Barron\'s - 22.07.2019

July22,2019 BARRON’S 23

Add up all of those pieces, and by

our calculation you get about $170

billion in net value, or about $140

billion if you subtract the potential

30% tax hit on the Alibaba stake.

And we haven’t even gotten to the

Vision Fund—that’s where the really

interesting opportunity lies.

The Vision Fund was set up to

make outsize bets on companies

changing the world through the

power of technology generally and

AI in particular. Masa is a huge be-

liever in artificial intelligence; it is

the thread that flows through almost

every investment SoftBank makes

and almost every conversation Masa

has with investors and entrepre-

neurs.

The Vision Fund has commit-

ments for a combined $103 billion

from a small group of investors, in-

cluding $45 billion from Saudi Ara-

bia’s Public Investment Fund and

$15 billion from Abu Dhabi’s

Mubadala Investment Co. Its smaller

investors include Foxconn Technol-

ogy (2354. Taiwan), Apple (AAPL),

Qualcomm (QCOM), and Sharp

(6753. Japan). SoftBank itself com-

mitted $32.5 billion.

The fund’s capital is split about

40%-60% between preferred and

common shares.

The preferred looks more like

debt, with a 7% fixed annual cou-

pon, independent of the underlying

fund’s performance. (The Vision

Fund would make up any shortfall

from cash on hand.) Aside from

SoftBank itself, all investors were

required to take 1.57 preferred

shares for each common share.

SoftBank holds only common. Soft-

Bank Group, as general partner,

also receives a 1% management fee,

plus a performance fee of 20% on

the preferred on all returns above a

certain threshold.

That structure ensures that

strong fund performance provides

tremendous returns to SoftBank

Group itself. And, so far, so good. For

the fiscal year ended March 31, the

fund generated a 45% return on the

common, a blended 29% return for

the limited partners, reflecting the

capped 7% return on the preferred,

and a 62% return for SoftBank

Group, reflecting both its more con-

centrated exposure to the common

and management and performance

fees.

As of March 31, SoftBank Group

estimates the total value of its stake

in the Vision Fund at $26.2 billion,

which reflects $18.6 billion of paid-in

capital, plus distributions to date, its

share of unrealized portfolio gains,

and accrued management and per-

formance fees. The simplest ap-

proach is to value the stake at that

level, although that doesn’t give them

full credit for the rich stream of re-

turns and management fees that are

likely if the fund’s bets are net win-

ners. (Asset managers like the

Blackstone Group [BX] tend to be

valued at multiples of their manage-

ment and performance fees.)

Throw that $26.2 billion into the

calculation, and SoftBank Group

now looks undervalued by about $65

billion, or close to two times its cur-

rent market cap if you use the full

value of the Alibaba stake. Not re-

flected here is Softbank’s announced

intention to raise a second Vision

Fund, expected to be comparable in

size to the first.

Under what Masa calls the “clus-

ter of No. 1 strategy,” the Vision

Fund looks for companies with a

market share of 50% to 80%—and

then takes stakes of at least 20% to

30%, investing aggressively to drive

growth fast and globally. Through

March 31, the fund had invested $64

billion; SoftBank expects the fund

to make total bets somewhere be-

tween $85 billion to $90 billion, sav-

ing cash for follow-on rounds.

A handful of the Vision Fund’s

portfolio companies already have

gone public, including Uber Tech-

nologies, Guardant Health (GH),

Slack, Ping An Healthcare &

Technology (1833. Hong Kong), and

ZhongAn Online Property & Ca-

sualty Insurance (6060. Hong

Kong). As of March 31, before the

Slack listing, the fund had unreal-

ized gains from IPOs of $1.5 billion.

The fund scored gains of $4.4

billion on two other investments:

Flipkart, an India-based e-com-

merce company acquired by Wal-

mart (WMT) in 2018, and a briefly

owned stake in the chip maker

Nvidia (NVDA), in a rare departure

from the fund’s focus on start-ups.

More exits are ahead. The Vision

Fund holds positions in several

dozen unicorns including WeWork,

which leases office space and then

rents it out on a short-term basis,

the food delivery service DoorDash,

and the Chinese social networking

company ByteDance, parent of the

short-video platform TikTok. In to-

tal, there are currently about 80

investments in the fund. (A nearby

chart gives a fuller look at the

broad portfolio.)

To date, the fund has bet most

heavily on transportation and logis-

tics companies, which account for

44% of its portfolio. That includes

the ride-sharing and food-delivery

wagers.

The Vision Fund’s giant cash pile

allows it to operate in ways that

other venture funds simply can’t. As

a result, it gets a look at almost

every promising start-up. From in-

ception through March 31, the Vi-

sion Fund considered 2,257 opportu-

nities, and invested in 71, about 3%

of the total, SoftBank says. A little

under half of the investments to

date are in the Americas; most oth-

ers are Asia-based, with a smatter-

ing in Europe. While the fund has

130 investment professionals, Masa

has the final say, and doesn’t hesi-

tate to reject deals.

For companies that win Masa’s

approval, the capital and connec-

tions can be life-changing.

Guardant Health CEO Helmy

Eltoukhy says his company was

able to “move even faster and scale

more aggressively” following a $360

million investment round that the

Vision Fund led in 2017. The cancer

diagnostics company, which uses AI

techniques for data analysis, had

previously raised about $200 million.

“We had a series of meetings with

Masa,” he says. “He became person-

ally engaged. He’s really an out-of-

the-box thinker, with a gut feel for

where things are going... You never

know with Masa where you’ll end up.

You explore opportunities you might

not have thought of before.”

For instance, Guardant and Soft-

Bank set up a joint venture to accel-

erate the company’s activities in

Asia—a tactic SoftBank has used

with a number of portfolio compa-

nies. Guardant went public in Octo-

ber 2018; the stock has since appre-

ciated about 400%.

Mihir Shukla, CEO of Automa-

tion Anywhere, a pioneer in “robotic

process automation,” says it took

Masa “30 seconds” to understand

his company’s seemingly complex

story. Its brush with Masa turbo-

charged Automation Anywhere.

Previously bootstrapped, it raised

$550 million in its first financing

round last year, $300 million of that

from SoftBank.

Shukla says he speaks with Masa

at least once a month. “We’ve had

so many amazing conversations,” he

says. “One of the things I love is

that he thinks big.”

Could it all go wrong for Soft-

Bank? Sure. Anyone worried that

we’re in Bubble 2.0 will see in the

Vision Fund shades of SoftBank’s

unfortunate widespread market ex-

posure 20 years ago. There are no

assurances that Arm will go public,

or that Sprint’s deal with T-Mobile

will close, or that the early strong

returns from the Vision Fund will

continue. Some real-estate industry

analysts see considerable risk in

WeWork’s business model, and that

company’s initial offering could face

the same tepid reception that Uber

received.

And SoftBank’s close ties to Saudi

Arabia have created uncomfortable

moments for Masa and the fund, in

particular following the murder of

the Saudi journalist Jamal

Khashoggi; Masa says Khashoggi’s

death was “a sad thing that should

have never happened.” It remains to

be seen if Saudi dollars will be as

central to Vision Fund 2 as they

were to the first fund.

But for all that, the math simply

works in the favor of investors.

New Street Research analyst

Pierre Ferragu boils it down this

way: At the current valuation, inves-

tors get both the Vision Fund and

Arm for less than zero. “There’s

way more upside than downside,”

he says.

In part, SoftBank Group has re-

sponded to the wide discount to its

underlying asset value by buying

back shares. In February, the com-

pany set a $5.5 billion stock repur-

chase plan.

Masa, meanwhile, says he’s confi-

dent that “people will understand,

sooner or later, the real value of our

company...valuation will catch up.”

You may want to buy the stock

now, before it does.

Tell Us What

You Think:

Will SoftBank

succeed in its

enormous bets

on new

technologies?

Write us at

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“Masa engages

deeply on

long-term

strategy—he

wants to

make sure

conservatism

doesn’t get in

the way of

ambition.”

—ARM CEO

Simon Segars