Coming earnings will show impact of steep declines in WeWork, Oyo and other top holdings
The Wall Street Journal
The world’s biggest tech fund was risky from the start, quickly pouring about $80 billion into cash-burning startups at high prices. A less-noticed part of SoftBank 9984 0.97% Group Corp.’s strategy has deepened the fund’s losses and will likely weigh on any recovery.
SoftBank’s Vision Fund invested roughly half of its assets in just seven companies, most of which, it turned out, were in industries that were particularly hard hit by the coronavirus pandemic. Three are ride-hailing companies, and one is in the hotel business. Then there is the shared-office-space provider WeWork, which was already in trouble before the idea of open workspaces full of staff from multiple companies became a relic of the previrus era.
SoftBank will report earnings Monday, and it has already told investors to expect a $17 billion write-down for the year ended March 31 because of poorly performing Vision Fund bets. The company’s shares fell 50% in a month earlier this year, and SoftBank has twice had extraordinary announcements of losses. In March, it said it would sell as much as $41 billion in assets to buy back stock and reduce debt, which helped its stock recover.
A Vision Fund spokesman said its valuations have been validated by sophisticated investors that have invested alongside the fund.
The earnings announcement will shine a spotlight on SoftBank Chief Executive Officer Masayoshi Son, whose strategy of pushing companies to outspend rivals to gain market share left many with big losses. A plan to launch a second giant fund fizzled in the midst of middling performance and SoftBank’s bailout of WeWork.
Mr. Son has said he would expect 15 companies of the Vision Fund’s 91 total investments to go bankrupt and another 15 to hit it big. Several of the fund’s companies are already in trouble or have shut down, including WeWork and smaller investments such as car-leasing company Fair, dog-walking app Wag Labs Inc. and consumer-products maker Brandless Inc.
For the fund to succeed, some of those big winners need to be among its big bets. Besides WeWork, those include ride-hailing companies Didi Chuxing, Uber Technologies Inc. and Grab Holdings Inc.; semiconductor design firm Arm; South Korean e-commerce company Coupang; and Indian hotelier Oyo Hotels & Homes Pvt. Ltd. Among them, these companies have laid off thousands of workers, and most have moved further away from profitability during the pandemic.
The Vision Fund spokesman said that, “with strong balance sheets, resilient business models and the accelerating adoption of digital services, we believe many of our portfolio companies are well-prepared to endure this unprecedented crisis, and even emerge stronger.”
The Vision Fund’s biggest investment is a $12 billion bet on Didi, the dominant Chinese ride-hailing company. China has already started to recover from the pandemic, but Didi’s ride volume is still only 60% to 70% of its previrus levels, a person familiar with the company said. Uber, a big holder of Didi shares, wrote down the value of its stake by 20% as of March 31, implying a valuation around $40 billion. The Vision Fund owns 20% of Didi, bought at roughly a $50 billion valuation, a person close to the fund said.
Vision Fund staffers had high hopes for Didi and other top investments. Last July, some midlevel Vision Fund investment-team staffers estimated how its positions would perform as they decided whether to take a loan to invest in the fund, according to a document viewed by The Wall Street Journal. They expected the fund’s top seven positions to increase in value to $130 billion over 10 years from a cost basis of around $40 billion. Didi, they expected, would quadruple in value to $50 billion.
Speaking to the internal estimates generated by staffers, the Vision Fund spokesman said “the data consists of unsubstantiated guesses from a few junior and midlevel employees and cannot be taken seriously or relied upon.”
Uber and Grab, the other two ride-hailing companies among the fund’s biggest investments, have also experienced business declines. Uber is the only company among the Vision Fund’s biggest investments to go public, though it is valued below where SoftBank invested in 2018, an interval during which the Nasdaq Composite has increased more than 20%. Uber laid off 3,700 people this month, 14% of its corporate workforce, and is in talks to acquirefood-delivery company Grubhub.
Vision Fund staff members were most optimistic about Oyo, which is among the fund’s hardest-hit investments. They said the investment would be worth $24 billion in 10 years, up from what they recorded as a roughly $3 billion valuation. Even before the pandemic, Oyo was struggling with mounting losses and earlier this year laid off thousands of workers. That was before its CEO said in an April video that the coronavirus pandemic shrank Oyo’s business by 50% to 60%. SoftBank has tried to help the company by taking on some of its Japanese workers.
The fund’s staffers were far less optimistic about WeWork, predicting that its value would be flat over 10 years. That was before WeWork’s botched initial public offering and bailout by SoftBank, which is now mired in litigation with WeWork’s founder. “My own investment judgment was really bad,” Mr. Son said last November of the WeWork investment. “I regret it in many ways.”
Broadly speaking, two types of investors fund private tech companies. Venture-capital funds target the youngest, riskiest startups and make small bets that mostly lose money but are offset by huge winners. Growth funds make bigger bets in more-mature companies that already have successful products or an established business model.
The Vision Fund merged the riskiest parts of the two approaches-it invested huge sums at high valuations, often into companies that hadn’t proved their business could generate sustainable profits. Because of that, there is no easy path to a rich exit for the fund’s big investments.
The fund has had some winners, including cancer-detection company Guardant Health Inc., which is up more than seven times, but on a $300 million initial investment. The fund’s Uber investment was roughly 25 times bigger.
Of the fund’s biggest investments, the two least affected by the pandemic have gone on divergent paths. Coupang has benefited from a surge in online shopping during South Korea’s lockdown. The company had an operating loss of almost $600 million last year, though that was narrower than the more than $900 million it lost in 2018.
As soon as SoftBank bought semiconductor design firm Arm for $32 billion in 2016, sales growth stalled during a saturated smartphone market. The company had posted growth in smaller, cheaper chips for internet-connected devices but not enough to reignite overall growth, estimates IDC analyst Mario Morales. Now, slowing car sales are likely to hit a newer and more lucrative market for Arm chips, he said.
Arm was the company Vision Fund staffers were most pessimistic about in their estimates last summer. The fund holds one-quarter of SoftBank’s Arm shares, which they projected would fall in value by 25% over 10 years.
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