The Financial Times reported last week that Softbank had been buying $4B worth of call options on US tech stocks which may have bolstered the NASDAQ rally since the pandemic doomsday before the sharp decline on the 3rd of September. NASDAQ increased by over 75% since end-March, hit a record high on the 2nd of September theeeen plunged more than 10% since. Softbank Group Corp, following the NASDAQ whale revelation, fell more than 10%.
The issue is that this is effectively ‘pumping’ the stocks that Softbank invests in. This is not illegal but perhaps not what investors thought was being done with the money. Considering the fund borrowed $40B at a reported coupon of 7%, investing in huge call options on the stocks that you already invest in does not seem like sage, considered VC investing?
Uber IPO, WeWork and coronavirus were like “nah” on bluff startup valuations and so now SoftBank turned to public investments. To options bets that can give a $4B a $50B exposure.
Softbank resurrected its share price through share buyback programmes. Following the coronavirus market downturn, SoftBank announced in March that it would sell assets - including T-mobile and Alibaba shares - to raise $42B to fund its share buyback program and cut down debt big time. It paid off alright.
By the end of August, Softbank was up more than 35% from its March-low. Besides asset sales, more factors played part in the SoftBank share price resurrection. A merger between Sprint and T-Mobile closed in April, Softbank-backed Lemonade, an insurance company, had an IPO in July (its share price increased by more than 138% on its IPO day). SoftBank Vision Fund scored two exits in the past month - Kabbage and OSIsoft. SoftBank also plans to sell the $32B British chip maker Arm and part of its wireless network unit Softbank Corp.
Now, let’s look at SoftBank’s startup investments.
We looked at portfolio companies that are held by SoftBank’s Investment Business of Holding Companies (governed by SoftBank Group Corp) and SoftBank Vision Fund.
Softbank has invested in 245 companies (including Alibaba, T-mobile, Arm). Sectors loved by SoftBank the most are: Mobility, E-commerce, Real Estate, Fintech and Healthcare companies.
Mobility : mostly ride sharing/hailing apps, autonomous vehicles
E-commerce : mostly e-commerce platforms and delivery services
Real Estate : mostly property listing marketplaces and WeWork
Fintech : mostly lending companies and some payments companies
Healthcare : mostly insurance companies or health data aggregation companies
Artificial Intelligence is the most used application across all industries of SoftBank portfolio companies. Taking advantage of the AI revolution is also the stated strategy of SoftBank Vision Fund. Robotics, Data management, marketing companies were the biggest beneficiaries of the technology.
The graph above shows the growth of SoftBank’s participation in various deals. Large and notable deals given year and sector are also shown above.
Vision Fund Spotlight
SoftBank Vision Fund had a mega debut back in May 2017, securing a whopping $100B from contributors such as Apple, Qualcomm, Saudi Arabia’s Public Investment Fund (PIF), Abu Dhabi state investment company Mubadala. PIF is the biggest investor of the fund Since its inception, the fund has poured investments into more than 80 companies including once-upon-a-time tech darlings Uber and WeWork.
SoftBank shocked us once again when it announced a $108B Vision Fund 2 with an AI (artificial intelligence) focus in July 2019 after the sad sob Uber IPO story in May the same year. Then the WeWork saga ensued shortly after. Given a disappointing performance of SoftBank Vision Fund 1, the second fund failed to meet its funding goal and is currently spending $38B SoftBank money.
SoftBank Vision Fund’s healthcare darling Relay Therapeutics went public in July at a price of $20.00/share. The price surged 75% on its IPO day and it’s now trading around $35/share. Among nine portfolio companies that went public, six are healthcare companies. Slack and Uber are trading below their prices at IPO. SVF sold off its entire $3.6B stake in Nvidia, a chip maker in January 2019. Indian e-commerce Flipkart went public in May 2018 and Vision Fund sold its stake to Walmart in August the same year.
In an annual shareholders meeting held in May 2019, the Vision Fund posted net returns of 29%. Fast forward to May 2020, SoftBank Vision Fund reported annual losses of $18B for the last financial year ended in March 2020. Then SVF had a turnaround in the past few months and posted a $2B gain through realized gain and valuation markups in end-July since inception. Among 80+ Vision Fund portfolio companies, 48 suffered a mark down leading to a $13.9B valuation loss. 29 investments had a valuation growth recording a $10.2B gain. It’s a $3.7B net valuation loss though realized gains of $6.3B could offset the valuation loss.
So it seems like the Vision Fund had a “rebound” for now and SoftBank Group reported a $12B quarterly profit after a hard year. Cool but where did the long term investing go? OTC?