While Masayoshi Son is still very much at the helm of SoftBank Group Corp. (TSE:9984), the company he built into a leader of the Japanese telecom industry, his attention increasingly seems to be focused on the SoftBank Vision Fund.
The Vision Fund is the company’s venture capital investing arm. While managed by SoftBank, it is funded principally by external investors and has raised a staggering $100 billion. Under Son, the fund has built significant positions in a litany of tech startup darlings.
One might think it would be difficult to deploy that much capital. After all, great deals are not exactly easy to find in this rarefied market. But just as life finds a way, so, too, has Son found ways to burn through most of the Vision Fund’s dry powder, barely two years after it started cutting checks to startups.
Now, SoftBank is floating a new vision for the Vision Fund: going public.
More cash needed
Son has been making deals at such a frantic pace that the Vision Fund’s $100 billion is already close to being fully committed - two years ahead of the original timetable. But Son’s hunger for deals has not been satiated. Even with a new $1 billion investment expected from Oman, the Vision Fund has already made commitments beyond its current resources, as The Wall Street Journal recently reported:
“Highlighting the need for new funds: Mr. Son recently returned from China, where he negotiated informal deals worth several billion dollars that the Vision Fund doesn’t yet have.”
The initial public offering of Uber Technologies Inc. (UBER, Financial) has likely helped improve liquidity already, as will the forthcoming debut of WeWork, but these cashout opportunities will not free up enough to suit Son’s ambitions.
An IPO will allow the Vision Fund to retain its various illiquid positions, while expanding its cash resources to deploy to further deals. It will also allow it to tap the massive global public capital market, which could fund its insatiable cash needs when sovereign wealth funds and other massive allocators have had enough.
A questionable vision
According to The Wall Street Journal, a Vision Fund IPO would aim to create a “mini-Berkshire” for the tech industry:
“The hope is to create a smaller version of Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway Inc. — only loaded with young technology companies, many of which have yet to turn a profit, instead of a stable of well-established utilities, insurers and energy companies.”
Comparisons between SoftBank and Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) have been popping up with even greater frequency in recent years. Yet, as we have discussed in a prior research note, these comparisons are superficial at best. Indeed, the very premise of the Vision Fund, taking positions in money-losing, massively expensive tech unicorns, is antithetical to every tenet underpinning Berkshire’s approach to investing.
Offloading to retail
For a Vision Fund IPO to be possible, SoftBank will have to overcome significant regulatory hurdles before it can hope to sell shares to retail investors. It is an open question whether it actually can do it at all.
If SoftBank does end up winning the necessary approvals to take the Vision Fund public, however, it will mark a major event in market history. As we discussed in another research note, unicorn startups are increasingly forced to go public in order to provide exit opportunities for their backers and founders:
“They provide the only realistic exit opportunity for the individuals and groups with stakes in the overvalued behemoths. No single private buyer is ever going to absorb a company with a bulging unicorn valuation, so it is left to retail investors to hold the bag for them, to use the parlance of Wall Street veterans.”
With the market so thoroughly infected with IPO Fever, perhaps it was inevitable that SoftBank would try to take the Vision Fund public. But this is no golden opportunity for retail investors.
Verdict
The Vision Fund IPO will not be an opportunity for ordinary investors to gain exposure to disruptive growth companies of the future. Rather, it will shift risk onto unsophisticated investors who have been sold a bill of goods, while allowing the original backers to cash out at a premium.
No investor in their right mind will buy into this IPO.
Disclosure: Author is short Uber.
Read more here:
- Failure to Disrupt: Tesla Pays the Price of Musk's Hubris
- With Uber, Everyone's a Loser
- Graham and Buffett on Profiting From Market Irrationality
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