(Bloomberg) — Billionaire Masayoshi Son is poised to set another record — not the good kind. When it announced its March quarter earnings Thursday, SoftBank Group Corp’s Vision Fund investment unit may have lost more money in one quarter than it did before.
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The world’s largest tech fund is estimated to have lost about $18.6 billion in its public portfolio alone during the quarter ending March 31, larger than the record drop of $18.3 billion in the second quarter of the fiscal year, according to Kirk Bodry, an analyst at Redex. Research published on SmartKarma. That could mean a loss of about $10 billion for the Vision Fund unit, which represents SoftBank’s stake in each fund, Boudry estimates.
It’s a dramatic reversal from a year ago when Son took the stage in Tokyo to announce that SoftBank had made more money in one quarter than any Japanese company in history. The company he founded nearly 40 years ago made a net profit of 1.93 trillion yen ($17.7 billion at the time), surpassing Japan Inc. Heavy duty such as Toyota Motor Corp. and NTT Corp.
“It’s not normal. Investors, markets are starting to get nervous,” said Boudry. When it comes to “the scale of losses or the likelihood of them happening, the markets seem to be growing in a negative direction in general.”
SoftBank’s two Vision Funds have been hit hard by lower technology valuations as global interest rates rise and China tightens its regulatory grip on the industry. The South Korean company Coupang and Didi Global Inc. China is among the biggest factors influencing the Vision Fund, with both reporting the largest quarterly share price declines of 40% and 50%, respectively.
Vision Fund’s biggest loss to date – 825.1 billion yen – came in the second quarter of the fiscal year when global stock markets slumped. The unit then regained profitability, earning 109 billion yen in the three months ended Dec. 31.
The actual bottom line for the fourth quarter of the fiscal year will depend on how SoftBank sets the value of its vast number of holdings. These include ByteDance Ltd. , which operates the popular short video platform TikTok, and Oyo Hotels in India.
“There is much less visibility for this portion of the portfolio, particularly in Vision 2 where many of these investments are smaller or at an early stage,” Boudry wrote in a note to investors. However, “SoftBank is likely to incur significant losses in the private wallet as well.”
The sharp downturn in global stock markets is working against the SoftBank business model, which Son repositioned into an investment holding company with Vision Fund in 2016. A series of scandals and missteps from WeWork Inc. and Wirecard AG and Greensill Capital to an international audit.
Now, concerns about further declines in technology valuation have taken their toll on Son’s reputation and fueled concern about the sustainability of her business. The lack of transparency about how much the funds’ assets are underwritten is another factor adding to market anxiety.
“Softbank’s entire business structure is based on one key assumption and that is the ever-increasing stock prices,” Amir Anfarzadeh of Asymmetric Advisors wrote in a note, specifically in technology stocks, which are driving the massive sell-off in the current market. This “fundamental flaw” is increasingly being exposed by the bear market, he said.
Vision Fund lost money in 32 of the 34 public holdings in the past quarter, according to Nomura Securities analyst Daisaku Masuno. This 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 US-based DoorDash ($1.1 billion). .
Unrealized losses in the general portfolio ranged between $37 billion and $38 billion for the 2021 fiscal year, according to Boudry. In all, the Vision Fund’s public portfolio companies are down more than 50% from their all-time highs.
Sure, SoftBank’s losses look pretty much the same on paper, as did its earnings a year ago. Few analysts provide estimates, at least publicly. Because the company turns into an investment holding company, it has to record the market values of the properties. Warren Buffett has long argued that such quarterly figures for investment firms like Berkshire Hathaway are almost meaningless.
However, SoftBank’s latest quarter may be a disgrace to Son’s reputation as it strives to reinvent itself and become the world’s most influential venture capital.
Son built his Vision Fund initiative based on his track record of picking startups, including his bet on Chinese e-commerce giant Alibaba Group Holding Ltd that became one of the most successful venture deals ever. But even that deal has lost its 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 Nasdaq 100, a major benchmark for technology stocks, is down about 25% year-to-date and is on track for its worst annual performance since 2008. The gauge is up 27% last year after a massive 48% gain in 2020.
Huge tech funds have been hit around the world, including Chase Coleman’s Tiger Global Management, one of the most successful equity hedge funds over the past two decades. The fund posted the industry’s biggest loss so far in 2022, as the tech trajectory helped wipe out $16 billion from its hedge funds and only long-term funds.
Dan Baker of Morningstar Inc. Among those who are less pessimistic about the prospects of SoftBank. While the performance of tech funds investing in early-stage companies will be equally volatile, SoftBank — with its size — will have greater access and more opportunities to invest, he said.
“It’s not for everyone,” Becker said. “But if you’re willing to accept the volatility, then if you look at the company’s long-term performance, it’s actually been pretty good.”
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