SoftBank’s Son uses rare structure for $93bn tech fund
Investment vehicle backed by Saudis and Apple is unprecedented in scale and ambition
The giant technology fund launched late last year by the founder of Japan’s SoftBank has only one objective: to unleash a new era of innovation backed entirely by private capital.
With Masayoshi Son at the helm and $93bn in commitments, the size of the SoftBank Vision Fund is unprecedented and its stated ambitions are limitless.
That has been underscored by a frenetic deal spree in recent months that has seen SoftBank itself place a $5bn bet on China’s Didi Chuxing, the ride-hailing group, and take a $4bn stake in US chipmaker Nvidia.
But the Vision Fund, which will be managed by the technology group, also has an unconventional structure that is raising eyebrows among seasoned investment professionals. They warn that its reliance on leverage adds to the challenge facing Mr Son, who must find worthy — and sizeable — investments in a sector already awash with capital.
While almost all venture capital and buyout funds raise capital in the form of equity, the Vision Fund has asked its outside investors to contribute a big slug of debt along with their equity cheques.
SoftBank’s backers include a combined $60bn in commitments from the state investment funds of Saudi Arabia and Abu Dhabi as well as tech groups Apple, Qualcomm, Taiwan’s Foxconn and Japan’s Sharp, who together have contributed about $5bn.
Mr Son’s aim is to replicate his company’s annual rate of return, which sits at 44 per cent over the past 18 years. That success is largely thanks to lucrative bets on Chinese ecommerce group Alibaba and internet search engine Yahoo Japan, which have dramatically overshadowed his less impressive punts.
Mr Son, who is driven by a belief that he has a unique ability to predict future technology trends, has made clear he is ready for the gamble. “We only live once, so I want to think big. I have no intention of making small bets,” the 59-year-old entrepreneur told investors in May. “My life really starts from here.”
That debt provided by the Vision Fund’s investors will be in the form of preferred units, which will receive to an annual coupon of 7 per cent over the fund’s 12-year life cycle. While the preferred unit holders will eventually receive their principal back, they will only receive a return for the equity portion of their investments in the fund.
All outside backers of the fund are receiving 62 per cent in preferred units and the rest in equity, allowing them to reduce their downside risk, while still generating a good return.
In other words, the fund — created so that Mr Son could make investments without further encumbering SoftBank’s stretched balance sheet — is relying in part on pre-funded debt to back its deals.
If the fund reaches its stated $100bn target, about $44bn will be in these units, people familiar with the fund’s structure say, while $28bn will be comprised of the equity from outside backers.
SoftBank is the only party contributing just equity and has committed $28bn. But part of SoftBank’s equity is a 25 per cent stake in Arm Holdings, the UK chip designer it acquired last year for $32bn.
As fund manager, SoftBank will retain roughly 20 per cent of returns over an 8 per cent threshold, a standard construct for operators of private equity vehicles. It will also receive management fees ranging between 0.7 per cent to 1.3 per cent of the capital committed, depending on each investor.
SoftBank declined to comment. The details were shared by people who had been briefed on the fund’s structure and some were previously reported by the Wall Street Journal.
As the only investor with a pure equity exposure, SoftBank is shouldering the most risk from the Vision Fund and will have the greatest exposure to its fortunes.
Mitsunobu Tsuruo, analyst at Citigroup, says: “The structure reflects both Mr Son’s confidence and greed . . . He’s very bullish about the market outlook and he has successfully taken control of the fund while offering enough incentives to other investors.”
But advisers to major private equity and venture capital firms say such hybrid financing methods are rarely used. “This structure is not something that I have seen before in my 25 years of practising as a fund formation lawyer,” says Jason Glover, a partner at Simpson Thacher, the law firm.
One person involved with the fund’s creation says the structure was designed to address the challenges of placing major bets on technology start-ups. While traditional private equity funds often borrow against their purchases to boost their firepower, Mr Son would likely struggle to raise leverage against companies that have little to no cash flow.
“If you are buying an old industry, you can always raise the debt separately because of the cash flows from prior years and the ability to forecast future cash flows but here, a lot of the companies are new and don’t have that,” this person says.
SoftBank says that the Vision Fund, which will be overseen by Rajeev Misra, one of Mr Son’s key lieutenants, represents the company’s future and will have “preferred access to investments of $100m or more that meet the fund’s investment strategy”.
But Mr Son has also signalled that he will focus on the fund while delegating day-to-day management of SoftBank’s other businesses — such as Vodafone Japan and US telecoms group Sprint — to other executives. “I am going to be personally involved in every investment decision,” he said.
The hierarchy of SoftBank, in which Mr Son has final decision-making power over all investments, is at odds with the culture of traditional venture capital, where investment decisions are generally made by committee.
Yet Mr Son’s record is why the fund was able to attract the fund’s biggest outside backers who want to invest alongside him: Saudi Arabia’s Public Investment Fund is putting in $45bn of which just over $17bn will be equity and Abu Dhabi’s Mubadala has placed $15bn in the fund of which just under $6bn in is in equity.
Meanwhile, in Silicon Valley, tech investors and advisers worry that the fresh wave of capital flowing in from the Vision Fund could prompt successful start-ups to stay private even longer and further delay initial public offerings.
“This is at a scale so much larger than anything that we see in the Valley . . . It is definitely unprecedented,” says one venture capital investor.
The Vision Fund’s need to pay annual coupons to the preferred units may also mean that it has a different focus from traditional venture capitalists, who repay their investors solely on the performance of the investments.
“It is one thing to raise a fund of this size. It is quite another to fully deploy it in high-quality investment opportunities,” says Mr Glover.
A route to mobile revolution
The investments that SoftBank makes through the Vision Fund are expected to mark a significant departure from the technology group’s more traditional deals, writes Leslie Hook. The Fund will invest around themes, one of which is ride-hailing and mobility.
SoftBank and the Vision Fund have already done a number of deals in the sector, raising questions of whether they have a grand strategy to consolidate their mobility investments.
“You can read behind the scenes, they are investing not only as investors, but also as business owners,” says Francesco Barosi, of consultancy AlixPartners.
“My hypothesis is that there is probably going to be a big roll-up of the players in mobility, and I think SoftBank will have a role.”
SoftBank has invested in Uber’s top rivals around the world, including Lyft in the US, Didi in China, Ola in India, Grab in Southeast Asia and Brazil’s 99. None of these companies operate in overlapping markets but all share a common enemy. In April, SoftBank participated in a $5bn fundraising round for Didi, which says that it hopes to begin expanding internationally.
Softbank’s recent investments also span technologies that are not directly related to mobility, but will tangentially benefit from trends such as self-driving cars. In April it led a $500m investment round in Improbable, a UK-based virtual simulation start-up whose projects include an operating system for cities.
SoftBank also owns Arm, the UK chip designer whose computer chips can be found in self-driving cars.
However, replicating its past investment success will not be easy. SoftBank recently recorded a $1.4bn loss that was blamed largely on its deals in India involving online marketplace Snapdeal and car-hailing app Ola, with both companies cutting their valuations in recent fundraising rounds. Its attempt to merge US satellite start-up OneWeb with Intelsat, a Luxembourg-based rival, also collapsed last week amid opposition from bondholders. If the deal had gone through, SoftBank had hoped to transfer its shares in the combined group to the Vision Fund.
“While SoftBank has a fantastic track record, its prior private equity initiative, SoftBank Capital, has been basically shut, and we are not inspired by Vision Fund’s investments to date,” said Peter Milliken, analyst at Deutsche Securities.
