Making sense of SoftBank’s long road to redemption

In their very conception, size was a defining trait for the talismanic leader of Japan’s SoftBank Group, Masayoshi Son. SVF 1 was launched in 2017 with a target corpus of $100 billion. While SoftBank was an anchor investor, it also drew sovereign wealth funds from West Asia and tech majors like Apple. It targeted late-stage investing and cut big cheques.

As SVF 1 faced challenges with deployment and exits, Son pared ambitions for SVF 2, launched in 2019 with a smaller corpus and a wider portfolio and without external investors. SVF 2 is about 60% the size of SVF 1, but has invested in about thrice as many companies. Yet, as of June 2022, both funds are in the red.

While weak public markets are one reason, the blows to their set of private companies is a greater cause for concern. Of the 349 companies across the two funds, over 80% were marked down in the latest quarter. Most were private companies. While SVF 1 made its significant investments between 2017 and 2019, SVF 2 did so during 2020 and 2021. A markdown in private companies suggests the two funds overestimated performance and valuations.

Mature valuations

A reading of the part of their portfolios that is listed on public markets suggests that, despite cutting big cheques, the two SoftBank funds were entering companies at valuations that were mostly mature, even stiff. Thus, when some of these companies went public, the SVFs made money. But they didn’t have the cushion of gains that could weather corrections in prices caused by crumbling markets.

Take SVF 1, which has been around since 2017 and has had some time to invest and exit. On its current public holdings of 23 companies, it is down about 26% on its investment cost of $32.5 billion. In 10 of these, SVF 1 invested at least $1 billion, including Indian company Paytm. As of June 2022, in just four of these 10 companies was SVF 1 in the money. And its loss in just one company, DiDi Global, exceeded the gains made elsewhere.

Public recovery

As they try to recover reputation and performance, the two SVFs need sentiment in public markets to look up. They have deployed their capital. They need investee companies to use this capital to deliver high rates of business growth and profits. And, at some point, they would want to monetize their investments. An essential outlet for that monetization is listing on the stock market, either through initial public offerings (IPOs) or by taking the special purpose acquisition companies (SPACs) route, where an investee company acquires a listed company.

Of the 42 public listings of SVF companies, 28 were IPOs and 14 were SPACs. Much of these happened in 2021. In 2022, however, public markets across the world have gone cold. Central banks, led by the American one, have tightened the flow of funds. In the first six months of 2022, the number of IPOs in major markets are presently on course to trail the 2021 count by a big margin.

Sectoral setbacks

Barring consumer, logistics and frontier tech for SVF 1, both SVFs are currently losing money across sectors. They do have time on their side. Their lifespan is scheduled to stretch between 2029 and 2034. At the same time, their performance this far has been underwhelming. While announcing the latest results, Son warned of radical changes, including in investment approach, personnel and cost structures.

Size hasn’t helped the SVFs. Deploying a large corpus has meant the necessity to write big cheques. In a relatively new asset segment, that can mean being limited by choice, especially from a portfolio management perspective. For example, they are invested in more than 20 of India’s 100-plus unicorns, including Oyo, Ola, Unacademy, Meesho and ElasticRun, according to data provider Tracxn. Some of these are facing headwinds and the IPO route looks difficult for now. For the two SVFs, it’s a long road to redemption.

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