Beyond WeWork, Uber’s stock price has plunged 30% since its public debut. SoftBank’s Vision Fund invested more than $7 billion in the ride hailing firm in 2017. The fund is Uber’s largest shareholder with a 13% stake, according to financial data provider Refinitiv.
Slack is also down 40% from a June high and down 25% from the reference price set when it went public. The SoftBank Vision Fund holds a 7.3% stake in Slack, according to brokerage firm Daiwa.
“Valuations in the private equity market, where participants are limited to venture capital firms, can lose credibility before shares are listed. Profit in [SoftBank’s Vision Fund] business can slump when it is based on such valuations,” Daiwa analyst Yoshi Ando wrote in a note earlier this month.
SoftBank says it has an appropriate process to value companies which is based on widely accepted methodologies set out by the International Financial Reporting Standards foundation.
The company reported operating profit for the Vision Fund and an affiliated fund rose 65% to 398 billion yen ($3.6 billion) for the three months ended in June.
What happens now?
But the disclosure of WeWork’s operations exposed not only problems under the hood at a Silicon Valley darling, but also revealed that SoftBank is willing to invest billions of dollars into a company with some glaring governance issues. That could spook investors and hurt Vision Fund 2, according to Scott Galloway, marketing professor at New York University’s Stern business school.
“Vision Fund 2 is already dead. Any discussion from Softbank regarding [Vision Fund 2] is propaganda,” Galloway said.
Bernstein Research analyst Chris Lane is more bullish, calling the WeWork IPO a “rare debacle” for SoftBank and its strategy.
“I doubt the types of investors that are in discussions regarding [Vision Fund 2] will change their mind,” Lane said.
“However, they are likely to insist on better governance for the fund in terms of transparency of decision making, and are likely to insist on governance standards for the investee companies,” he said.
Lane estimates SoftBank invested in We at an average valuation of $24 billion. He said if the company goes public with a $10 billion valuation, that would result in a $2.4 billion write-down for the Vision Fund.
Jefferies analyst Atul Goyal said in a recent research note that the fund will also have to take a loss on Uber. He calculated that Uber’s 30% decline in market value since the end of June would result in a $3.9 billion hit to the Vision Fund for this quarter.
The Vision Fund ‘has pneumonia’
SoftBank’s Vision Fund has invested in about 80 companies. The vast majority of them are still private and there isn’t a lot of clarity about how the fund operates. Investors in SoftBank want to see “a more simple, easier-to-understand business portfolio,” said Daiwa’s Ando.
Brokerage firm CLSA cut its valuation for the Vision Fund last week.
“We have refined our approach [to the Vision Fund] by taking a harsher approach to asset values based on those which are listed and applying valuations to the private companies that we are more familiar with” such as WeWork, CLSA analyst Oliver Matthew said in a research note. For other companies, CLSA lobbed 30% off the price the fund paid.
Based on those assumptions, Matthew estimates the asset value of the Vision Fund is $39 billion, which is a lot less than the $65 billion the fund spent gobbling up stakes in all those different tech companies.
A SoftBank spokesman declined to comment for this article.
Son said in August that once 85% of the first Vision Fund is used, which he expects to happen by the end of this month or next, SoftBank will start using Vision Fund 2. The “basic rule” for the first Vision Fund is to keep 15% for follow-on investments or distribution for preferred shareholders of the fund, he said.
Son also boasted about the Vision Fund’s performance, saying it had so far invested 7 trillion yen ($65.2 billion) in various companies and brought in “2 trillion yen ($18.6 billion) in profit and return.”
“That’s the track record of Vision Fund 1,” he said.
But as WeWork and Uber show, just a couple bad investments can deal a big blow to that record.
With nearly $20 billion invested in Uber and We, the Vision Fund “is impaired,” said Galloway, the NYU professor.
“If either of these firms sneeze, because of the scale of the capital that’s gone into them, [Vision Fund] gets a cold. Right now, [Vision Fund] has pneumonia,” he said.