Masayoshi Son isn’t one to shy away from risk.
The Japanese billionaire of course established the $100 billion Vision Fund to make big bets on tech startups like Uber Technologies Inc. and WeWork Cos. Less well known is that Son leveraged his stake in the fund to boost returns if things go well -- with outsized losses if things go poorly. That explains how Son has made eye-popping 62% returns so far.
The little-understood Vision Fund is one reason Son’s SoftBank Group Corp. trades at a steep discount to the value of its assets, according to an in-depth research report from Sanford C. Bernstein & Co. analyst Chris Lane. He estimates the current fund’s net present value is $14 billion to $24 billion, assuming returns of 15% to 20%. Lane figures that buying SoftBank today would give investors a portfolio of assets worth at least 40% more than the stock price.
“This makes no sense unless you see the Vision Fund as a value destroying entity. We don’t,” he wrote in the 24-page report released Thursday. “In fact, we see a huge opportunity for long-term value creation.
While SoftBank announced the Vision Fund in 2016, it only recently disclosed how the whole thing works. Limited partners, including Saudi Arabia and Abu Dhabi’s Mubadala, contribute capital that is split between preference and common shares. The former make a fixed 7% return, while the latter share in profits from the fund’s investments minus certain fees.
As the Vision Fund’s general partner, SoftBank holds about half the common equity and makes commensurate profits. It also gets a management fee and a performance fee of 20% on returns above 7%. That allowed SoftBank to report a 62% return after making 71 investments for a total of $64.2 billion. Limited partners made 45% on their common shares and a blended return of 29% including the preference shares.
Lane, in his report, breaks down the investments so far in terms of geography and sector. The fund has put 46% of its money in the Americas, 40% in Asia and 14% in Europe, the Middle East and Africa. Some 44% of the money has gone into transportation and logistics, including ride-hailing giants Uber and Didi Chuxing. The next biggest sectors are ‘frontier’ tech, consumer and real estate/construction.
Lane estimates that investors who buy into SoftBank now can get a portfolio of listed shares worth roughly 70% more than the face value of its stock. While SoftBank traded around 9,900 yen in Tokyo on Thursday, the portfolio, which would include SoftBank’s domestic telecom unit and Alibaba Group Holding Ltd., would cost 17,000 yen.
The total value of the conglomerate’s publicly-traded shareholdings is around 20 trillion yen. SoftBank’s market cap is 10.8 trillion yen. By the company’s own estimation, there is a discount of about 50%.
- Even adjusting for likely capital gains taxes, the premium could be as much as 25%-45%, Lane wrote.
- SoftBank’s share of Vision Fund’s investments together with unrealized gains and performance fees is worth 2.7 trillion yen ($24.9 billion).
- The Vision Fund, which has already deployed two thirds of its capital, has come under criticism that it’s pushing up valuations in subsequent funding rounds to book unrealized gains. But out of the 71 investments so far and 28 follow-on rounds, over 120 other investors took part at the same valuation, Lane wrote.
- Son has also said that he is planning a second Vision Fund of about the same size. SoftBank could use its stake in ARM or the proceeds from the listing of its domestic telco to pay for its share.
- “Small investors are able to access a huge portfolio of some of the most impressive new companies on the planet without having to pay fees for the privilege,” Lane wrote. “This is the biggest advantage of the Vision fund.”
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