SoftBank’s Vision fund profit is reduced by trading losses

(Bloomberg) – SoftBank Group Corp. posted a record profit in its Vision Fund as a booming stock market boosted the value of its portfolio companies, but founder Masayoshi Son wiped out a significant portion of those gains with his controversial derivatives trading.

The Vision Fund posted a profit of 844.1 billion yen ($8 billion) in the December quarter, topping record numbers set just a quarter earlier. A global rally in tech stocks boosted the value of SoftBank’s stakes in publicly traded companies like Uber Technologies Inc. and paved the way for initial public offerings from companies like DoorDash Inc.

Those gains, which were widely expected, were offset by the fallout from Son’s decision last year to start trading stocks and options. SoftBank posted a loss of 285.3 billion yen on derivatives during the period. This resulted in 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.

“The Vision Fund’s outstanding performance over the past few quarters continues to hedge losses in options trading,” said Bloomberg Intelligence analyst Anthea Lai. “SoftBank might argue that these derivatives were for hedging purposes, but Son’s trading adventure certainly doesn’t look good so far.”

In a presentation to investors after the results, Son focused on his successes. He echoed his argument that SoftBank is like a goose that lays golden eggs, from Alibaba Group Holding Ltd. and Yahoo! two decades ago, to companies like Uber and DoorDash more recently. So far, about 15 Vision Fund companies have gone public, he said. “Since the launch of the Vision Fund, the number of golden eggs has been in an acceleration mode,” he said, pacing a stage in a white turtleneck sweater and gray jacket. “We are finally in the harvest phase.”

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 for a stake worth about $9 billion, he said, while its $7.7 billion investment in Uber is worth $11.3 billion.

The Tokyo-based company made a net profit of 1.17 trillion yen in the December period and did not release operating profit figures. At least six other portfolio companies are planning IPOs this year.

“There is a lot of liquidity and investors are particularly fond of technology stocks,” said Justin Tang, head of Asian research at United First Partners in Singapore. “At some point, IPO fatigue sets in, but it doesn’t look like we’re there yet. For now, the window of opportunity is open for SoftBank.

After stocks plunged in March with the coronavirus outbreak, SoftBank disclosed plans to sell 4.5 trillion yen in assets to reduce debt and fund buyouts. The sale included part of its interests in Alibaba, T-Mobile US Inc. and SoftBank Corp., the Japanese 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 stocks” at the end of the quarter, including a $7.39 billion investment in Inc., $3.28 billion in Facebook Inc. and $1.38 billion in Alphabet Inc. The deal is being managed by its asset management subsidiary SB Northstar, of which Son personally owns a 33% stake.

The investments were backed by derivatives that amplified exposure, but SoftBank ended its options strategy amid investor backlash. The fair value of SoftBank’s futures and options positions was just over $1 billion at the end of December, down from $2.7 billion in the prior quarter. Long call options on listed stocks fell to $1.68 billion from $4.69 billion and short call options on listed stocks fell to $238 million from $1.26 billion. worth dollars.

Son said the asset management arm’s losses have reached a profit of around 100 billion yen since the end of the last quarter. But operations remain in a “trial phase”, he said.

Alibaba, Son’s most striking investment success to date and SoftBank’s biggest asset, saw its shares plunge about 20% last quarter amid a Chinese government crackdown that scuttled the planned listing of its subsidiary Ant Group Co. Founder Jack Ma had all but disappeared from public view. , causing investors unease before it resurfaced last month.

Son said he had stayed in touch with Ma, without giving specific details of their communications. He said that Ma likes to draw and shares her drawings with Son via chat; the SoftBank chief also draws but hasn’t shared any of his work. Son also said he sees increased antitrust scrutiny of Ma’s activities in China as part of the country’s natural evolution.

SoftBank’s own sale of Arm to Nvidia is still in the approval process. Both the UK and the European Union are preparing to launch investigations into the deal, the Financial Times reported last week. Son said he remained confident he would be given a green light when it was finished.

SoftBank has also joined the blank check corporate frenzy with plans for several special purpose acquisition companies. SVF Investment Corp. raised $525 million last month to address sectors including mobile communications technology, artificial intelligence, robotics, cloud technologies and software. LDH Growth Corp I plans to raise up to $200 million to target Latin American and Hispanic markets.

SoftBank filed two additional SPACs last week, seeking to raise an additional $630 million. The new SoftBank vehicles, SVF Investment Corp. 2 and 3, will target the same diverse technology areas as the first, including mobile communications and artificial intelligence, according to documents filed Friday with the Securities and Exchange Commission.

“The continued strong performance of Vision Fund’s portfolio companies also helps SPAC’s outlook as investors can extrapolate management expertise,” said Tang of United First Partners. “It underscores their ability to deploy capital.”

SoftBank can see between 10 and 20 public listings a year from its portfolio of 164 startups spread across three different funds, Son said. A typical early-stage venture capital fund might see a third of its bets pay off, but SoftBank’s portfolio of early-stage companies should do better than that, he said. Even WeWork has attracted interest from PSPC, he said.

The billionaire struck a tone reminiscent of the days before the WeWork fiasco in late 2019. He said the key to turning “white egg” investments into golden egg success was to “turbo-charge” startups with a “crushing capital”, more ambitious goals. and synergies with other portfolio companies.

Son’s presentation then took a comedic turn. It switched to an animated slide of a goose labeled with the text “AI revolution” and a line of golden eggs protruding from its back towards Tchaikovsky’s Nutcracker.

“Investment is a beat,” Son said. “But please don’t look at this too seriously.”

(Updates with comments from Son on Alibaba, derived from 12th paragraph)

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