Has SoftBank Taken Activist Lessons From Elliott?
(Bloomberg Opinion) -- Unicorns used to be the almost exclusive focus of SoftBank Group Corp. But now hedge funds are entering Chief Executive Officer Masayoshi Son’s backyard, chasing these billion-dollar plus tech startups in droves. As the competition heats up, can SoftBank retain its edge in venture capital? Could it change its investing style to stock picking or perhaps even activism?
The questions arose when it became known SoftBank had built a $5 billion stake in Roche Holding AG, as Bloomberg News reported. It’s a curious move. SoftBank is now one of the largest investors in the highly undervalued Swiss pharmaceutical giant, whose Genentech division is a pioneer in the data-driven development of drugs with the aid of artificial intelligence. Combined with smaller stock investments made earlier, the Japanese VC giant could well become a market mover in the sector — the new biotech whale. Is that what SoftBank wants to do?
Might Masa Son be trying activism? Is this a campaign to get Roche to unleash its pent-up value? Son could have gotten a few tips from Paul Singer’s Elliott Management Corp. Last year, the venerable activist hedge fund launched an aggressive campaign to nudge SoftBank itself to boost share price via asset sales and share buybacks. The way Roche is set up, however, will make that difficult for SoftBank. The drug maker has a dual-class share structure with the founding families owning 50.1% of the voting class, while crosstown rival Novartis AG holds one-third.
More likely, SoftBank’s move is evidence that it is pivoting to another investment strategy.
Son’s second Vision Fund still writes checks to startups every day, but hedge funds are crossing over to private markets at greater speed. In the second quarter, Tiger Global Management was doing 1.3 deals a day, making it the world’s most active venture capitalist, according to CB Insights. SoftBank ranks fifth. Other big hedge funds, from Third Point LLC to Marshall Wace LLP, are looking to buy unlisted companies, too. In fact, there’s so much demand from hedge funds, sovereign wealth funds and pension funds, who largely stayed in the public markets in the past, that startups are turning to Wall Street banks, instead of traditional venture capital funds, to broker financing deals.
Hedge funds are aggressive financiers. The likes of Tiger Global can arrive at negotiating tables with multi-million-dollar checks in hand, and they do not even demand a board seat. All they want is exposure. If hedge funds are crossing the river into private markets, the world’s largest venture capital fund may have no choice but to come out of its comfort zone and swim the other way.
That doesn’t mean Son will be good at stock investing. Last year, SoftBank waded into trading big tech shares via equity options and earned the nickname “Nasdaq whale.” Elliott was so uncomfortable with the endeavor the fund took out offsetting options itself to protect against the Nasdaq whale’s possible billion-dollar losses.
That was smart. SoftBank’s controversial trading of listed big tech stocks alone cost the group $2.7 billion in derivative losses. SB Northstar LP, a new asset management arm set up last year to trade listed shares and one-third owned by Son himself, finished the fiscal year ending March with 509 billion yen ($4.7 billion) in operating cash outflows, mainly from realized loss on investments in derivatives. SoftBank does not seem to have the knack for market timing.
Elliott can take some comfort from the more than $2.5 billion stake it’s built up in SoftBank, or about 3% ownership: it had a handsome 46.6% return from that bet, one of its largest, according to Bloomberg Intelligence.
But you still need to wonder about Son. He infamously invested in WeWork, the insolvent supply chain financing start-up Greensill, and the bankrupt construction unicorn Katerra. What does it portend that SoftBank is the new biotech whale? Is it sign of a surging ocean of profit? Or just a lot more froth?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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