WeWork Cos. Inc.'s failed initial public offering and the poor market performance of other SoftBank Group Corp.-backed listings are placing the Japanese company's much-anticipated Vision Fund 2, and other potential floats, under the microscope, analysts said.
SoftBank announced its new Vision Fund in July, listing Apple Inc., Microsoft Corp., Foxconn, Mizuho Bank, Standard Chartered Bank and the Kazakhstan sovereign wealth fund among expected investors. The fund generated about US$108 billion in pledges, with SoftBank itself committing US$38 billion, up from the US$25 billion it invested in Vision Fund 1.
The indefinite postponement of office space company WeWork's listing, combined with the lackluster performance of Uber Technologies Inc. and Slack Technologies Inc., has made investors increasingly nervous, Arun George, IPO, M&A and TMT analyst at Global Equity Research said.
The key risk is that most of Vision Fund's paper gains are based on bullish private market valuations, which public investors are increasingly unwilling to pay in an IPO, George said.
The market capitalization of both Uber and Slack fell dramatically after the companies listed May 9 and June 19, respectively, S&P Global Market Intelligence data showed. In both cases, SoftBank's large funding rounds helped boost the companies' pre-IPO valuations. SoftBank invested US$1 billion in Uber when it was valued at US$72 billion and its IPO valuation was US$75.71 billion. Similarly, the Japanese conglomerate invested US$250 million in Slack at a valuation of US$4.23 billion, and Slack directly listed its shares at US$13.12 billion.
WeWork, which saw multiple investments from SoftBank including a US$5 billion round, has also seen its valuation plunge to a fraction of the US$47 billion that WeWork had first estimated. SoftBank on Oct. 22 announced a US$3 billion tender offer for existing WeWork shares and an additional US$5 billion investment. The rescue deal will give SoftBank approximately 80% economic ownership in the asset, but it will not control the board or have majority voting rights.
In this context, SoftBank must reduce the size of Vision Fund 2 to "get it over the line," George said, adding that one way could be to raise the target amount in installments that are spread over time.
Hatem Dhiab, managing partner at wealth and investment management firm Gerber Kawasaki said that with such low appetite for risk in general, the Vision Fund 2 may be delayed or even be canceled, making the WeWork case and 2019's poor tech IPO performances "a major turning point in private overvalued [venture capital]-backed businesses."
Analysts say a key concern for Vision Fund 2 is SoftBank's ability to honor its US$38 billion pledge.
"While SoftBank can tap debt markets, coming up with US$38 billion will be a challenge as [the company] was hoping to crystallize some paper returns and/or reduce the requirement to fund some of its portfolio companies through IPOs," George said.
The Japanese company is reportedly considering a more cautious approach to investing under Vision Fund 2. Assets with shorter routes to profitability may be targeted, for example. The fund may also reportedly have a different structure than the first, with SoftBank weighing an evergreen component that would allow limited partners to reinvest part of their profits from exits back into the fund. It would aim to release its funding in four to five years.
Ultimately, some risk may be passed on to SoftBank-backed companies that have been preparing for an IPO, the analysts said.
"Rumors already have been surfacing that Saudi Sovereign Wealth Fund was pushing back on SoftBank's [Masayoshi] Son and his plans to buy even more if not all of WeWork at the end of last year, so investors are likely to be wary of assumed valuations for all SoftBank investments, especially those with pending IPOs," Vicki Bryan, CEO of bond research firm Bond Angle, told S&P Global Market Intelligence in an interview.
Various reports have suggested that India's Oyo Hotels and Homes, the fast-growing hotel chain, is considering to list in the next two to three years. SoftBank recently led the hotel startup's US$1.5 billion fundraising round, having invested in the company before.
Dhiab noted that Oyo's business is "quite risky," with not much known about its profitability, and that they are "vulnerable to any slowdown."