SoftBank’s billionaire founder to make personal investments with Vision Fund

Masayoshi Son draws criticism for mixing personal financial interests with corporate responsibilities

Masayoshi Son, billionaire, chairman and chief executive officer of SoftBank Group Corp., speaks during a news conference in Tokyo, Japan, on Wednesday, Feb. 7, 2018. Son unveiled plans for an initial public offering of his domestic telecom operation, signaling the evolution of his business empire and his increasing focus on investments in startups such as Uber Technologies Inc. Photographer: Tomohiro Ohsumi/Bloomberg

Masayoshi Son said he will begin to make personal investments alongside SoftBank Group’s Vision Fund, a controversial step that could lead to conflicts of interest as his company backs technology start-ups.

The Japanese billionaire made the disclosure as his company reported earnings, explaining he will begin to co-invest in Vision Fund 2, an investment vehicle where SoftBank has been the sole source of capital.

Mr Son can invest up to $2.6 billion and will own 17.25 per cent of the equity. He will have a similar arrangement with SoftBank’s Latin America fund.

Business leaders tend to avoid mixing their personal financial interests with corporate responsibilities. Governance experts caution there can be conflicts of interest, especially when the company has public shareholders.

If, for example, the chief executive has a personal stake in a start-up, it may create extra pressure for the Vision Fund to ensure the company does not go under.

“Investors were holding their breath for more buybacks, so this is not the reveal we were hoping to see,” said Kirk Boodry, an analyst at Redex Research in Tokyo. “This raises corporate governance concerns.”

SoftBank shares slid as much as 2.7 per cent in Tokyo trading.

Mr Son’s mingling of personal interests with those of his company has drawn fire before. When SoftBank set up a unit called SB Northstar to trade public stocks and derivatives, Mr Son took a 33 per cent personal stake in the operation.

Analysts and fund managers questioned why the billionaire would decide on such a structure given the potential for confusion and conflicts.

On Tuesday, Mr Son defended the latest decision during a press conference. He said SoftBank’s board approved the structure, while he recused himself from the vote.

“Because I believe, I want the management to share in the investment risk,” he said. “In good times and bad, one thing doesn’t change – my conviction that AI [artificial intelligence] revolution will absolutely continue for the next 10 to 20 years.”

The board approval was not reassuring to everyone.

“The board may have signed off on this but are there any directors who could stand up to SoftBank founder and owner Son? There is a possibility of a conflict there,” said Koji Hirai, president of mergers and acquisitions advisory company Assist.

Mr Son said he had planned for top management to contribute to the first Vision Fund. While the programme was approved by the board, it was never put into action as the Vision Fund slipped into the red and SoftBank’s share price crashed.

Quote
The board may have signed off on this but are there any directors who could stand up to SoftBank founder and owner Son?
Koji Hirai, president of Assist

“I became poor,” Mr Son joked, referring to his personal borrowing using his company’s stock as collateral.

The founder explained that venture capital firm partners typically receive a 20 per cent to 30 per cent performance fee, but the Vision Fund does not have similar incentives. The co-investment is supposed to provide financial benefits but it will include a downside.

“I will take risks all by myself initially,” Mr Son said. “Then I will distribute to other people in the management. We want this to remain as the culture of SoftBank.”

The Japanese company has stoked concerns in the past that it does not have sufficient governance and compliance infrastructure in place as it evolves into an investment holding company.

SoftBank director Yuko Kawamoto resigned from the company’s board after one year in June, writing a highly unusual departing memo that highlighted the company’s need for better internal checks and governance.

“SBG needs to formulate a form of governance that allows Masa to fully demonstrate his talents, which can then be integrated into shareholders’ value,” she wrote.

SoftBank’s announcements on Tuesday are unlikely to help revive the company’s share price, which has dropped by about a third from its peak in March. Investors have been looking for the company to buy back more of its own shares but Mr Son declined to commit to such a move while reporting a sharp drop in profit at the Vision Fund business.

“We are surprised and disappointed,” Jefferies analyst Atul Goyal wrote in a research note. “The stock may continue to underperform without any catalyst in sight.”

The Vision Fund’s income in the three months ended June 30 was 235.6 billion yen ($2.1bn), down from a record 2.27 trillion yen profit in the previous quarter. The Tokyo-based company had net income of 761.5bn yen in the period and did not release operating profit figures.

Mr Son’s investment business had a strong run as a global surge in technology shares boosted the Vision Fund’s profit to new records for three consecutive quarters in the past fiscal year.

Since then, some of the company’s biggest hits have surrendered gains, with South Korean e-commerce company Coupang falling by about 20 per cent. Now, a technology sector crackdown by Chinese regulators is threatening to push the Vision Fund’s earnings into the red in the current quarter.

SoftBank reported a $4.3bn loss in Coupang’s valuation. The company contributed $24.5bn to the Vision Fund's profit in the previous quarter.

Gains from Didi Global, whose debut at the end of the quarter was one of the largest US offerings of the past decade, were the main reason the business remained profitable. Didi contributed $3.2bn to the bottom line.

But as soon as the books for the quarter were closed, China’s cyber space regulator launched an offensive on the country’s technology sector, sending SoftBank’s China portfolio into a tailspin.

Didi, which was removed from app stores on orders from Beijing, and Uber-like lorry start-up Full Truck Alliance are both down more than 30 per cent since the end of June.

Zhangmen Education, part of China’s private education industry that the government said was “hijacked by capital”, lost more than 60 per cent.

“The problem with the Vision Fund SoftBank is that their largest investments so far have been middling to poor – WeWork, Uber, Didi,” said Mr Boodry. “Those three alone are a quarter of the fund. That is a huge performance hurdle for the rest of the fund to overcome.”

In the press conference, Mr Son defended the company’s track record and its long-term investment success. He said SoftBank’s funds have $88.2bn in unrealised fair value, along with $18.3bn in realised value.

Mr Son said his investments were not concentrated in any single geographic area, explaining China made up only 23 per cent of the fund’s total value and accounted for 11 per cent of new investments in the past quarter.

He also suggested investors should wait it out, giving new regulations there one to two years to be finalised.

He conceded most of the company’s portfolio of more than 300 companies leverage artificial intelligence, but said there is little doubt that technology will be central to the future.

“If AI fails, SoftBank would fail, that is a risk,” Mr Son said.

SoftBank pared back its holdings in technology stocks, a potential warning sign for other investors. It no longer lists Facebook, Microsoft, Alphabet or Netflix among its investments. The disclosure was as of June 30.

Updated: August 11th 2021, 7:17 AM
EDITOR'S PICKS
NEWSLETTERS