Sprint Corp to T-Mobile US Inc.

"Vision Fund is still going to have a lot of problems," Amir Anvarzadeh, a market strategist at Asymmetric Advisors Pte in Singapore, said in an interview on Bloomberg Television before the earnings announcement. "They really need to focus on profitability rather than sales growth."

SoftBank said the Vision Fund's portfolio remained unchanged from the previous quarter at 88 investments. It reported a gain in valuation for 29 companies, while 31 saw their worth decline. The unrealised gain on the investments, or the difference between the cost at which it acquired the stakes and their present fair value, shrunk to US$5.2 billion. That's less than a third of the paper profit SoftBank reported six months ago.

SoftBank also said it is introducing new governance standards for its portfolio companies that cover corporate governance aspects including the composition of the board of directors, founder and management rights, rights of shareholders, and mitigation of potential conflicts of interest. The new rules will "enhance value creation and liquidity" at SoftBank's portfolio companies, it said in a statement.

Mr Singer's Elliott Management Corp took a stake of almost US$3 billion in SoftBank, saying the Japanese company's shares are woefully undervalued compared with assets like its stake in Alibaba Group Holding Ltd. Mr Singer's agitating for another buyback, arguing it could spend as much as US$20 billion by trimming investments in companies like Sprint and Alibaba.

"A share repurchase seems more likely, now that Elliott is involved," Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co, said prior to the announcement. "Investors need Son to start showing some results with his investments, because at this point it sounds like it's just Alibaba."

Elliott wants SoftBank to set up a special committee to review the investment process at the Vision Fund, which it thinks has dragged on the share price despite making up a small portion of assets under management, people familiar with the matter have said.

At least one of Son's bets continues to deliver consistently: Alibaba. SoftBank said it booked a 331.9 billion gain from the e-commerce giant's listing in Hong Kong.

Mr Son's investment in Alibaba two decades earlier is still the best bet the billionaire has made to date. It turned US$20 million into a stake worth over US$130 billion, a spectacular return that cemented Mr Son's reputation as an investor and helped him raise the US$100 billion Vision Fund. But the track record since then has been spotty. In addition to the WeWork fiasco, he suffered setbacks at portfolio companies, including Wag Labs, Zume Pizza and Brandless Inc.

Still, Mr Son is determined to raise a second Vision Fund, originally targeting at least US$100 billion. Major backers of the first fund, Saudi Arabia's Public Investment Fund and Abu Dhabi's Mubadala Investment Co, have remained on the sidelines so far. But SoftBank has weighed contributing US$40 billion to US$50 billion, people familiar with the matter have said.

"Masa will strongly resist selling any more Alibaba," Chris Lane, an analyst with Sanford C Bernstein, said prior to the announcement. "But the company will struggle to fund both Vision Fund II and buybacks unless they get a large outside commitment to VF II."

SoftBank's last share repurchase was announced about the same time a year ago, a record 600 billion yen. SoftBank closed 12 per cent higher in Tokyo before the earnings announcement, buoyed by news that the sale of Sprint to T-Mobile US Inc won approval. The shares are up 21 per cent this year.

The company's own sum-of-parts calculation puts its total value at more than 12,000 yen a share. That's more than double SoftBank's actual share price, which values the company at about US$110 billion. Elliott thinks SoftBank's net asset value could be about US$230 billion, people familiar with the discussions have said.

"Buybacks would provide an immediate shot in the arm," Justin Tang, head of Asian Research at United First Partners, said prior to the announcement. "But more concrete changes are needed to sustain price action."

BLOOMBERG