China's Regulatory Crackdown Impacts Vision Fund 1 Returns

SoftBank's Shifting Investment Landscape

In recent years, SoftBank has experienced a decline in its leading position within the investment world. Firms such as Tiger Global and a16z have gained prominence through swift deal closures and a proactive approach to funding startup expansion.

However, as SoftBank continues to deploy capital from its Vision Fund 2, the outcomes from its earlier, highly influential Vision Fund 1 are becoming apparent.

Vision Fund 1 Performance and Recent Losses

The latest earnings report from SoftBank reveals significant losses within Vision Fund 1. Several key portfolio companies have experienced a reduction in valuation, impacting overall returns.

While some investments did generate positive results, these gains were insufficient to fully offset the losses incurred from other holdings.

The Interconnectedness of Global Markets and SoftBank

A discussion of Middle Eastern investment, Chinese regulatory actions, the U.S. stock market, and SoftBank are all relevant at this juncture, as they are intrinsically linked.

This connection centers around the case of Didi, a ride-hailing company.

Didi and the Broader Implications

The situation with Didi highlights the complex interplay between geopolitical factors and investment outcomes.

Chinese regulations have significantly impacted Didi’s performance, subsequently affecting SoftBank’s investment in the company.

This situation underscores the risks associated with investing in companies operating within heavily regulated environments.

Furthermore, the performance of Didi is also influenced by broader market trends in the U.S. stock market.

Vision Fund 1’s performance serves as a case study in the challenges of navigating global economic and political landscapes.

SoftBank’s continued investment activity through Vision Fund 2 will be closely watched to assess its ability to adapt to these evolving conditions.

Didi Investment Losses for SoftBank

Crunchbase records indicate that SoftBank made three distinct investments in Didi, the prominent Chinese ride-hailing service that successfully competed with Uber within its home market. Notably, SoftBank’s Vision Fund 1 also participated as an investor in Uber itself, creating a complex financial landscape.

At the time of Didi’s initial public offering (IPO), the Japanese telecommunications and investment firm held a substantial stake. TechCrunch reported that SoftBank controlled approximately 21.5% of the ride-hailing company.

Didi’s IPO price was set at $14 per share, resulting in a valuation of around $67 billion. However, the company subsequently encountered difficulties due to regulatory scrutiny from Chinese authorities. These actions included restrictions on accepting new users and the removal of its application.

Consequently, Didi’s share price has significantly decreased to $8.12, reflecting its diminished standing with the Chinese Community Party. This represents a substantial decline from its IPO valuation.

SoftBank’s Investment Performance

SoftBank estimates that its total investment of $12.073 billion in Didi, channeled through Vision Fund 1, was valued at just $7.544 billion as of September 31, 2021. A further valuation on November 5, 2021, placed the investment’s worth at $7.864 billion. The difference between the initial investment and the current valuation is considerable.

Here’s a breakdown of the Vision Fund 1 performance, as detailed by SoftBank in its report covering the six-month period ending September 2021:

While the loss on Coupang is larger, stemming from a decline in the Korean company’s share price from a peak of $69.00 to $29.93, SoftBank’s Vision Fund 1 has still realized significant overall gains from its Coupang investment. As of November 5, 2021, the fund reported paying $2.729 billion for Coupang equity, which had increased in value to $16.991 billion.

The future value of Didi remains uncertain. However, it is undeniable that the company’s valuation has plummeted following the regulatory crackdown in China. This impacts not only U.S. investors who purchased Didi stock on the public market, but also those who retained their shares post-IPO, including SoftBank and its Vision Fund 1.

The fund sourced capital from various sources, with CNN reporting that approximately 60% originated from Saudi Arabia and the UAE. Therefore, Chinese regulatory actions are negatively affecting the value of a U.S.-listed stock, which in turn diminishes the value of a Japanese investment fund largely financed by Middle Eastern capital.

It now seems distant when a U.S. company directly challenged a Chinese domestic company for market dominance within China. The current geopolitical climate suggests such a scenario is unlikely to repeat.

It is improbable that these specific circumstances will align again. Nevertheless, tracing the flow of funds – from initial capital reserves to investment vehicles, and ultimately to public markets before facing regulatory intervention – provides a compelling case study.