Investment groups that register unrealised gains as profits should do so gingerly. If they make big mark-ups when markets are roaring, it may amplify write-offs when the asset cycle turns.
SoftBank epitomises the problem. The Japanese tech investment group has booked an investment loss of ¥2.3tn ($17bn) at its Vision Funds for the first quarter. The funds, whose backers include Saudi Arabia, are belying their ambitious name. This latest wipeout of value follows a record annual loss. The tech stock rout is to blame.
The same applies to SoftBank’s own Y3.16tn ($23bn) attributable net loss in the latest quarter. Value ebbed from Chinese artificial intelligence company SenseTime and Norwegian robotics firm AutoStore. That compounded losses from companies such as South Korean ecommerce platform Coupang, down 60 per cent since it listed last year
SoftBank boss Masayoshi Son has made progress in diversifying away from China. The group now has investments in listed Indonesian tech giant GoTo, and Delhivery in India. It has sold positions in Chinese real estate platform Beike.
But these developments are overshadowed by the ups and downs reminiscent of the nursery rhyme about the Grand Old Duke of York. The two Vision Funds reported ¥3tn of unrealised gains at the end of March. At the end of June nearly 60 per cent of their companies recorded valuation losses, wiping out nearly all of March’s gains.
Even the quarter’s net loss figures are unlikely to capture the full extent of the impact of the market sell-off. Valuations of unlisted companies have catching up to do. For example, Swedish payment group Klarna raised funds last month at a valuation 85 per cent lower than last year. That was when SoftBank invested. New listings such as GoTo are struggling.
Distributions to limited partners have been increasing, quadrupling in the past two years. SoftBank shares have, meanwhile, suffered a 46 per cent fall from last year’s peak. SoftBank’s current $67bn market value is about half the group’s $135bn net asset value — which Son still considers an important gauge of performance.
Nearly $10bn in buybacks have not been enough to rally the stock. The latest $3bn repurchase will be more of the same.
Son’s immediate task is to float chip designer Arm on a weak market. His broader mission is to bolster credibility that is slipping with every tech stock reversal.