|08 July, 2019

Gulf backers can recycle Vision Fund cash

The Saudi Public Investment Fund and Abu Dhabi’s Mubadala pumped $23bln in equity and $37bln in debt-like preferred shares into the first fund

Saudi Crown Prince Mohammed bin Salman and Masayoshi Son, SoftBank Group Corp. Chairman and CEO, attend the Future Investment Initiative conference in Riyadh, Saudi Arabia October 24, 2017.

Saudi Crown Prince Mohammed bin Salman and Masayoshi Son, SoftBank Group Corp. Chairman and CEO, attend the Future Investment Initiative conference in Riyadh, Saudi Arabia October 24, 2017.

Reuters/Faisal Al Nasser

LONDON - Saudi Arabia and Abu Dhabi face a SoftBank dilemma. The Gulf states bankrolled the Japanese group’s $100 billion Vision Fund. Now they have to decide whether to dig into their vaults again to support CEO Masayoshi Son’s planned sequel. The solution may be to recycle cash.

The Middle Eastern states’ sovereign wealth funds collectively pledged $60 billion to the first incarnation of Son’s technology investment vehicle, which has bought stakes in dozens of companies including Uber Technologies and WeWork. Yet the Saudi Public Investment Fund also has to finance mega-projects like NEOM, the country’s high-tech desert city. Abu Dhabi’s Mubadala Investment Company has other commitments, too. Shunning the second fund, however, could dent confidence in its predecessor’s portfolio companies, many of which are still burning cash.

There is a way out of the dilemma. The Gulf duo pumped $23 billion in equity and $37 billion in debt-like preferred shares into the first fund. The equity is so far showing an impressive 45% internal rate of return. Even if this falls to, say, 25%, the investors might pocket $4.9 billion a year between 2019 and 2030, according to Breakingviewscalculations.

In the meantime, the preferred shares pay a 7% annual coupon, adding up to $31 billion over the life of the fund. After SoftBank redeems those securities, the pair will have extracted a total of $127 billion - double their initial investment, and more than enough to sponsor a follow-up.

The problem is timing. If Son’s Gulf sponsors rely solely on payments from the first fund, they won’t be in a position to write really big cheques any time soon. Assuming that cash returns from the first Vision Fund are distributed evenly over its life, the pair will have about $7.5 billion a year to play with. The actual number may be lower as venture funds tend to harvest more investments towards the end of their lives. That would leave the Japanese billionaire casting around for other backers, or having to squeeze more cash from SoftBank’s own assets.

The alternative would be for SoftBank to slow down. The Vision Fund invested an astonishing $620 million a week, on average, between the first major 2017 fundraising and March 2019. The Saudis and Emiratis could make their commitments to the second fund dependent on returns from the first, thereby giving Son a nudge to cash in profitable investments. Some enforced conservatism might be no bad thing.

CONTEXT NEWS

- Most investors in SoftBank’s $100 billion Vision Fund want to join the group's forthcoming second fund, Chief Executive Masayoshi Son said at the Japanese firm’s annual general meeting on June 19.

- Son said in May that a second fund would launch "soon", even if SoftBank was initially the only investor.

- Both Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment Company are currently deliberating over whether to commit to the second Vision Fund, people familiar with the situation have toldBreakingviews.

(Editing by Peter Thal Larsen and Karen Kwok)

© Reuters News 2019