Anatomy of the worst quarter in Softbank history

On August 8, 2022, Softbank reported the worst quarterly result in its history, seeing the April to June quarter clock in at a JPY 3.2trn (USD 24.5bn) loss. If one is positioned long during one of the worst six months stock market performances in history, that is what one gets. One can ride out a slump in valuations — if it is only a slump — while the focus then shifts to one’s liquidity position. Liquidity for Softbank means a Loan-to-Value (LTV) ratio below 25%, and cash on hand for two years of bond redemptions, as Son re-iterated multiple times during his earnings presentation.

What is Softbank?

Often, “Softbank” and the “Vision Fund” are used synonymously. However, based on the latest quarter, the Vision Funds make up just less than half of Softbanks’ Net Asset Value (NAV). The other major components are Alibaba (21%), chip designer ARM (14%) and Softbank Corp (11%). At its peak valuation of over USD 300, Alibaba made up 59% of Softbank’s NAV. After the Chinese government stopped the IPO of Alipay, and took restricted measures on several e-commerce platforms, its value plunged to just over USD 110 at the end of the quarter, and sits at around USD 90 now. As was reported recently, Softbank has sold a large part of its Alibaba holdings in forward transactions. Exactly how much remains in Softbank ownership, Son could not answer during the Q&A session.

It seems obvious, however, that these sales were required to put Softbank in line with its liquidity policy stated above. As a result of those transactions, Softbank cash position at the end of the quarter was USD 33bn, comfortably exceeding the USD 13bn in planned bond redemptions over the next two years.

How bad was the quarter?

A historically bad quarter is one thing. Losing against the benchmark is something entirely different. While this comparison only includes the Vision Fund companies that are publicly listed, Softbank under-performed the NASDAQ by nine percentage points.

For another comparison, the Ark Innovation ETF (Ticker: ARKK), Cathy Wood’s flagship fund of unprofitable high-growth companies, declined from USD 66.29 on March 31 to USD 39.88 on June 30, for a loss of almost 40 percent. Masa 1, Cathy 0.

For absolute valuation adjustments, Berkshire Hathaway posted a USD 53bn loss on its investment just two days prior. With an NAV a multiple that of Softbank, on a relative basis, Berkshire still performed better.

Quo vadis, Vision Funds?

On a cumulative basis, the gains of the Vision Funds have been reduced to just about USD 830m. What hurts even more, though, is that the first Vision Fund is mostly “other people’s money”, while the second Vision Fund had a hard time raising external capital, and was thus funded primarily by Softbank itself and its employees. The once pace-setting LatAm fund is also in negative territory.

Asked to clarify governance and leadership, Son struggled, but ultimately conceded that Rajeev Misra will remain as the CEO of Vision Fund I, while Son himself will take control as CEO of Vision Fund II (which will roll in the LatAm fund).

At the end of June, again on a cumulative basis, only 25% of portfolio companies have recorded gains (119 companies), while 59% (277 companies) have recorded losses, with the remainder unchanged. Over 50% of the markdown during the quarter was attributable to the 35 publicly listed portfolio companies, with about a third of the markdown aligned with those 175 private companies that have publicly listed comparables.

How does the weak Yen play into this?

The Japanese Yen declined from 122.4 to 136.7 to the US Dollar during the quarter. There are multiple, partially offsetting effects of that:

• Losses in USD get amplified through a weaker Yen, as does foreign currency-denominated debt. Approximately 25% of the net loss, JPY 820bn out of 3.2trn, are attributable to foreign exchange losses
• NAV increases for foreign currency-denominated holdings. For the last quarter, the FX impact increased the NAV from JPY 16.3trn to JPY 18.5trn, or around 13.5%, allowing the NAV to remain unchanged compared to the prior quarter

During his presentation, Son pointed out that the current NAV, one month into the new quarter, was about JPY 1trn lower, e.g. JPY 17.5trn. Hence the caution in the liquidity position and investment approach, discussed next.

Buy high, …..and then?

Buy high, sell low obviously is not a viable investment strategy. And hindsight is 20/20. So much for the platitudes. It is clear, however, that the Vision Funds deployed capital straight into a frothy, bubbly market, to the tune of almost USD 43bn from April through December 2021. With that bubble popping spectacularly, it is probably as much “heightened investment discipline” as it is some pure and simple running out of dry powder that changes the focus now on “enhancing the value of current portfolio” instead of making new investment. Which is a shame, since the PE vintage 2022 will undoubtedly beat the prior vintages by a large margin.

Masayoshi Son is a survivor. What rescued you him from the popping of the internet bubble was the spectacular, and unparalleled USD 20m investment in Alibaba in 2000. Son must hope that among the 473 Vision Fund companies, there is the next Alibaba. It clearly was not WeWork, Uber or Didi. If there is such hidden gem, it is likely going to be company that only few of us have heard of, just like Alibaba in 2000. Alas, it is in plain few, just check out the Vision Fund portfolio company roster.

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