This article is about the SoftBank Vision Fund, the world’s largest venture capital fund in terms of current Assets Under Management (”AuM”). Affiliated with SoftBank Group (“SoftBank” or “SBG”), the fund raised nearly $100 bln in its one fundraising to date in May 2017, the largest amount raised by a venture capital (“VC”) fund ever in one go (with the next largest (non-government affiliated) VC fund raising being the $6 bln raised by Sequoia Capital Growth Fund III in June 2018, source see Toptal website).
The Vision Fund has been in the news for several months now for the wrong reasons, first with respect to the failed IPO of WeWork and then because of the impact of the poor results of the fund on full year results of SoftBank for its year ended March 31, 2020. Many “inside” stories have also appeared about the Vision Fund, some not particularly flattering because they discuss the rather complex relationships amongst some of the principals of the fund and – in some cases – between the management of Vision Fund and senior executives at SoftBank. Of course, understanding these complex interpersonal relationships requires close access to the Vision Fund and its principals, a luxury I do not enjoy. Rather, my focus in this article is on the Vision Fund’s history and investment track record.
I will focus first on SoftBank and the Vision Fund so as to provide context, and then will raise the issues which I believe have influenced the poor performance of the fund so far. It is important to remember that although the fund is closed now to investments in new companies, the various twists and turns of this saga and its key actors are far from over. Time will be the ultimate arbitrator on the success of the Vision Fund, and the recent market recovery will have greatly assisted in the fund’s performance, certainly compared to the time of SoftBank’s most recent fiscal year end on March 31, 2020. The concept and the beginning Masayoshi Son, the founder, CEO and Chairman of SoftBank Group Corp, first mentioned the concept of the Vision Fund in October 2016. As he said in the company’s annual report for 2017 (fiscal year ends March 31st so I am referring to the March 31, 2017 annual report), Mr Son noted that the aim of the newly named Vision Fund was “to invest in promising technology companies around the world.” He went on to say that the Vision Fund would:
“….make large-scale, long-term investments in companies and platform businesses that have the potential to spark the next generation of innovations. We [SoftBank] will utilize our abundant insight and business networks to support the growth of the fund’s portfolio companies. In doing so, we aim to further accelerate the Information Revolution.”
It is clear from several references in the 2017 annual report that the Vision Fund would focus on later-stage technology companies, especially ones involved with the Internet of Things (“IoT”), artificial intelligence or robotics. The fund would consider investments in both public and private companies. Ultimately, the strategy was perhaps best summed up in this reference, also from the 2017 annual report:
“….the Group aims to accelerate the information revolution even further by forming a corporate group of like-minded companions with a shared passion for “Information Revolution — Happiness for everyone.”
It almost sounds like something that WeWork would say!
Mr Son had certainly earned the reputation to be able to pull off something as bold as the Vision Fund, having started SoftBank Group in 1981 and then building the company into one of the largest and most dynamic public companies in the world. SoftBank is perhaps best known for its operating business in mobile telephony and broadband, and also for its well-timed and highly successful investments in Alibaba in 2000 ($20 million) and 2004 ($82m), a stake which was worth $60 bln by the time Alibaba went public in 2014 and is worth around $154 bln today. SoftBank has made many other headline grabbing acquisitions over the years in technology, telecom and media companies, with the impetus and vision driven largely by Mr Son. It is hard to argue against the fact that Mr Son has earned the right to be considered a visionary, highly confident in his view of the future.
The Vision Fund – it’s big!
Trying to fit together the complex pieces of the Vision Fund solely from the SoftBank’s annual reports and other disclosure documents is not easy. The 1Q2018 interim report (quarter ended June 30, 2017, see starting p. 17) of SoftBank reported that the Vision Fund initially closed with commitments of $93.2 billion in May 2017, and a new segment was created in the SoftBank financial reports starting with that quarter. To put the size of the fund in context, The Economist reported in its May 12th, 2018 edition that the Vision Fund raised more in commitments than the entire global venture capital industry in 2016 ($64 bln). In fact, Crunchbase estimates that around $1.5 trillion was raised globally for venture capital funds over the entire 10 year period 2010-2019. This means that in its one and only fund raising in 2017, the Vision Fund accounted for 6.2% of the total amount of venture capital raised during the entire 10-year period. Any way you slice it, the size of the Vision Fund was truly phenomenal, even more so when considering it was essentially a debut fund.
Key Investors
It might be most accurate to describe the Vision Fund as a small partnership amongst three very large and deep pocketed entities – SoftBank, the Public Investment Fund of Saudi Arabia (“PIF”), and Mubadala, one of several sovereign wealth funds for Abu Dhabi. These three investors accounted for over 94.4% of the $93.2 bln (excluding the $5 bln employee incentive plan) in the first closing, split:
SoftBank: $28.1 bln ($33.1 bln if include the Employee Incentive Fund)
PIF: $45 bln
Mubadala: $15 bln (shared across a second fund named Delta Fund)
Other investors mentioned in the company’s March 31, 2017 annual report included Qualcomm, Apple, Foxconn and Sharp, which collectively must have accounted for the remaining $5.1 bln.
The story of the Vision Fund is made slightly more complex by the existence of a sister fund, the Delta Fund, in which two investors - SoftBank ($4.5bln) and Mubadala ($1.5bln) – committed $6 bln. As I understand it, Mubadala’s $1.5 bln commitment to the Delta Fund is essentially a sub-limit under the investor’s $15 bln commitment to the Vision Fund, which means that every dollar that the Delta Fund draws from Mubadala’s $1.5 bln commitment for the Delta Fund reduces its commitment to the Vision Fund by one dollar. The Delta Fund owned only one asset – shares in China’s Didi (the ride hailing company for China, a la Uber), originally acquired by SoftBank on May 26th 2017 for $5 bln. SoftBank contributed its shares of Didi to the Delta Fund at cost in 2Q2017 to satisfy a portion of its commitment to this fund, and I presume that Mubadala funded its 25% portion with cash. During SoftBank’s fiscal year 2020, DiDi was transferred to the Vision Fund, resulting in the Delta Fund having no assets as of March 31st, 2020.
Both the Vision Fund and the Delta Fund (when it existed) are managed by SoftBank Investment Advisors (“SBIA”), a wholly-owned subsidiary of SoftBank based in London and established to manage the fund. This means that SoftBank is essentially “pulling the strings” of the Vision Fund, not a revelation by any means since the Vision Fund is SoftBank’s idea from the onset.
As far as SoftBank’s own commitment to the Vision Fund, $8.2 billion of its $28.1 billion commitment came from its contribution of 24.99% of ARM Holdings, a British chip manufacturer and software company that SoftBank acquired in the summer of 2016 for $32 billion. I presume that the remainder of its commitment was in cash. It is my understanding that all other investors contributed cash (rather than in-kind assets), although there were companies owned simultaneously by one or more of the three investors directly and by the Vision Fund at times, resulting in some complexities that I found challenging to unravel, not to mention the fact that that multiple affiliated investors could potentially result in conflicts of interests.
The structure of the Vision Fund
The structure of the fund was also very different than most venture capital funds, with three separate “equity” tranches, as follows (in order of priority): 1. a preferred-return element (debt like) owned only by third-party investors, 2. a performance-based equity tranche owned only by third-party investors, and 3. a “plain vanilla” equity tranche owned by SoftBank. This diagram below from SoftBank’s 2019 Annual Report (dated March 31, 2019) shows the split of ownership and the waterfall of distributions to the investors based on the tranche they hold.
Third-party investors bought a package of preferred equity with a fixed distribution and common equity with a performance-based distribution (the top two traches in the diagram above), split roughly 62%/38%. All of SoftBank’s contribution was in equity illustrated at the bottom of the table above. The Vision Fund’s debt-equity mix is roughly 43%/ 57%. At closing, the preferred shares had up to a 12-year life and an annual dividend yield of 7% which was notcontingent on performance, essentially making it debt-like. As the fund manager and general partner, SoftBank (via SBIA) was to earn 20% of realised returns in the Vision Fund in excess of 8%/annum, and also receives an annual management fee of between 0.7% and 1.3% per annum, which was different depending on each investor.
The fund’s investment cycle was closed on September 12th, 2019, with $75 bln having been invested in 88 companies. The unused portion of the commitments to the Vision Fund will be used in the future to support existing portfolio companies, such as when follow-on investments are needed.
Investments over time
Before going over the history of the Vision Fund’s investments, let me provide some context. The website Crunchbase provides a good overview of the venture capital (“VC”) industry, dividing VC funds into three specific types: i) angel & seed, ii) early stage, and iii) late stage & technology growth. The last category, the one on which Vision Fund focuses, generally involves more mature companies needing subsequent rounds of funding in Series D, E, F and so on, pre-sale or pre-IPO. By its nature, this category involves fewer investment opportunities for VC investors, but the opportunities tend to be much larger and arguably less risky than earlier stage venture capital investing.
Total venture capital invested in “late-stage & technology growth” companies globally in 2019 was around $165.8 bln / 2,449 rounds (transactions), resulting in an average transaction size of $67.7m. If you are wondering how Vision Fund fits in, then the table below from Crunchbase provides the ranking of 2019 late-stage VC investors by number of rounds, not the $ amount invested.
The figure in this table from Crunchbase News for Vision Fund does not exactly reconcile to the figure in the SoftBank financial statements for the 2019 calendar year, but it isn’t far off. The figures used by Crunchbase, for example, might exclude partner-to-fund transfers of assets (i.e. SoftBank to Vision Fund transfers of assets). In any event, the 2019 calendar year results for SoftBank using its interim statements suggest that $29.1 bln was invested in 39 companies during a 9.5 month period ended September 12th, 2019, when the fund closed to new investment opportunities.
Although the fund started in May 2017 with the intent to invest over a period as long as five years and to harvest its investments over the subsequent 7 years, the Vision Fund stopped investing in new transactions much earlier, after only 26 months. Investing $75 bln in 88 companies in this relatively short period of time for a start-up VC fund is remarkable and has implications touching many parts of the fund during its life so far.
Infrastructure
With a huge amount of capital to invest, the first thing the Vision Fund had to do was to put in place all of the relevant infrastructure to support this business, including the systems (including portfolio monitoring and investor reporting) and the people. The people are perhaps the most difficult since a team had to be assembled quickly that included executive management, risk management, investment professionals (origination, portfolio management/monitoring and investor relations), and the requisite support staff. As you look through the senior management of the Vision Fund, you will also notice that there are a fair number of professionals that are “connected” from the past by having worked at the same firm, Deutsche Bank. In the March 31, 2019 annual report, it was reported that the Vision Fund had a staff of around 300 people of which 120 were investment professionals. It is far from easy to set up a business of this scale quickly by assembling a team that is competent and sufficiently experienced in late stage venture capital.
As far as the executive management of the firm, the Vision Fund is led by Rajeev Misra, formerly a close confident of Mr Son when he was a banker at Deutsche Bank and then UBS. Mr Misra’s background is mainly in derivatives. For those of you that have combed through the SoftBank Group annual reports, SoftBank uses a lot of derivative transactions. I presume that Mr Son developed a strong relationship with Mr Misra for his work in this area before he eventually was hired by Mr Son and joined SoftBank. As mentioned already, Mr Misra and some of the other senior management of SBIA are linked in background because several had worked at Deutsche Bank prior to joining SBIA. In fact, of the 12 managing partners, five worked at Deutsche Bank in the past. However, the most striking thing when looking at the backgrounds of the Vision Fund’s CEO Mr Misra and the 12 managing partners is that only four are experienced in running start-up or early stage companies or investing in venture capital, whilst the remainder (nine) are all former bankers. Although Mr Misra appears to have been a successful derivatives trader, his background suggests little to no experience in managing a venture capital fund of this size. In fact, I see no history of him ever working in or close to the venture capital business at all. Mr Misra is listed as one of the three senior executives at SBIA on the Vision Fund website, with all three, including Mr Son, Mr Misra and Ron Fisher, also having executive roles at SoftBank.
From my perspective, this raises issues of governance and independence, and I am shocked that the other investors in the fund did not ask for a more independent executive management team, as well as more venture capital and early stage operating business experience for the next layer of management (meaning the 12 managing partners under the three-person executive management team). The management structure would also make me, if I were an investor, uncomfortable because of the need to value the portfolio quarterly including the illiquid companies, as well as several transactions – some sizeable - that either involve the transfer of illiquid assets from SoftBank Group to the Vision Fund, or companies owned by the Vision Fund and one or more of the investors directly (at the same time). In summary, these close ties and backgrounds of the principals raise red flags as far as governance and potential conflicts of interest.
The big problems: Uber, WeWork and SoftBank’s March 31, 2000 year-end results
One final very important piece of this complex story is the poor investment performance of the Vision Fund so far, which first came to the forefront following the IPO of Uber and then the failed IPO of WeWork.
The poor after-market performance of Uber (and as an aside similar to the post-IPO performance of Slack) began to expose the fact that the Vision Fund (and other involved VC investors) were funding later (pre-IPO) rounds of capital at higher valuations than the public market was implying once the company was listed. Providing additional rounds of pre-IPO funding at steadily higher valuations provided the impetus for Vision Fund to mark-up its legacy positions to the new higher price of that funding round. The reality, however, was that several of these companies, with Uber being the most prominent, settled at valuations - once they were listed - at significantly lower levels than the latter rounds of funding in the private markets. Let me provide a few details of the chronology of Uber as I understand it.
In 4Q2018 (interim period Jan 1-Mar 31, 2018), Uber invested circa $7.65 bln in Uber, with $6.6 bln being a secondary purchase of shares from existing investors at a $48 bln valuation (200m shares at $32.87/sh), and $1.05 bln being newly-issued shares (22.45m shares) by Uber at a higher valuation of $48.77/sh. The stake of 222.45m shares was around 15% of Uber. SoftBank did not get the two board seats it thought it would because the U.S. government did not approve them (because of restrictions on foreign control).
The Uber shares were transferred from SoftBank to the Vision Fund in 3Q2018 (interim period Oct 1-Dec 31, 2018) at the same value as paid by SoftBank for the shares at the beginning of 2018. Subsequently, they were marked up in the financial statements for the year ended March 31, 2018, just prior to the IPO of Uber in May 2018.
Uber went public on May 10th, 2018 at $45/sh, a valuation of $75.46 bln, well below discussions some months before that Uber would be worth closer to $100 bln. Keep in mind that the company has never (and still has never) made a profit. As you can see from the price history to the right, Uber’s shares have not performed well since their IPO, and consequently, the Vision Fund has had to mark down its position accordingly.
I believe that the experience with Uber undermined the Vision Fund in two ways. Firstly, it brought into question the fund’s ability to properly value companies in which it was investing often significant amounts in late stage pre-IPO rounds. Secondly, the poor performance of Uber (and several other Vision Fund investments) in the secondary market undermined the integrity of valuations that the Vision Fund was using to value the unlisted companies in its portfolio, especially true for many of the other ride-sharing and food delivery companies in the Vision Fund portfolio segment “Transportation & Logistics” (e.g. OLA, DiDi, DoorDash and several others).
Having discussed the saga of Uber, WeWork is even more complicated and troublesome for SoftBank and Vision Fund because both were heavily invested and associated with this real estate company. WeWork required periodic access to capital to stay afloat because of its rapid growth and the fact it was losing large amounts of money. The company was targeting an IPO in the autumn of 2019 to address its on-going need for capital. However, after an extensive pre-marketing campaign, the IPO was pulled in September 2019 because of a lack of investor interest caused by a combination of valuation and concerns over governance. In various press articles leading up to the IPO, it was suggested that WeWork could have a value of as much as $47 bln , an amount which would have resulted in sizeable mark-to-market gains for both SoftBank and the Vision Fund. The Vision Fund has invested around $4.25 bln in WeWork, a position which was marked down in the March 31st, 2020 annual report to $0.9 bln. SoftBank itself has invested another $6 bln and provided several guarantees, with its position marked down to $1.3 bln in the March 31st, 2020 annual report. Similar to Uber, WeWork is money losing and burns through large amounts of cash just to stay afloat. The WeWork saga is chronicled in detail in the March 31st, 2020 financial statements of SoftBank, and you can read about it here (focus on pp. 9-13). Again, this failed IPO raised doubts about both SoftBank and the portfolio of the closely-intertwined Vision Fund. Regarding WeWork specifically, many analysts were left wondering how a real estate company managed to gain an aurora – and the accompanying multiple - of a technology company. Of course, the WeWork valuation bubble burst when the IPO failed as investors essentially exposed the company for being just what it was – a money-losing, cash flow negative real estate company.
WeWork ($4.6 bln loss) and Uber ($5.2 bln loss), along with a number of other marked-down unrealised investments (losses of $7.5 bln), led to the Vision Fund recording a loss of $17.7 bln in for the year ended March 31, 2020. This, in turn, contributed to SoftBank’s first bottom line loss in 15 years of $9 billion, severely damaging the visionary reputation of Mr Son and bringing into question the validity of his sponsorship of the Vision Fund. SoftBank’s shares also plummeted, although they have since recovered. The poor performance of the Vision Fund led to SoftBank abandoning its previously announced attempt to raise a Vision Fund 2, at least for the time being.
In addition, both the Uber and WeWork debacles raised issues related to the recognition of segment operating profit and the bottom line contribution of Vision Fund to SoftBank in fiscal years leading up to 2020, as most of the gains recorded by SoftBank were in fact unrealised gains resulting from revaluations of illiquid portfolio holdings. Concurrently however, the Vision Fund has had to meet its fixed obligations to its investors independent of portfolio performance. The combination of poor portfolio performance and required fixed cash payments on the debt-like equity tranche caused the Vision Fund to become a significant drag on SoftBank’s performance for the year ended March 31st, 2020.
In its fiscal year ended March 31st, 2019, the Vision Fund contributed $5.9 bln to SoftBank, net of 3rd party interests, which included $2.12 bln of management fees and performance fees paid to SBIA.
In its fiscal year ended March 31st, 2020, the Vision Fund contributed ($9.43 bln) to SoftBank (that is a lose of $9.43 bln), net of 3rd party interests, which included ($2.36 bln) of management fees and performance fees paid to SBIA. (source for both: pp. 19-20 of SoftBank Vision Fund I Update).
What a difference a year makes! For what it’s worth, since inception through March 31st, 2020, the Vision Fund has lost circa $4 bln, of which ($1.55 bln), net of 3rd party interests, has been for SoftBank. The portfolio of the Vision Fund was marked down by a huge $10.2 bln between December 31st, 2019 and March 31st, 2020 as markets declined and financing conditions worsened due to the CV19 pandemic.
In fact, the entire area of the accounting of Vision Fund by SoftBank would take some time to understand, even though the data is available. However, I found that the figures in SoftBank’s financial statements were difficult to understand because the details (in the footnotes) varied from period to period, making it difficult to piece the trends together. With more time, this could be done, but it is beyond the scope of this paper and the time I wish to spend on this.
Having discussed Uber and WeWork, two of the very difficult situations at Vision Fund, it is perhaps only fair to note that the fund has had some winners, including its investment in shares of listed NVIDIA ($2.9 bln gain realised over three fiscal years of the Vision Fund), Flipkart (circa $1.325 bln realised and recognised August 2018 when sold to Walmart), and most recently, the IPO of Lemonade in July 2020, discussed in the next section.
Post March 31st results: some good news
In the March 31st, 2020 Investor Briefing, SoftBank provided valuations of its portfolio, including market prices of the companies it owned which were listed (p. 33). It also provided an update of valuations as of May 15th (p. 15), just before the report was made available to investors. The 5/15 results were only updated for listed companies, not for private or exited companies. I have summarised these values in the table below.
As the table illustrates, the publicly-listed companies in Vision Fund’s portfolio clawed back around $2 bln of value in the six weeks between March 31st 2020 and May 15th 2020, as public equity markets recovered from their CV-19 driven lows in late March. However, you should also note that the cost basis for the companies that have been listed is $9.6 bln, so the Vision Fund has had a gain overall on its listed companies although listed companies account for only circa 12% of the fund’s portfolio.
The table below provides a further update of the value of the listed companies as of July 14th 2020.
As this table illustrates, there has not really been much change since mid-May in the value of the companies listed which are owned by the Vision Fund. Guardant Health and Uber continuing to be drags offsetting good performance by Vir Biotech and insurance company ZhongAn. Even so, the implied valuation of the non-listed companies in the Vision Fund portfolio has probably risen, too, at least since late March given the broad equity market recovery. In fact, it is likely that the first quarter of 2021 (ended June 30, 2020) is going to be a good quarter for SoftBank. Investors seem to be anticipating this as SoftBank’s stock has more than doubled since its lows on March 19th.
Also, SoftBank recently had additional good news in early July via the successful IPO of on-line insurance company Lemonade, which it owns rather than the Vision Fund. The company’s shares are currently trading at $76.14/sh (market cap of $4.2 bln), versus its IPO price on July 2nd of $29.00/sh. SoftBank owns 21.8% of the fully-diluted shares post-IPO. This is the type of news that the SoftBank needs, and hopefully the Vision Fund is holding some similar assets poised for success once they are harvested via sale or IPO.
The Issues that Matter
With this context, let me present some of the issues I see at the Vision Fund.
1. Too much money - Having too much money sounds like a high class problem, but it can easily lead to mistakes by less experienced investment funds regardless of whether they are investing in debt, private equity or venture capital. To earn management fees, the commitments have to turn into invested capital, and this provides an obvious incentive for fund managers to deploy as quickly as they can. Of course, the internal risk management function of any investment firm should act as a counter-weight, but this is far from guaranteed and never perfect. At the end of the day, the Vision Fund invested $75 bln in 88 companies in only 26 months. Any way you cut it, that’s a huge amount of money to invest in risky late stage venture capital in 26 months.
2. Infrastructure - Concurrently with raising a mega fund in their first go round, the Vision Fund has to build the appropriate infrastructure, especially a highly competent professional staff, to source high quality transactions, perform the deep and intense work on each situation to vet the idea and management team, structure the appropriate investment instrument after determining the valuation, close and fund 88 such transactions, and monitor each and every one closely to gauge their performance. This takes experienced professionals, and a lot of them. Clearly, there was no time to establish a culture or even to be overly selective in hiring because - as mentioned in the first point - the Vision Fund was huge and raring to go. From my perspective, with no insights specifically into the Vision Fund, I cannot authoritatively comment on the quality of the team, especially those in the trenches doing the “real" work. Nonetheless, hiring so many competent people so quickly and getting them right is a daunting challenge for any firm, especially one with nearly $100 bln to invest.
3. Overconfidence - Mr Son is a confident investor and manager because he has chosen several “winners” over his many years as the head of SoftBank, the company he founded. In the world of venture capital and technology investing, it is inevitable that you get some right and some wrong. When you get one Alibaba right, as Mr Son did, it can cover a lot of poor investments. However, this is largely the game of venture capital – you know you will get a lot wrong but are aiming for several big winners which will more than compensate for the losses. I am not questioning Mr Son’s investment judgement because he has shown over many years that he both knows the TMT space well and is a visionary. However, no one has a monopoly on good ideas, and the world of venture capital investing is competitive with many experienced firms having longer histories of identifying trends and investing throughout cycles. A bit too much confidence might have caused Mr Son and SoftBank to have a “go big or go home” approach in his first foray into “managing” third party money for a late stage mega venture fund, and this might have also contributed to the poor performance so far
4. Affiliate transactions - There was some dealing of portfolio companies between SoftBank Group and the Vision Fund (and Delta Fund) that was often confusing and at the very least potentially fraught with questions around transfer value. This was uncomfortable to me because of the potential conflicts as far as valuation of non-public assets that were transferred from SoftBank to the Vision Fund (or Delta Fund in the case of DiDi). Transferring assets like this meant that SoftBank had to revalue its residual holdings, if any, of the same asset (if 100% of the holdings were not transferred) at the agreed transfer price. In addition, the third-party investors in Vision Fund deserve (and might have, in fact received) sufficient validation from a third party to provide comfort, because they are the ones that are paying for the majority of the cost of the asset. In a nutshell, any gain on the residual interest of holdings transferred to the Vision Fund inures 100% to the benefit of SoftBank, whilst SoftBank as the general partner of the Vision Fund also realises a percentage of the newly-valued asset via its equity interest in the fund. Nothing is wrong with this on the surface if transaction prices are validated, but it raises plenty of issues with respect to governance and conflicts of interest that are one more thing that should make investors uncomfortable.
5. Confusing and inconsistent accounting, volatile contribution to earnings – I looked at SoftBank’s financials in each of the years ended March 31, 2018, 2019 and 2020, to dig into the results of the Vision Fund. Transactions with respect to the Vision Fund were segregated clearly in the income statement, balance sheet and cash flow statements, and generally more granular data was available by combing through the footnotes. However, it seemed that each year something changed, and I struggled to reconcile the numbers from year to year, making comparisons difficult. There are income statement items related to realised and unrealised gains and losses at the Vision Fund. There are also cash flow line items recognising the non-cash nature of unrealised gains and losses, as well as investments into and cash payments out of the Vision Fund. It’s all there, but inconsistently presented year-to-year with the granularity of information varying. Also and in any event, the contribution of the Vision Fund to SoftBank's performance via its proportionate interest in the fund and its ownership of SBIA can create volatile swings in SoftBank's operating performance period-to-period, largely related to how the portfolio is valued since - to date - most of the performance of the fund has been unrealised.
6. PIF and the murder of Jamal Khashoggi – After PIF committed a cool $45 bln to the Vision Fund, the brutal murder by Saudi Arabian agents of dissident journalist Jamal Khashoggi occurred (October 2018), and this raised doubts around the world about any foreign business or country that does business with Saudi Arabia or its leader Crown Prince Mohammed bin Salam. This is certainly no fault of the Vision Fund, but it nonetheless taints the fund because PIF is the largest investor. If the performance of the fund doesn’t keep PIF away from a second fund, then Vision Fund 2 would anyhow probably prefer to steer clear of PIF as the country’s leadership remains under a dark cloud. Theoretically, this means that a second Vision Fund would have a sizable hole to fill as far as an anchor investor.
7. Executives at the top of Vision Fund – I have covered this already in detail above, but the simple reality is that the backgrounds of the managing partners of the Vision Fund are too skewed towards bankers and professionals with finance backgrounds rather than towards founders or operators of technology companies. Also, there is probably too much background overlap of people that have worked at the same bank (Deutsche Bank).
8. Structure of the Vision Fund – The structure of the fund, which I covered earlier, is highly unusual but perhaps was demanded by the lead investor PIF. Having a preferential payout, a good portion of which was fixed, helps slightly offset some of the concerns with the uncomfortably tight relationship between the Vision Fund and SoftBank. However, since I doubt any of the portfolio companies pay dividends, these fixed obligations – along with the management fees and if applicable performance fees payable to SBIA – will need to be met from existing commitments or eventually from realised gains from the sale of portfolio companies as exits occur. As of March 31st, 2020, the Vision Fund had paid out around $10.7 bln in distributions ($1.7 bln of which has gone to SoftBank) since inception from a combination of realised capital gains, performance fees and management fees, even though the fund's "cumulative investment gains" over the same period from realised and unrealised gains has only been $0.7 bln (source: p.12 of Investor Briefing).
Conclusion
It is not fair to judge the Vision Fund at this point, similar to any fund early in its life. The long life of funds can take many twists and turns, and the Vision Fund does after all own some winners amongst its 88 portfolio companies. The saga of WeWork and decrease in share prices post-IPO of both Slack and Uber have not helped, but time will tell. Although owned by SoftBank rather than the Vision Fund, on-line insurer Lemonade showed that an IPO can be successful, going public in early July at $29/share and increasing since then to $76.14/sh ($4.2 bln market cap), a nice pop from its IPO price. Also, many of the other public companies in Vision Fund’s portfolio have clawed back value from their CV-19 driven lows of late March. Similarly, the implied valuation of the non-listed companies in the Vision Fund portfolio have certainly risen, too, given the broad equity market recovery. The first quarter of 2021 (ended June 30, 2020) is going to be a good quarter for SoftBank, and investors recognise this as the company’s stock has more than doubled since its low on March 19th.
Also, Elliott Management, an active investor, is putting pressure on SoftBank to make changes, as this excerpt from the New York Times says: “One of Elliott’s chief proposals is having SoftBank buy back up to $20 billion of its own shares, which should push up their price. The firm has also suggested shaking up SoftBank’s board, which has just two independent directors, and giving more transparency into the operations and management of the Vision Fund, which some investors have complained is a black box.” SoftBank still trades below the NAV of its businesses, with its stake in Alibaba alone, valued at $174 bln (26%), worth more than current public value of SoftBank ($118 bln). Clearly there are issues, as some of these might very well have to do with the unusual and rather opaque nature of the Vision Fund.
In conclusion, the purpose of this article is to provide you with an overview of the profile and amazing journey of the Vision Fund so far, and to provide some lessons as to the issues around things like fund size, the development of appropriate infrastructure including staffing, governance, and other similar issues, which could very well be applicable to many other investment funds today.