ReutersBy Quentin Webb
(The author is a Reuters Breakingviews columnist.)
HONG KONG, Aug 28 (Reuters Breakingviews) - SoftBank could have a $34 billion jackpot in sight. The company is readying the Vision Fund, an unprecedented $100 billion war chest to plough into artificial intelligence, robotics, and other emerging technologies. The challenge for maverick Chairman Masayoshi Son and his team is to find good big bets in an already hype-fuelled, expensive market for startups and listed technology stocks.
SoftBank is putting in $28 billion of equity, partly by injecting existing investments. Saudi Arabia's sovereign fund and other outsiders will contribute $28 billion more, plus $44 billion of debt-like funding using "preferred" securities, the Financial Times reported. The newspaper says SoftBank will charge management fees and keep a fifth of profits once it hits an 8 percent annual return hurdle - a fairly typical way of sharing profits through carried interest - known as carry.
Assume SoftBank rebates management fees before sharing in profits, a common setup. And suppose that when things go right, it gets 20 percent carry on everything, not just the extra returns above the hurdle rate. For simplicity's sake, assume too that it does not give its own managers a huge cut of the profits.
NON-RECOURSE
SoftBank will be shooting for the stars. Son boasts of the company's fabulous 44 percent annual internal rate of return for previous internet investments, including Alibaba and Yahoo. But repeating that feat today will be much harder. Son found Alibaba and Yahoo early on. Nowadays, SoftBank is circling so-called unicorns that already enjoy multibillion-dollar valuations, like Uber and India's Flipkart. Valuations for listed tech firms are lofty, too. And it's much, much harder to earn a stellar return when deploying a pot of money that is hundreds of times larger than the typical venture capital fund.
So say instead that SoftBank can double its money over the life of the fund - in line with traditional expectations for private equity investors. Provided it can do that fast enough to meet its annual hurdle rates, SoftBank would pocket a $28 billion gain on its own investments, and about $5.6 billion in carried interest on the cash it is investing on behalf of others. This does not include any potential tax bill.
SoftBank also has a cushion if things go awry: annual management fees, which are not dependent on deal success. The FT says these will total 0.7 to 1.3 percent of committed capital - the money investors have agreed to put up, whether or not it has yet been used. Assume that tally applies just to outside equity, and not to the preferred securities. An average fee of 1 percent would bring $280 million a year. Those fees would typically decline in the second half of the fund's life, as it switches from accumulating assets to selling out of existing deals.
If things go really wrong, the fund has no claim on the parent company, so SoftBank need not compensate other investors for losses. However, the company will still be exposed to poor performance through its half-share in Vision's equity.
PAPER GAINS
Whatever the outcome, Vision will quickly affect SoftBank's consolidated results. The company has already started reporting an operating profit from the fund, and this contribution will fluctuate long before Vision cashes out on any deals. That is because the results will include items such as paper gains or losses on investments, dividend and interest income from the holdings, and the fund's expenses - with the portion due to outside investors subtracted further down SoftBank's income statement.
In an eventful year, Vision could make a sizeable difference to SoftBank's overall operating profit, which was roughly $9 billion in the last full financial year. Cash flow will also be affected, as SoftBank starts including outflows to pay for new deals, or proceeds from disposals, and cash going to and from the fund's outside investors.
All of this is an experiment. For a big telecoms and technology conglomerate to give birth to the world's largest investment fund is unheard of. SoftBank investors, and many others, will be watching closely to see whether it can come close to hitting the jackpot.
CONTEXT NEWS
- The SoftBank Vision Fund secured more than $93 billion of committed capital as part of its first funding round, the investment vehicle announced in May.
- Outside investors in the fund managed by Japanese technology company SoftBank include Saudi Arabia's Public Investment Fund, and Mubadala of the United Arab Emirates, as well as Apple, Foxconn, Qualcomm and Sharp.
- SoftBank will itself invest $28 billion into the Vision Fund. This includes injecting a near-25 percent stake in ARM, the chip designer, at an $8.2 billion valuation.
- The Financial Times and Wall Street Journal have each since reported SoftBank will keep about 20 percent of profits from the fund, above a threshold of about 8 percent.
- Both newspapers have also said outside investors would contribute some capital through debt-like preferred units, paying a 7 percent coupon. The FT, citing people familiar with the structure, added that if the fund reached $100 billion, outsiders would supply $44 billion of debt and $28 billion of equity.
FT article
WSJ article
Read Again SoftBank has $34 bln Vision Fund jackpot in sight : http://ift.tt/2xp1ry3
Bagikan Berita Ini
0 Response to "SoftBank has $34 bln Vision Fund jackpot in sight"
Post a Comment