Vision Fund pulls back from China amid regulatory uncertainty

Vision Fund 2, which is 100% balance sheet capital, made 47 new investments in the three months ended June 2021. It deployed JPY1.6 trillion ($14.4 billion), about half of that comprising recycled distributions from both Vision Funds.

Diversification was a major theme, with the China share of the overall portfolio falling from one-third to 23%. Of new investments made from Vision Fund 2 since April, only 11% of that capital has gone to Chinese businesses. China exposure now trails Asia ex-China exposure.

This reflects a bullishness on markets like Korea and India. SoftBank has sought to replicate the big-bet strategy that worked so well with Coupang by making a solo commitment of $1.7 billion to Korean travel industry unicorn Yanolja. It is also an active participant in India’s growth-stage and pre-IPO surge, backing the likes of Swiggy, OfBusiness, and Unacademy.

Yet the series of crackdowns in China has hurt the existing portfolio. SoftBank has a balance sheet position in Alibaba Group, which was fined following an anti-monopoly investigation. Various other platform internet companies have since been targeted.

Vision Fund is a significant investor in Didi and Manbang, which were pulled up by regulators not long after their IPOs over data privacy violations. It also has exposure to online education, where new rules threaten to undermine business models.

“We are not against or for the Chinese government, and we don't have any doubt about the future potential of China. But again, new rules and new regulations are beginning to be implemented. So, until things get settled, we want to wait and see,” Masayoshi Son, SoftBank’s founder, said in an earnings call. He later added: “Once things get clear, then we are open to resuming active investment in China.”

Son noted that the post-IPO plunge in Didi and Manbang’s stock prices has negatively impacted the likes of Alibaba, Tencent Holdings, Baidu, and Meituan. However, he believes they will recover because fundamental business performance is strong. “There are good times and bad times. And whether it's a good time or bad time, my belief remains the same,” Son said.

SoftBank recorded a net loss of JPY961.6 billion for the 12 months ended March 2020, partly because Vision Fund 1 had performed poorly. This impacted marketing efforts for Fund II, which had received $108 billion in provisional commitments. In the end, SoftBank proceeded with its own capital.

With tech valuations surging in the wake of COVID-19, the company posted a net profit of JPY4.99 trillion for the 2021 financial year, underpinned by JPY6.4 trillion in investment gains.

SoftBank responded to this turnaround by increasing its Fund II commitment from $10 billion to $30 billion. Fund II is now listed as $40 billion. Moreover, Son has launched a co-investment scheme that will see him make a personal commitment to the vehicle of up to $2.6 billion, or 17% of the corpus, a presentation reveals. Other management team members are expected to participate in due course.

According to Son, a similar co-investment scheme was approved for Fund I, but then problems emerged in the portfolio and SoftBank’s share price dropped, so it never materialized. Son claimed that, while he was willing to proceed, other management team members pulled back because they couldn’t afford to take the risk.

“But this time, it's different. Why? Because … I take risks all by myself initially, and then I will distribute to other people in the management,” he said.

As of June, $86.2 billion out of the $98.6 billion Fund I corpus had been deployed. The total fair value of the portfolio was $146.5 billion, while $27 billion had been realized, a separate presentation shows. For Fund II, deployment was $19.5 billion and total fair value and distributions were $25 billion and $2.1 billion, respectively. 

SoftBank contributed one-third of the Fund I corpus. Of the external capital raised, $40 billion was preferred equity with a 7% fixed distribution. Preferred equity investors have received $20.7 billion of the $27 billion in distributions to date, of which $15.4 billion is return of principal.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Technology
• Expansion
• Regulation
• North Asia
• China
• Asia
• India
• South Korea
• Growth capital
• TMT
• Softbank