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SoftBank Recovery Gains Ground With Vision Fund’s Record Profit

Bloomberg logoBloomberg 11/9/2020 Pavel Alpeyev
a person holding a sign: The SoftBank Corp. logo is displayed on a store window in Tokyo, Japan, on Friday, May 15, 2020. SoftBank Group Corp. expects to book a record 1.35 trillion yen ($12.5 billion) operating loss for the fiscal year ended March 31 when it reports results on Monday. © Bloomberg The SoftBank Corp. logo is displayed on a store window in Tokyo, Japan, on Friday, May 15, 2020. SoftBank Group Corp. expects to book a record 1.35 trillion yen ($12.5 billion) operating loss for the fiscal year ended March 31 when it reports results on Monday.

(Bloomberg) -- Masayoshi Son is making his case for SoftBank Group Corp.’s turnaround.

The Japanese conglomerate reported a record 784.4 billion yen ($7.6 billion) profit in its Vision Fund business for the three months ended Sept. 30, a sign the fund’s investments in startups are paying off amid a broad rally in technology stocks. One Chinese startup quadrupled SoftBank’s money after going public in August.

Son also addressed nagging concerns about his stewardship. He revealed details about a controversial stock and options trading program, making clear the effort was relatively modest in scope and strategy. He even took steps to improve corporate governance by increasing the proportion of outside directors with the removal of four insiders, including Chief Operating Officer Marcelo Claure and Vision Fund chief Rajeev Misra.

“Masa, myself, should be most supervised,” Son joked in a question and answer session after the results. “More external directors mean better governance.”

The Japanese billionaire took the stage at a briefing in Tokyo to explain how the company he founded four decades ago is coming back from record losses in the last fiscal year. The Vision Fund unit’s highest-ever profit cames as a global surge in technology shares lifted the value of stakes in public firms like Uber Technologies Inc. and improved the prospects for startups in its portfolio. That helped the Tokyo-based company report net income of 627.5 billion yen for the quarter.

“The Vision Fund’s performance was very encouraging,” Bloomberg Intelligence senior analyst Anthea Lai said. “They have pulled off a U-turn.”

The standout success for the quarter was a little-known Chinese startup called KE Holdings Inc. It runs an online property platform called Beike and its shares have surged since an initial public offering in August, handing SoftBank an unrealized gain of $5.1 billion on the investment for the quarter.

In his presentation, Son said his original $1.35 billion investment is now worth $7.9 billion because shares have kept surging since the end of September. Still, he said that after WeWork, another real estate bet that lost him billions, Beike “wasn’t very popular” at first.

375% Return on One Startup to Help SoftBank Get Past WeWork

Son’s disclosures about his stock and options trading may ease the concerns of some investors who sold off SoftBank shares after initial reports about derivatives bets in September. The company said the fair value of its futures and options positions came to $2.7 billion at the end of September, including long call options on listed stocks worth $4.69 billion and short call options on listed stocks with negative $1.26 billion of value.

In response to media reports that SoftBank was the “Nasdaq whale” stoking the rally in tech stocks, Misra said publicly in October that SoftBank is “not even a dolphin, forget being a whale.”

Son explained that recent investments in securities and derivatives are experiments in how to put its cash to use now that the company is selling assets. He pointed out that the options account for just 1.2% of the company’s shareholdings.

That hasn’t stopped the skeptics.

“It’s still not clear why a company like SoftBank is dabbling in derivatives,” said Justin Tang, head of Asian research at United First Partners in Singapore. “There is a chance they are mistaking their initial success at the Vision Fund for skill instead of luck. Now they are trying to replicate that with the public funds division.”

SoftBank has also been putting capital into publicly traded stocks, part of an asset management effort revealed this year. It acquired 1.7 trillion yen of “highly liquid listed stocks” in the quarter, including a $6.3 billion investment in Amazon.com Inc., $2.2 billion in Facebook Inc. and $1.8 billion in Zoom Video Communications Inc. The operation is managed by its new subsidiary SB Northstar, in which Son personally holds a 33% stake.

SoftBank has typically made investments in private startups, giving funds to companies like Uber and Alibaba Group Holding Ltd. to help them grow. The founder argued his bets on public stocks are consistent because he’s backing more mature companies with advanced capabilities in areas like artificial intelligence.

“I can hear people saying, what’s he doing now investing in public companies,” Son said at the briefing. “These are investments in the AI revolution.”

Separately, Son announced the most substantial changes to his board in years, a move toward stronger governance practices supported by activist investor Elliott Management Corp. Four internal directors -- Claure, Misra, Chief Strategy Officer Katsunori Sago and Yasir Al-Rumayyan of Saudi Arabia’s Public Investment Fund -- have resigned. That increases the proportion of outside directors because the changes leave the board with four independent members out of nine.

SoftBank also said Chief Legal Officer Robert Townsend is leaving the company this month. The former co-chair of Morrison & Foerster’s Global M&A Practice Group joined SoftBank in August of 2018 to head its legal, compliance operations and corporate governance operations. Tim Mackey, who has served as deputy general counsel since November 2018, will take over from Townsend.

The departure comes after SoftBank has lost several top executives, including the COO of the Vision Fund. SoftBank’s Chief Compliance Officer Chad Fentress left the company in September and vacated his WeWork board seat.

Son has boosted his share price in part by selling off assets and buying back his own shares. After years of resisting, he’s sold stakes in Alibaba, T-Mobile US Inc. and SoftBank Corp., the Japan telecommunications unit. SoftBank also announced a deal to sell its chip designer Arm Ltd. to Nvidia Corp. for $40 billion.

The shift from running telecom and tech companies to investment management has left some investors and analysts perplexed.

“It’s becoming difficult to tell what SoftBank is all about anymore,” said Atul Goyal, senior analyst at Jefferies. “While investors are always keen to hear about Son’s vision for the company, it seems to be changing every quarter. What people really want is more consistency.”

The billionaire argued that SoftBank is in fact very simple to understand: Investors should focus on a single metric -- net asset value, or the value of its shareholdings minus net debt. By that measure, the company is worth 27.3 trillion yen, a 5.6 trillion yen gain from half a year ago. SoftBank’s market capitalization was 14.8 trillion yen at the end of trading on Monday.

“What is SoftBank? It’s a company that invests in the information revolution,” Son said. “That hasn’t changed even for a day since I founded it.”

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