The biggest risk of SoftBank’s Vision fund: investing quickly and wisely

SoftBank Group chairman and CEO Masayoshi Son. Image credit: aradaphotography / Shutterstock.com

SoftBank announced last week that the first round of its $100 billion Vision fund has closed with $93 billion in committed capital, but the problem now is going to be how to quickly put this huge amount of money to work.

At $93 billion, the SoftBank Vision Fund ranks as the third largest private equity fund globally, behind KKR with $98 billion and Blackstone which has $311 billion in assets under management. The investment strategy will be wide, with the fund looking to target long-term investments in both private and public companies all the way across the technology sector. The one exception appears to be semiconductors but the fund will have some exposure there if it takes up its option to take a 25% stake in ARM.

The fund is clearly intending on having a significant influence on the activities of the companies in which it invests as the aim is to supply growth capital and accelerate the development of disruptive technologies. I am pretty sure that this will also involve turn-around situations as most disruptive technology and requirement for growth capital is to be found in small companies. With the Vision fund’s lowest investment size at $100 million, start-ups and small companies are clearly off the table

The main investors are SoftBank ($28 billion), the Public Investment Fund (PIF) of the Kingdom of Saudi Arabia ($45 billion estimate) and Mubadala from United Arab Emirates ($15 billion estimate). I estimate that between them they make up 95% of the funds committed. Apple, Qualcomm, Sharp and Foxconn Technology Group make up the other 5%.

The fund will share the option to acquire a 25% stake in ARM ($8.2 billion) as well as some or all of SoftBank’s investments in Guardian Health, Intelsat, Nvidia, OneWeb and SoFi.

It is worthy of note that SoftBank’s investments in Alibaba or Flipkart, which fit the criteria for the Vision Fund, do not appear to be included as potential contributions. If the fund decides to take these investments, they will be offset against SoftBank’s $28 billion commitment to the fund.

I suspect that the biggest issue that the fund will face will be pressure to find good investments. Rivals such as KKR, Blackstone etc have grown their asset base over time, but here the Vision Fund has $93 billion at its disposal from Day 1. Consequently, its main shareholders will be wanting to see their money quickly put to work, opening the door to making rapid but sub-optimal investments.

I hope that SoftBank’s recent (ongoing) experience in India will be heeded as an example of what happens when too much capital chases too little paper on a wave of hype and optimism.

Common sense indicates that the shareholders will not be putting up all of the capital on Day 1, but as the investment opportunities arise, they will contribute their share as per the commitments that they have made. This is made all the more likely as I understand that PIF will be raising the money from other investments that it is holding, and that Mubadala did not have $15 billion of spare cash on its balance sheet at the end of 2016.

Although the Vision Fund is the third largest private equity fund globally, it is the largest that is dedicated to technology. Consequently, it should be a major player in sector going forward.

This article was originally published on RadioFreeMobile

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