Giant fund, gigantic bubble? – Update on SoftBank’s Vision Fund

By Eduardo Marziale, Andreas Gerckens and Davide Martelozzo

On October 14, 2016, SoftBank Group’s CEO and founder, tech-visionary and billionaire Masayoshi Son, announced the establishment of a record-breaking $100bn Private Equity tech investment fund. Along the way, he promised $50bn of investments and the creation of 50.000 new jobs in the U.S. to President Donald Trump. SoftBank Group and Saudi Arabia’s Public Investment Fund (PIF) committed to invest in the fund $25bn and $45bn, respectively. The remaining $30bn will come from major international investors such as Apple, Foxconn, Qualcomm, and Oracle’s founder Larry Ellison. A $15bn contribution will also come from Abu Dhabi’s sovereign wealth fund, Mubadala. The SoftBank conglomerate, already having operations in broadband, fixed-line telecommunications, internet, technology services, finance, media and marketing, semiconductor design, and other tech-related businesses, has also brought a team of professionals with Private Equity, Investment Banking and Consulting experience on board to manage the so-called Vision Fund. Indeed, financial analysts have recognized the Fund as a powerful financial tool for Son and SoftBank to drive technology development particularly in the U.S. and deliver on their long-term strategic vision.

Since our last report, the fund has not only garnered additional capital, but started to deliver on its investment agenda. As already planned in April, SoftBank contributed a 25% stake in chipmaker ARM, worth around $8.2bn, to the fund to secure the participation of Mubadala. Also transferred was a stake in coworking space provider WeWork. The takeover of ownership stakes directly from SoftBank appears to remain a recurring pattern. As investment targets are mostly privately held, this can oftentimes blur the lines for the public between SoftBank’s direct holdings and those of the SoftBank Vision Fund. A recent example of this was the IPO of ZhongAn, an online insurer from China: Prior to the IPO in September, SoftBank committed to participate in the flotation as an anchor investor, acquiring up to 5% directly or through subsidiaries and investment vehicles, including the Vision Fund. When the IPO went through, however, SoftBank opted for a direct participation and did not leave a share on the table for the fund.

According to a press release issued in May, the Vision Fund was granted the right to acquire from SoftBank not only stakes in ARM, but also in the medical diagnostics upstart Guardant Health, graphics and AI specialist Nvidia, the fintech SoFi and in OneWeb, which aims at delivering internet service using low-orbit satellites. Of these potential investments, only Guardant Health and Nvidia have materialized. SoftBank’s strategy for OneWeb took a hit in June 2017 when the merger with Intelsat was called off. Owning a 20% stake in OneWeb, SoftBank planned to make substantial follow-up investments into the combined entity, potentially through the Vision Fund. Other SoftBank investments potentially available to the fund include the software companies OSI and Improbable, as well as the autonomous driving company Nauto.

The Vision Fund’s most prominent investment is expected to stem from advanced talks between SoftBank and Uber over an investment reported to be worth up to $10bn. To allow the deal, which is co-led by Dragoneer Investments, to move forward, the Uber board agreed on substantial governance changes, reining in the power of ousted CEO and co-founder Travis Kalanick and committing to an IPO by 2019. According to Reuters, the investment will be a combination of a $1-1.25bn direct injection and a tender offer for up to 17% of existing shares. But once again, it has not been disclosed to which extent SoftBank as a direct investor, the Vision Fund and other investors could participate. Other recent investments in ride-hailing companies were made directly by SoftBank and have not been rumored to change hands to the fund.

But even outside of SoftBank’s existing tech microcosm, the Vision Fund has been on an impressive investing spree: Indoor farming start-up Plenty, e-commerce platforms Fanatics and Flipkart, experimental drug specialist Roivant, the budget accommodation app OYO, business messaging company Slack, AI specialist brain, and the digital mapping start-up Mapbox: Capital is poured into a variety of industries, even if only loosely related to Son’s main investment themes artificial intelligence and robotics. At the same time, the creation of the Vision Fund has by no means lessened SoftBank’s own willingness to spend, as the recent acquisition of robotics lab Boston Dynamics from Alphabet proves. The massive inflow of capital channeled into tech by SoftBank will likely have far-reaching consequences for the entire tech industry and established venture capital players.

Tech deals have been among the most lucrative in the investment world in recent years, giving Private Equity and Venture Capital firms understanding tech an edge over competitors focused on more traditional industries. Since the foundation of the first Private Equity firms dedicated to tech at the end of the nineties, such as Silver Lake Partners and Vista Equity Partners, investments in tech companies and startups grew exponentially and cumulated in the creation of the massive Vision Fund. However, its establishment does not seem to be the final act in a story of ever increasing hunger for tech investment opportunities: After the successful raise of $100bn for his fund, Son revealed in October his intention to create as soon as possible a second $100bn tech fund and others in the future.

Softbank, however, is not the only big player in the tech investment world. Many San Francisco-based tech PE firms have in the past decade set up  tens of multibillion funds which provided return rates between 20% and 30%. This spring, the software-focused firm Vista Partners raised more than $10bn for its 7thfund after the success of the previous ones. At the same time Silver Lake, the global leader in technology with $39bn assets under management, completed raising a $15bn tech fund and Thomas Bravo, a PE firm focused on software and technology-enabled services sectors with $17bn in capital commitments, was in the middle of a buying spree of software companies that is reshaping the target industry. The old guard of the PE industry is skeptic about the present valuations of these tech companies, given the mixed record in the past 20 years and the ridiculous EBITDA multiples. However, the larger firms cannot steer clear of the sector – leveraged buyouts in technology increased exponentially after the crisis and represented 40% of the U.S. total last year, and this trend does not seem to end in the near future.

Given the excess liquidity in global markets provided by a long period of loose monetary policy and the increasing flow of money to the Silicon Valley from oil producing countries and China that flooded the tech industry and inflated its valuations, many believe a huge bubble is being created. Its burst could be a catalyst, according to some even worse than the dotcom bubble: The Nasdaq Composite Index surpassed its dotcom peak in 2015 and kept rising since then. Despite these fears of a sudden stop for a seemingly overheated investment sector, the absolute majority of M&A industry experts believe M&A activity in the technology sector will modestly increase in the next two quarters, according to a Merrill Corporation survey conducted in September.

Authors: Eduardo Marziale, Andreas Gerckens, Davide Martelozzo