Raising capital with IPOs “results in a virtuous circle of growth and progress,” according to SoftBank’s investor deck for its two technology-focused Vision funds. Except when the market crashes.

Vision Fund 1 was launched in 2017 as a 12-14 year investment vehicle, but 59% of its invested capital was in investments it left or companies already listed as of Dec. 31, its filings show. of investment. — not even five years into its lifespan. Almost a third of its public listings from last year were in the fourth quarter of 2021.

The push proved timely. The tech-heavy Nasdaq Composite soared 58% last year, but fell 15% in the first quarter of 2022. You can hardly blame an investment firm for striking while the iron was hot. Again, the 22 Vision Fund 1 companies that went public as of Dec. 31 had racked up an average loss of nearly 38% from their respective opening prices as of Wednesday, according to data from S&P Capital IQ.

Consider some high-profile Vision Funds holdings: Last year, Chinese mobile transportation company DiDi was delisted from the New York Stock Exchange due to Chinese regulatory concerns, just six months after raising billions of dollars. in an initial public offering. Its shares plunged 44% in a single day last month after the company announced it had suspended preparations for a Hong Kong listing. Shares of synthetic biotech company Zymergen have fallen more than 90% from their IPO last year, after the company said earnings this year would be “intangible”.

Vision Funds does not mark its investments against a listing price, but rather against the pre-listing price at which it originally purchased a stake. So even investments that have seen a sharp decline in market value in the public markets can be very profitable for SoftBank as a whole.

But the younger Vision Fund 2, launched in 2019, might have a tougher road. With just 13 public offerings out of the 209 investments it has made in Vision Fund 2 so far, SoftBank is still relying heavily on public investor appetite for future offerings. While SoftBank also uses debt, public listings provide a key source of cash that Vision Funds can reinvest in new investments. In a November interview with the Wall Street Journal, Vision Funds CFO Navneet Govil referred to SoftBank’s ability to “effectively recycle” funds from “so many publicly traded companies” as crucial to enabling Vision Fund 2 to exclude outside investors.

SoftBank is a minority investor in its Vision Funds companies and as such says it encourages them to seek public listings when the time comes. With that in mind, it seems likely that 2022 will be a slower year from an IPO perspective, given deteriorating market conditions. It is also reasonable to suggest that Vision Funds will make less investments this year in turn.

General Manager Masayoshi Son has a considerable personal stake in the outcome. As of December 31, Mr. Son held more than 17% of the total stake in Vision Fund 2, which had a total commitment of $51 billion.

SoftBank itself is also more indebted than it appears. Bloomberg Intelligence estimates that the company’s loan-to-value ratio is already above target: excluding prepaid futures from the value of loans and assets and including contingent liabilities and net debt from internal hedge fund SoftBank, SB Northstar and Vision Fund 2, company analysis shows SoftBank’s ratio was recently above 36%. SoftBank says its policy is to manage this ratio “below 25% in normal times in financial markets, with an upper threshold of 35% even in an emergency”.

Fewer public offerings for short-term Vision Funds investments make the performance of those going public important. Global hotel platform OYO has already filed for a public offering, and SoftBank said semiconductor design firm Arm will pursue a public offering by March next year after its purchase by Nvidia. was overturned by antitrust concerns. The Journal reported that Nvidia’s purchase of Arm could have been worth $80 billion to SoftBank, which owns Arm but transferred about a quarter of its stake to Vision Fund 1.

SoftBank has to hope that its recent listing underperformance hasn’t deterred public investors from bidding on future Vision Funds public offerings. Vision Fund 2 investments that have been made public so far are down an average of 51% from their respective opening prices as of Wednesday, according to data from S&P Capital IQ.

The company that prides itself on a virtuous flywheel risks becoming a fly on the wheel.

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