July 26, 2019 / 12:22 AM / 5 months ago

SoftBank Group's $108 billion Vision Fund 2 draws in Microsoft, Apple

TOKYO (Reuters) - SoftBank Group Corp (9984.T) has secured pledges from Microsoft Corp (MSFT.O) and other investors of around $108 billion (£86.8 billion) for a second Vision Fund aimed at investing in technology firms.

The Japanese conglomerate itself plans to invest $38 billion in the fund, it said in a statement. Others set to join include Apple Inc (AAPL.O) and Taiwan’s Hon Hai Precision Industry Co Ltd (Foxconn) (2317.TW) - both investors in the first fund.

Notable by their absence on the list of state and corporate backers were the sovereign wealth funds of the two countries which formed the cornerstone of its first fund: Saudi Arabia and Abu Dhabi, as well as investment bank Goldman Sachs (GS.N).

SoftBank said it was still talking to potential investors and that it expected the fund’s anticipated capital to grow.

Saudi Arabia’s Crown Prince Mohammed bin Salman told Bloomberg in October his country was ready to commit a further $45 billion through its Public Investment Fund (PIF), adding: “Without the PIF, there will be no SoftBank Vision Fund”.

Those close links later compelled Softbank founder and Chief Executive Masayoshi Son to defend the relationship after Saudi security personnel were accused of murdering Jamal Khashoggi, a journalist critical of the Saudi state.

Discussions between Softbank and PIF were ongoing, but the Saudis would wait for a formal proposal before deciding whether to invest in the new fund, a source familiar with the matter said.

A spokeswoman for Abu Dhabi’s Mubadala told Reuters it was still in the process of assessing a potential investment. The Wall Street Journal on Wednesday reported Goldman Sachs would invest in the fund.

THE VISION

The second fund’s investor base reflects diversification beyond the Middle East that provided most of the first $100 billion fund’s outside capital as SoftBank touts industry-beating returns, with joiners including cash rich Japanese financial institutions and a Kazakh sovereign wealth fund.

“Those investing two years ago were investing in the vision, there was no proof the concept was going to succeed,” said Sanford C. Bernstein analyst Chris Lane.

“Given the track record achieved over the last two years Vision Fund 2 has been substantially de-risked,” Lane said.

SoftBank in May said the first fund had generated a 45% internal rate of return for investors in its common shares, or 29% when debt-like preferred shares are included - though the gains still exist mostly on paper.

On Friday, it said other participants in the second fund will include the National Investment Corporation of National Bank of Kazakhstan, Standard Chartered Bank PLC (STAN.L), undisclosed parties from Taiwan and the fund’s own managers.

FILE PHOTO: The logo of SoftBank Group Corp is displayed at the SoftBank World 2017 conference in Tokyo, Japan, July 20, 2017. REUTERS/Issei Kato/File Photo

The new fund has broad backing from Japan’s financial industry including units of the three mega banks, Mitsubishi UFJ Financial Group Inc (8306.T), Sumitomo Mitsui Financial Group Inc (8316.T) and Mizuho Financial Group Inc (8411.T), SoftBank’s statement showed.

It said Daiwa Securities Group Inc (8601.T), Dai-ichi Life Holdings Inc (8750.T) and Sumitomo Mitsui Trust Holdings Inc (8309.T) have also signed memoranda of understanding (MOU).

The financial structure of the fund, how much each investor would contribute and whether they would provide debt or equity backing was not disclosed by Softbank.

A spokeswoman for Standard Chartered, however, told Reuters the bank would take part in the fund as a debt investor.

“The objective of the fund is to facilitate the continued acceleration of the AI revolution through investment in market-leading, tech-enabled growth companies,” SoftBank said in its statement.

Masayoshi Son uses artificial intelligence (AI) as a catch-all term to characterise SoftBank’s investment portfolio, which features businesses as varied as ride-hailing and autonomous driving, insurance and healthcare.

SoftBank has not provided concrete details on the kind of investments it is targeting, said a senior executive at one Japanese bank listed as a participant in the new fund.

“The fund itself is of course attractive, but what matters is the overall balance of the portfolio,” the banker said, declining to be identified further.

LATE-STAGE STARTUPS

Friday's announcement was driven largely by Softbank's need to alert shareholders to its planned investment in the fund. SoftBank Group's shares ended the day up 1.1% in a 0.5% weaker Nikkei 225 .N225.

The first Vision Fund launched two years ago with $60 billion in backing from the sovereign wealth funds of Saudi Arabia and Abu Dhabi. It has already burned through much of its capital with investments in over 80 late-stage tech startups.

Bets included Uber Technologies Inc (UBER.N) and WeWork parent The We Company in a spending spree that has reshaped the venture capital industry as SoftBank outguns less-capitalised rivals.

“We’ve seen several startups start to beat their rivals and push them out of the market, mainly because - and only after - they receive investment and backing from SoftBank,” said one Hong Kong-based senior investor at a large venture capital firm.

SoftBank did not provide details on how it would fund its $38 billion contribution to the new fund. With the conglomerate not needing to put up all the money at once, proceeds from the first Vision Fund can potentially be recycled, said analyst Dan Baker at Morningstar.

FILE PHOTO: Japan's SoftBank Group Corp Chief Executive Masayoshi Son attends a news conference in Tokyo, Japan, Nov. 5, 2018. REUTERS/Kim Kyung-Hoon/File Photo

Such a strategy would rely on the first fund continuing to provide blistering returns, as it transitions beyond identifying and investing in promising startups to managing a portfolio of companies that are listed or heading toward public markets.

“We believe this move should create a positive impression in as much as it confirms the substantial interest in the Vision Fund business and fund procurement capabilities,” UBS analyst Kei Takahashi said in a note to clients.

Additional reporting by Takashi Umekawa and Chang-Ran Kim in Tokyo, Julie Zhu in Hong Kong, Iain Withers in London, Stanley Carvalho in Abu Dhabi and Saeed Azhar in Dubai; Editing by David Dolan, Christopher Cushing and Emelia Sithole-Matarise

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