(Bloomberg Opinion) -- SoftBank Group Corp. and its Vision Fund need another win. And they need it fast.
With news that U.S. rental office company WeWork – formally known as The We Company – looks set to delay its IPO, we can see just how dependent SoftBank supremo Masayoshi Son’s empire was on this one exit to keep the Japanese company’s hit machine ticking along.
SoftBank Vision Fund has been a major investor in some of this year’s most significant listings. Uber Technologies Inc. and Slack Technologies Inc. were among them. Both have fallen this quarter, dragging down the value of the Fund.
There is a pattern to how the Vision Fund keeps returns climbing. Buy in at a later round of a startup’s funding, list the company a year or two later, and book the mark-to-market gains.
Sounds simple, except for the one-two punch that follows: SoftBank, like most pre-IPO investors, is generally locked in and can’t cash out that profit for at least a year. Additionally, IPO shares have a tendency to perform badly in their first year. For SoftBank and the Vision Fund, that means quick gains turn to slow public-market losses that need to be booked every period, hurting returns in subsequent quarters.
To paper over these losses, the Fund can book gains by bringing its next hot offering to market. That means that as long as there’s a healthy IPO each quarter, the pain from public-market declines can be squelched. So the model becomes: IPO gain, public-market losses, IPO gain. And around again.
With WeWork, however, the merry-go-round risks turning into musical chairs. The game needs IPOs on the floor or the music stops. Had WeWork gone public before Sept. 30, and at a healthy premium to the various prices SoftBank paid through its funding rounds, then such paper profits likely would have covered over losses caused by the 26% decline in Uber’s shares so far this quarter and the 30% drop in those for Slack.
As Bloomberg’ s Gillian Tan wrote earlier this month, SoftBank and its affiliates own around 29% of WeWork. Should the $47 billion valuation at which SoftBank most-recently bought in turn into the current whisper number of $15 billion, then SoftBank and the Fund could be set to lose as much as $9.28 billion right out of the gate.(4)
That would result in an unusual IPO loss, drag down the Fund, and ruin the quarterly model. So it makes sense that SoftBank wants to delay WeWork’s IPO, at least until after Sept. 30. WeWork responded to reports of this delay by saying it expects to complete the IPO by the end of this year.
Assuming that there’s no other basis for revaluation, such as a new equity round, the Vision Fund can still contend that WeWork is worth $47 billion when it closes its books at the end of this month.
But that doesn’t solve the possibility of the Vision Fund posting a loss this quarter thanks to slides in Uber and Slack. One listed portfolio company, Ping An Good Doctor (aka Ping An Healthcare and Technology Co.), was up 39% in Hong Kong as of Tuesday morning, netting a gain of around $110 million to the Vision Fund. Others have fallen, including Guardant Health Inc. (-13%) and ZhongAn Online P&C Insurance Co. (-8.6%).
I believe that this leaves SoftBank Vision Fund with little choice but to enact a two-pronged strategy. First, take a “big bath(3)” for the September quarter and get the bad news behind it. Second, hurry along the IPOs of the other unicorns in its stable.
ByteDance, the hugely popular Chinese video content platform, is currently the world’s most valuable startup at $75 billion, according to CB Insights. That’s followed by Chinese ride-hailing provider Didi Chuxing at $56 billion. I don’t think either is ready to IPO in the next month or two, but there’s always a chance ByteDance may decide to list before a slowdown in the Chinese economy starts to show up in its growth metrics.
There are also some smaller fruit about to ripen. South Korean e-commerce company Coupang and U.S. food delivery provider DoorDash Inc. could find favor among IPO investors. Southeast Asian transport and services startup Grab Holdings Inc. would also be very popular, but I sense they want to spend a little more time building the non-transport offerings before pitching an IPO. Then there is Son’s plan to relist British semiconductor designer ARM Holding Plc, which would likely be a success because of its central role in the global technology sector.
Despite the troubles with WeWork, SoftBank still has a strong team of highly valued startups on its roster. But they’re not much good to the Vision Fund if they’re sitting on the bench.
(1) The exact scale of any loss would depend on how SVF has valued preferred shares acquired in earlier rounds. This figure assumes the Fund raised valuations in subsequent funding rounds.
(2) Big Bath refers to the concept of collating lots of bad news in one quarter so that a company can put it all in the past and move on. Often seen as manipulation, I'd argue this can actually be a healthy strategy because it allows investors and management to return their focus to building the company.
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Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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