The biggest technology investment fund in the world has implemented an aggressive and unconventional strategy. Since its inception, the Vision Fund has invested almost one third of its capital in 30 companies, which, depending on any potential additions to the fund’s portfolio, could exceed $50 billion. The fund is also starting to make payments from its accumulated capital to some of its initial investors, which include the sovereign wealth funds of Saudi Arabia and Abu Dhabi.
The Vision Fund is run by Japan’s SoftBank Group Corp. (SFTBY, Financial), which owns Sprint Corp.(S, Financial) and has acquired a stake in Uber Technologies Inc. SoftBank CEO Masayoshi Son started the Vision Fund in 2016 and its committed capital of $100 billion is almost equal to the entire sum invested by the venture capital industry worldwide.
The Vision Fund’s aggressive strategy of investing in startups, as well as more mature tech companies that Son anticipates will acquire a dominant position in their sectors, has trickled down to the venture capital industry at large. The Vision Fund’s immense presence has impacted and influenced the direction of other firms within the venture capital industry who now seek to mimic the modus operandi of the Vision Fund.
Nick Bonastsos, managing director at venture capital group General Catalyst, which recently raised $1.4 billion, its largest run to date, said, “Founders expect us to be writing larger checks. Other smaller firms are seeking to replicate and hopefully achieve similar returns by exceeding their original goals for total capital raised."
The management and structure of the Vision Fund sets it apart from pure venture capital firms as well as private equity funds. Despite the fact the fund hasn’t cashed out any of its investments, it has nonetheless borrowed capital to make payments to investors with whom the fund had offered a fixed return on original capital invested. This is a highly unusual arrangement for a venture capital firm, which typically waits for a period of eight to 10 years before it cashes out its equity interest and disburses the profits to original investors.
Though this procedure hardly makes the Vision Fund a Ponzi scheme, it does raise a number of troubling questions that have captured the attention of some investment analysts. Depleting capital to pay off investors' guaranteed returns could be problematic if the Vision Fund doesn’t realize gains quickly. Son, nonetheless, is supremely confident the Vision Fund will be able to fulfill its binding agreements with earlier investors for a specified pay down on their invested capital.
Son’s response to critics of the fund’s operating model is that the fund is planning on cashing out soon on some profitable investments. The fund’s short-term record to date is enviable. It took an early stake in Chinese e-commerce company Alibaba (BABA), which yielded the firm tens of billions of dollars in profits. In addition, the fund has agreed to sell its $2.5 billion interest in Indian e-commerce company Flipkart to Wal Mart Inc. (WMT, Financial) for $4 billion.
Son has no temerity in characterizing the performance of the Vision Fund so far as, “almost too good.” He noted further during a recent press conference in Tokyo that the performance of the Vision fund is “exceeding even [his] track record” for return on investment.
The fund was not immune, however, from the consequences of the irrational exuberance of the late 1990s dot-com boom, losing billions of dollars in profits on bad bets on overvalued internet companies that quickly went bust. In light of this humbling experience, one might expect a little humility on the part of Son in terms of his supreme confidence in his investment acumen. Like PIMCO under the reign of Bill Gross, the Vision Fund seems to operate as a one-man show
Although returns to date may seem stellar, a number of additional issues have been raised by the Vision Fund’s unorthodox investing stratagems.
The fund’s practice of returning investors original funds in the form of a guaranteed return makes it difficult to ascertain whether these investors original capital contribution was an equity interest or a debt obligation for which the fund must make “interest payments.” Perhaps the interesting and unique tax ramifications this issue raises will help clarify the matter.
The Vision Fund is also planning on cashing out its positions by taking some of the companies in its portfolio public, including Uber. However, the initial public offering market is not as robust as it was three years ago. Investors are no longer willing to pay high multiples for social media or internet-dependent companies that have no earnings history or profit, nor any near-term prospect of providing seed investors a return on their capital.
By way of illustration, one of the largest and oldest venture capital firms in Silicon Valley, New Enterprise Associates (NEA), is planning on selling $1 billion in its startup interests through a private placement to a group of its original limited partners. The firm’s decision departs from venture capital orthodoxy in that it is looking to cash out not by way of an IPO, but rather thorough a secondary or private offering.
Finally, Son’s braggadocio concerning his ability to continue providing enviable returns for the fund’s investors is eerily reminiscent of Benjamin Graham’s warning to those who aspired to be intelligent investors. Graham dispassionately reviewed a number of “growth funds” of the late 1960s and revealed the quick and unceremonious descent of these high-flyers from astronomical returns to the negative side of the ledger.
Will the Vision Fund, under the tutelage of Son, continue to defy gravity? Or will Graham’s admonition repeat itself yet again?
Disclosure: I have no positions in any of the securities referenced in this article.
