(Bloomberg) – The SoftBank Group Corp. reported a record profit on its Vision Fund as a rising stock market raised the value of its portfolio companies, but founder Masayoshi Son eliminated a significant portion of those gains with his controversial derivatives trading.
Vision Fund reported a profit of 844.1 billion yen ($ 8 billion) in the December quarter, exceeding the record numbers set just a quarter earlier. A global recovery in technology stocks increased the value of SoftBank’s holdings in publicly traded companies like Uber Technologies Inc. and paved the way for initial public offerings from companies like DoorDash Inc.
These gains, which were widely expected, were offset by the consequences of Son’s decision last year to start trading in stocks and options. SoftBank recorded a derivative loss of 285.3 billion yen in the period. This led to an overall loss in the asset management arm of 113.5 billion yen, compared to 85.2 billion yen in the previous three-month period.
“Vision Fund’s stellar performance over the past few quarters continues to cover losses in options trading,” said Anthea Lai, an analyst at Bloomberg Intelligence. “SoftBank could argue that these derivatives were for hedging purposes, but Son’s adventure in trading definitely doesn’t look good so far.”
In a presentation to investors after the results, Son focused on his successes. He reiterated his argument that SoftBank is like a goose that lays the golden eggs, from Alibaba Group Holding Ltd. and Yahoo! two decades ago, for companies like Uber and DoorDash, more recently. About 15 companies have gone public with the Vision Fund so far, he said. “Since the launch of the Vision Fund, the number of golden eggs has been in accelerated mode,” he said, walking from a stage in a white turtleneck sweater and gray jacket. “We are finally at the harvest stage.”
He said Vision Fund 1 and Vision Fund 2 invested in a total of 131 companies. In the case of DoorDash, SoftBank invested about $ 680 million in a stake that is now worth about $ 9 billion, he said, while its $ 7.7 billion investment in Uber is worth $ 11.3 billion.
The Tokyo-based company had a net profit of 1.17 trillion yen in the December period and did not release operating profit figures. At least six more portfolio companies are planning IPOs this year.
“There is a lot of liquidity out there and investors are particularly biased towards technology stocks,” Justin Tang, head of Asian research at United First Partners in Singapore. “At some point, IPO fatigue sets in, but it doesn’t seem like we’re there yet. For now, the window of opportunity is open for SoftBank. “
After stocks plummeted in March with the coronavirus outbreak, SoftBank revealed plans to sell 4.5 trillion yen in assets to reduce debt and fund buybacks. The sale included part of its interests in Alibaba, T-Mobile US Inc. and SoftBank Corp., Japan’s telecommunications unit. SoftBank also announced an agreement to sell its chip designer Arm Ltd. to Nvidia Corp. for $ 40 billion.
SoftBank held a total of $ 22 billion in “highly liquid listed shares” at the end of the quarter, including a $ 7.39 billion investment in Amazon.com Inc., $ 3.28 billion in Facebook Inc. and $ 1.38 billion at Alphabet Inc. The operation is managed by its asset management subsidiary SB Northstar, where Son personally holds a 33% stake.
Investments were accompanied by derivatives that increased exposure, but SoftBank has slowed its options strategy amid a reaction from investors. The fair value of SoftBank’s futures and options positions was just over $ 1 billion at the end of December, compared to $ 2.7 billion in the previous quarter. Listed stock options decreased from $ 4.69 billion to $ 1.68 billion and listed stock options decreased from $ 1.26 billion to $ 238 million.
Son said losses in the asset management arm have reached a profit of about 100 billion yen since the end of the last quarter. But operations remain at a “test drive stage,” he said.
Alibaba, Son’s biggest investment success to date and SoftBank’s biggest asset, saw its shares plummet about 20% in the last quarter amid a crackdown by the Chinese government that ended the planned listing of its affiliate, the founder Ant Group Co.’s Jack Ma almost disappeared from public view, alerting the investor before reappearing last month.
Son said he kept in touch with Ma, without giving specific details of his communications. He said that Ma likes to draw and shares his drawings with Son via chat; the head of SoftBank also makes sketches, but has not shared any of his work. Son also said he saw the increase in antitrust scrutiny of Ma’s business in China as part of the country’s natural evolution.
The sale of Arm to Nvidia by SoftBank is still going through the approval process. The United Kingdom and the European Union are preparing to launch investigations into the deal, the Financial Times reported last week. Son said he remains confident that he will get the green light in the end.
SoftBank also joined the frenzy of blank check companies with plans for several special-purpose acquisition companies. SVF Investment Corp. raised $ 525 million last month to serve sectors such as mobile communications technology, artificial intelligence, robotics, cloud technologies and software. LDH Growth Corp I plans to raise up to $ 200 million to reach the Latin American and Hispanic markets.
SoftBank last week filed an order for two more SPACs, seeking to raise another $ 630 million. The new vehicles from SoftBank, SVF Investment Corp. 2 and 3, will target the same diverse areas of technology as the first, including mobile communications and artificial intelligence, according to files filed on Friday with the Securities and Exchange Commission.
“The consistently good performance of companies in the Vision Fund portfolio also helps SPAC’s prospects because investors can extrapolate management experience,” said Tang, of United First Partners. “This underscores your ability to distribute capital.”
SoftBank can see between 10 to 20 public listings per year from its portfolio of 164 startups in three different funds, Son said. A typical early-stage venture capital fund may see a third of its bets work, but SoftBank’s portfolio of advanced-stage companies should do better than that, he said. Even WeWork received interest from SPAC, he said.
The billionaire achieved a tone that recalled the days before the WeWork fiasco in late 2019. He said the key to turning “white egg” investments into gold successes was “turbocharged” startups with “overwhelming capital” and more goals ambitious and synergies with other companies in the portfolio.
Son’s performance then became comical. He switched to an animated slide of a goose labeled “AI revolution” and a line of golden eggs marching from its back to Tchaikovsky’s nutcracker.
“Investment is a pace,” said Son. “But please, don’t look at it too seriously.”
(Updates with Son’s comments on Alibaba, derived from the 12th paragraph)
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