Masayoshi Son, a billionaire, is set to break another record. When he reports earnings for the March quarter Thursday, SoftBank Group Corp.’s Vision Fund investment unit may have lost more money in one quarter than it ever has before.
The world’s largest tech fund is estimated to have lost about $18.6 billion on its public portfolio alone during the quarter ended Mar. Kirk Boodry, an analyst from Redex Research, who writes on SmartKarma, says that 31 is more than the $18.3billion drop in the fiscal second quarter. That would mean a loss for the Vision Fund unit of about $10 billion, accounting for SoftBank’s stake in each fund, Boodry estimates.
It’s a drastic reversal from a year ago when Son took the stage in Tokyo to announce SoftBank had earned more money in a single quarter than any Japanese company in history. His company, which he started 40 years ago, made a net profit of 1.93 trillion Japanese yen ($17.7 million at the time). This surpasses Japan Inc. heavyweights like NTT Corp. and Toyota Motor Corp.
“It’s not normal. Investors, markets are starting to get worried,” Boodry said. When it comes to “the scale or potential of losses, markets seem to be building in more downside in general.”
SoftBank’s two Vision Funds have been hit hard by plunging tech valuations as global interest rates climb and China tightens its regulatory grip on the industry. South Korea’s Coupang Inc. and China’s Didi Global Inc. have been among the biggest drags for the Vision Fund, with each of them posting their biggest quarterly share-price slump of 40% and 50%, respectively.
The Vision Fund’s biggest loss to date — 825.1 billion yen — came in the fiscal second quarter when global stock markets tumbled. In the three months ending Dec. 31, the unit regained profitability and earned 109 billion Japanese yen.
The value of SoftBank’s many privately-held holdings will determine the actual bottom line for fiscal fourth quarter. These include ByteDance Ltd., which operates the popular short video platform TikTok, and India’s Oyo Hotels.
“There is much less visibility on this part of the portfolio, particularly at Vision Fund 2 where many of these investments are smaller or at an earlier stage,” Boodry wrote in a note to investors. Still, “SoftBank will likely take meaningful losses in the private portfolio too.”
A sharp downturn in global stock markets is working against SoftBank’s business model, which Son repositioned into an investment holding company with the Vision Fund in 2016. International scrutiny has resulted from a number of scandals and errors at WeWork Inc., Wirecard AG, and Greensill Capital.
Now jitters over further tech valuation falls have dented Son’s reputation and raised concern over the sustainability of its business. The lack of transparency over how much of the funds’ assets are collateralized is another factor fanning market anxiety.
“Softbank’s entire business structure is dependent on one key assumption and that is ever-rising stock prices,” specifically in tech stocks, which are leading the current market sell-off, Amir Anvarzadeh of Asymmetric Advisors wrote in a note. This “fundamental flaw” is being increasingly exposed by the bear market, he said.
According to Nomura Securities Co. analyst Daisaku Masuno, the Vision Fund lost money last quarter on 32 of 34 public holdings. That includes South Korea’s Coupang ($5.4 billion), Singapore’s Grab Holdings Ltd. ($2.4 billion), China’s Didi ($2.4 billion), India’s Paytm ($1.3 billion) and the U.S.’s DoorDash Inc. ($1.1 billion).
Boodry estimates that the unrealized losses in public portfolio ranged from $37 billion to $38 million for fiscal 2021. All together, Vision Fund’s public portfolio companies are down more than 50% from their all-time highs.
SoftBank’s losses are, to be certain, largely on paper. His profits from a year ago were also on paper. At least, estimates are not provided by analysts. Because of the company’s transformation into an investment holding company, it has to log mark-to-market values on holdings. Warren Buffett believes such quarterly numbers for investment firms like Berkshire Hathaway almost have no meaning.
Still, SoftBank’s latest quarter could be a stain on Son’s reputation as he strives to reinvent himself and become the world’s most influential venture capitalist.
Son built his Vision Fund initiative based on his track record of picking startups. He also placed a bet with Alibaba Group Holding Ltd. on China’s ecommerce giant Alibaba Group Holding Ltd. which was one of the best venture deals ever. But even that deal has lost luster, as Beijing’s crackdown on Jack Ma’s empire has wiped out more than 70% of Alibaba’s value since its peak in October 2020.
The Nasdaq100, which is a benchmark for tech shares, has dropped 25% over the past year and is currently on track for its worst ever annual performance since 2008. After a 48% increase in 2020, the measure rose 27% last year.
Tech-heavy funds have been hit across the globe including Chase Coleman’s Tiger Global Management, one of the most successful equity hedge funds of the past two decades. The fund posted the industry’s largest loss so far in 2022, with the tech rout helping to erase $16 billion from its hedge and long-only funds.
Dan Baker of Morningstar Inc. is among those who are less pessimistic about SoftBank’s prospects. He said that while tech funds investing in early-stage companies will experience volatile performance, SoftBank, with its size, will be able to access more investors and have more options.
“It’s not for everyone,” Baker said. “But if you’re willing to accept the volatility, then if you look at the long-term performance of the company, it’s actually been pretty decent.”