Startups

SoftBank’s back, but Masa’s aura is waning

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Less than a year later, Japan’s second-richest person has more than quadrupled his fortune to $38 billion, according to the Bloomberg Billionaires Index, hitting the highest level since Bloomberg started tracking billionaire wealth in 2012.

The surge is closely tied to the rally in SoftBank shares, which represent more than 95% of his net worth and have climbed almost fourfold from a low at the worst of the pandemic-fuelled sell-off. SoftBank’s stock price has surpassed its dot-com peak, thanks in part to aggressive share buybacks and the successful initial public offerings of its unicorns, such as food delivery startup DoorDash Inc.

The Vision Fund—the world’s largest investment pool for tech startups—posted its best quarterly profit, while SoftBank sold assets, bought back stock and settled a legal dispute with WeWork Cos. It’s also gathered supporters along the way, with Paul Singer’s Elliott Management Corp. disclosing last year it took a stake as the stock was undervalued.

“SoftBank’s current major assets have huge cash flow and will continue to grow,” said Thomas Hayes, chairman of Great Hill Capital. “If he balances his harvesting of winners, with appropriately timed share repurchases, he will avoid a repeat of 2000, even if tech stocks moderate.”

That said, founder Masa’s star power is somewhat waning. SoftBank managed to raise only $600 million last year in the US special purpose acquisition company (SPAC) boom. Its third blank check outing has a goal of only $280 million. In comparison, Chamath Palihapitiya, a former Facebook Inc executive, venture capitalist, and social influencer, raised $2.1 billion in one October day alone. He’s the new superstar on the block.

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SoftBank India portfolio.

Masa’s eclipse is probably due to SoftBank’s troubled past—which isn’t that much in the past. Still vivid are WeWork’s IPO debacle in 2019, and the messy entanglement with WireCard AG last year. SoftBank is now considering a complete write-down of its $1.5-billion stake in Greensill Capital, which was using reverse factoring to disrupt the sleepy supply-chain finance sector.

Can Masa restart 2021 with a clean slate, pushing aside upstarts like Chamath and re-emerging as the world’s premier venture capitalist?

The man and his plans

SoftBank’s fate has been deeply intertwined with its founder, to the point the relationship recently raised corporate-governance concerns. Masa, who’s also chairman and chief executive officer, is personally invested in a unit that poured about $20 billion into tech stocks and derivatives. The 63-year-old, who owns one-third of that division and has denied there was a conflict of interest, said the program was a way to put SoftBank’s cash pile to use.

To amplify his leverage, Masa uses a common tactic among the ultra-rich— borrowing against his stock. He just does it much more than most other billionaires.

Recently, though, he’s trimmed his pledges as shares of the Japanese giant have become more valuable. Masa had committed about one-third of his stake in SoftBank to more than 16 financial institutions as of February 9, down from 38% in September, according to regulatory filings. That still represents about $18 billion—one of the highest figures among the 500 richest people in the world.

The pledges are used as collateral for loans, whose size could be smaller than the value of the committed shares given the recent rally (Bloomberg doesn’t include the value of pledged stock in net-worth calculations). A representative for SoftBank declined to comment for this story.

After closing at an all-time high on Wednesday, SoftBank shares slipped 5.3% Thursday amid a decline in the broader stock market. Its Vision Fund last month posted a record profit for the final quarter of 2020, thanks to a boost in the value of its stakes in newly-listed firms including DoorDash Inc and Chinese online property agent platform KE Holdings Inc.

“Since the Vision Fund launched, the number of golden eggs is in accelerating mode,” Masa said at a briefing last month. “We are finally in the harvesting stage.”

Some 15 companies have gone public from the Vision Fund, and SoftBank may see between 10 and 20 listings a year from its portfolio of 164 startups, he said.

Coupang Inc, a South Korean e-commerce giant, is seeking a US IPO and could be valued at more than $50 billion. Compass Inc., one of the largest US real estate brokerages, has filed for a listing, and Chinese truck startup Full Truck Alliance could go public this year.

SoftBank has also had its share of troubles. As mentioned earlier, the Vision Fund has written down its $1.5 billion holding in Greensill Capital and is considering dropping the valuation to near zero, people familiar with the matter have said. At its worst point last year, investors questioned several of SoftBank’s investments, including WeWork, whose IPO spectacularly imploded.

That said, the turnaround has been rapid. In addition to improving the outlook for the startups in the Vision Fund, the rally in tech stocks helped boost the value of SoftBank’s stakes in publicly traded firms like Uber Technologies Inc. The Japanese conglomerate also just settled a lawsuit with WeWork and its co-founder, Adam Neumann, paving the way for another attempt at a potential listing of the office-sharing company.

“SoftBank Group may expedite its second attempt to list WeWork,” Anthea Lai, a senior analyst at Bloomberg Intelligence, wrote in a 1 March note. “The additional stake should tighten SoftBank’s control and facilitate potential merger talks with special purpose acquisition companies.”

The big bet on Coupang

The Vision Fund is preparing one of the unicorns it’s long nurtured in its stables for an IPO: the South Korean e-commerce giant Coupang, whose operations span online groceries and restaurant deliveries all the way to video streaming. Coupang is seeking to raise up to $3.6 billion in New York.

That has a whiff of Son’s old recipe for success, which was embodied in WeWork. When the shared workspace company came to market in 2019, investors worried about its massive debt pile, including $47 billion in lease obligations. It was an extreme example of what Masa loved—debt-fuelled mega-unicorns that seemed to grow despite the odds.

Like WeWork, Coupang—which was founded a decade ago—seems forever hungry for cash. In 2020, its revenue jumped 91% year-on-year to $12 billion, but its operating costs rose 81% as well. Meanwhile, its working capital flipped into a deficit of $892 million from $273 million in surplus a year earlier.

Because of its cash burn, Coupang had negative equity as of 2020 year-end, despite $2 billion in investments from the $100 billion Vision Fund, agreed upon in December 2018. The South Korean company sat on $5.7 billion in debt; roughly half of which, or $2.9 billion, was in the form of accounts payable to its suppliers. It’s no surprise then, that Coupang is keen to go public.

The question remains for investors: Where’s the operating leverage of this 10-year-old, or its economies of scale? Profitability appears out of reach. Granted, as long as Coupang can list, it’s a win for Masa. Over the years, SoftBank has put $3 billion into the Korean company and, after the IPO, will hold a 37% stake via the Vision Fund. At the midpoint of the offering range, that would be worth $18 billion. The Vision Fund is not selling when Coupang debuts in New York, but it can record a sweet paper gain.

All well and good. But Coupang reminds us how many aging unicorns SoftBank still has hanging around in its Vision Fund. What makes Coupang stand out exactly other than cash burn?

On the other hand, Palihapitiya seems to be involved with cutting edge enterprises. He merged his first SPAC with Richard Branson’s space tourism business Virgin Galactic Holdings Inc. His second SPAC was with real estate tech start-up Opendoor Technologies Inc, which was first backed by Masa in 2018. It was Palihapitiya, however, who got it listed.

In conclusion

Take a look at Vision Fund’s portfolio. Since its inception in 2017, only 11 startups in its portfolio have gone public; 74, including Indonesian e-commerce company Tokopedia PT, which has only reached a series I funding round, are still privately-held.

As of December 2020, the Vision Fund notched $18 billion in capital gain from a year ago. But can these wins be turned into cash profits? The fund expects $10.1 billion in gross realized proceeds from its sales of ARM Holdings Inc. to Nvidia Corp. That deal has not closed yet.

SoftBank’s attempt to ride the SPAC boom comes across as flawed. In its revised prospectus for the third blank check company, SoftBank removed the warrant that allows its holders to buy more shares at a 15% premium to the $10 issue price.

That may explain why SoftBank is cutting its offering goal. SPACs are well-liked by hedge funds and retail investors, with the former seeing it as a fixed income product with a ton of upside—thanks to the warrant—while the latter uses it as a “poor man’s” private equity fund.

As the offering currently stands, Masa is not giving hedge funds the upside they crave and is keeping it all to himself. Chamath, on the other hand, is fully into playing the game: promoting via tweet his involvement in a so-called private investing in public equity (PIPE) funding round to help his SPACs merge with targets.

A blank-check company is a shell company that raises money from public investors with the goal of acquiring a business within two years.

These deals—some sponsored by the rich and famous including Hong Kong billionaire Richard Li and ex-Credit Suisse chief Tidjane Thiam—have raised more than $66 billion in the US alone just this year, according to data compiled by Bloomberg.

Singapore could join the bandwagon soon. The country’s exchange is consulting the market on allowing SPACs to go public and could see its first such listing this year if it gets enough support. As many as 10 Indian companies could go public through SPAC deals before the end of the year and the trend could accelerate if Singapore’s blank-check firm listings are permitted, Utpal Oza, head of investment banking for India at Nomura, said.

So, sure, SoftBank’s stock price has returned to its dot-com peak. But is that really something worth celebrating? So did the Nasdaq—and the benchmark index has rallied well beyond its old heights. The world has moved on. Masa is beginning to sound like a name from the past. Once upon a time, he ran the world’s biggest venture capital fund.

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