Is the world big enough for a second SoftBank mega fund?

Mooted version 2.0 tech war chest could help further inflate already-pumped private valuations, crowding out other investors

Masayoshi Son, chairman and chief executive of SoftBank. The billionaire is said to be considering creating a second huge investment vehicle. Noriko Hayashi/Bloomberg

Ask investors from Silicon Valley to Wall Street what’s had the biggest recent impact on tech start-up exits and most will answer: Masayoshi Son’s almost $100 billion Vision Fund.

Now Mr Son, the the founder and chief executive officer of SoftBank Group, has a version 2.0 in the works, according to people familiar with the matter. It’s likely to be similar in size to the first - already the world’s biggest tech fund - and it could be coming as soon as next year, the people said, asking not to be identified.

Another mega fund rooting for deals among private tech companies would give founders cash to grow their businesses, and early investors a potential opportunity to sell and get liquidity. But it also could help further inflate already-pumped private valuations, crowding out other investors and delaying the inevitable sale or initial public offering - and the scrutiny of public markets.

“There’s already too much money chasing too few private companies,” said Kathleen Smith, principal at Renaissance Capital, which manages IPO-focused exchange-traded funds. “When there’s too much money, the returns get eroded. That’s what we have here.”

Japanese entrepreneur Mr Son has held preliminary discussions with investors about committing to a second fund, which would likely draw a wider pool of investors than the first one, the people said. For the first Vision Fund, most contributions came from sovereign wealth funds in Saudi Arabia and the UAE. No final decisions have been made and the billionaire businessman may also change his plans, they said.

A representative for SoftBank declined to comment.

Although the fund held its first close only a year ago, about $45bn has already been deployed on investments, the people said. While come of the cash has gone on stakes in publicly traded companies, like chipmaker Nvidia, much has been used to buy into private companies. The Vision Fund was the biggest investor in a $9.3bn sale of Uber stock; $4.4bn went toward WeWork.

“I’m not sure where he can find more good investment opportunities,” said Dan Baker, an analyst at Morningstar Investment Management Asia in Hong Kong. “That seems like a lot of additional capital.”

Mr Son hasn't shied away from sharply driving up the valuations of private companies the Vision Fund invests in, even when there's not a material change in the business itself. At a Wall Street Journal event in Tokyo this month, the 60-year-old billionaire talked at length about how he makes investments. Mr Son invoked the mindset of Yoda, the Jedi master from the Star Wars films.

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“Yoda says use the force. Don’t think, just feel it,” he said. “My first insight in the first few minutes is sometimes more meaningful than detailed calculation.”

“You do it so many times, you don’t even need to think,” Mr Son said. “You can just feel it.”

His instincts have led him to stakes in private companies that dwarf all but the biggest IPOs and send companies’ valuations soaring overnight. In the past decade, US IPOs have had an average size of $250 million, according to data compiled by Bloomberg; that’s the typical minimum investment size for the Vision Fund’s private stakes.

In 2015, London-based virtual reality start-up Improbable Worlds was valued at about $100m. After SoftBank led a $502m investment in the company last year, it was suddenly worth 10 times that.

SoftBank spent $300m in March 2017 on an initial stake in WeWork at a valuation of about $17bn. Just five months later, the firm paid another $4.4bn for private WeWork shares in a deal that bumped its valuation to $20bn, a person familiar with the matter said at the time.

The largest US pension fund will also be on the hunt for private technology investments. The $349bn California Public Employees’ Retirement System plans to pour as much as $13bn a year into non-public companies, including late-stage and early growth startups, chief iInvestment officer Ted Eliopoulos said this month.

A looming question remains: how is Mr Son going to realise returns on his investments? While the IPO market has come back strong this year, concerns about not living up to lofty private valuations have still slowed the pipeline.

SoftBank hasn’t shown the “fine pencil on valuation that public investors will have”, Ms Smith said. That could make it difficult to exit some stakes if other investors aren’t willing to match their stunning valuations, she said.

While the Vision Fund - and its potential successor - has the dry powder and leverage to get into the most valuable companies, they will need deep-pocketed buyers to get out.

Bloomberg