Explaining SoftBank’s Close Ties With Saudi Arabia

(Bloomberg) -- The controversy over the disappearance of journalist Jamal Khashoggi has prompted business leaders to distance themselves from Saudi Arabia. U.S. Treasury Secretary Steven Mnuchin, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon and Uber Technologies Inc.’s Dara Khosrowshahi have all dropped out of an investment conference in Riyadh slated to begin Oct. 23. However, SoftBank Group Corp.’s founder Masayoshi Son is among the few who haven’t. Here’s an overview of Son and SoftBank’s ties to Saudi Arabia — and their potential risks.

1. What is the SoftBank-Saudi relationship?

A close one. SoftBank’s empire spans wireless operations in Japan, solar power in India and a stake in Sprint Corp. But in the past few years, Son has increasingly focused on investments in technology companies through a $100 billion fund known as the Vision Fund. Saudi Arabia is the biggest investment partner in the fund. Its sovereign wealth fund -- the Public Investment Fund, or PIF -- has committed $45 billion and plans to put the same amount into a second fund. SoftBank has also said it will support a planned $200 billion solar power project in Saudi Arabia.

2. How did the relationship start?

It’s very much a personal relationship. The latest dealings began when now Crown Prince Mohammed bin Salman met with Son in Tokyo in September 2016. The Japanese billionaire pitched the idea of setting up the largest investment fund in history to finance technology startups. Son has since said that he convinced the man who has become the de facto ruler of Saudi Arabia in less than an hour: “One billion dollars per minute,” Son has said. Prince Mohammed controls the PIF, which is behind both the Vision Fund and the solar investments. They are part of the the 33-year-old crown prince’s push to modernize the kingdom’s economy and diversify away from oil.

3. Does this have an immediate affect on SoftBank?

In less than a year, the Vision Fund has already committed about $65 billion, acquiring stakes in Uber, WeWork Cos. and Slack Technologies Inc. While only about a half of the PIF’s $45 billion has been tapped, the Saudi wealth fund has a contractual commitment to provide the rest, according to a person familiar with the matter. U.S. President Donald Trump has warned of “very severe” consequences over the likely killing of Khashoggi, even as he has continued to talk up the need for close ties with Saudi leaders. Most of the Vision Fund’s investments are in the U.S., where SoftBank is also planning to sell Sprint to T-Mobile US Inc. More immediately, Son has yet to confirm whether he will attend Saudi Arabia’s Future Investment Initiative, which is scheduled for Oct. 23-25. He is a member of the event’s advisory board. Bloomberg has also pulled out of the event as a media partner, a spokesperson said.

4. What does this mean for the Vision Fund’s ability to invest?

That’s unclear. The Vision Fund will “undoubtedly find itself in a more challenging environment in convincing startups to take its money,” according to Amir Anvarzadeh, a senior strategist at Asymmetric Advisors in Singapore. Herman Narula, CEO of startup Improbable Worlds Ltd., said he won’t be attending the conference in Riyadh. Improbable raised $502 million from investors led by SoftBank last year. Those choosing to accept Vision Fund money could possibly face a backlash from employees. Earlier this year, workers at Alphabet Inc.’s Google succeeded in convincing management not to renew its Maven AI contract with the U.S. military and to withdraw from the Pentagon’s $10 billion JEDI cloud computing contract.

5. What about the prospects for the second fund?

They are closely tied to Prince Mohammed’s. “We are the creators of SoftBank Vision Fund,” the crown prince said in an interview this month. “Without the PIF, there will be no SoftBank Vision Fund.” In an interview in September, Son said he planned to raise a new $100 billion fund every two or three years. His goal is to give entrepreneurs the opportunity to compete with unlimited amounts of money. Without Saudi backing, Son would likely have to wait until the original fund delivered results before being able to attract more money.

6. What does this mean for Son personally?

Son, who turned 60 in August, has said he plans to retire by his 70th birthday. But before that he wants to ensure that SoftBank is in a position to survive successive waves of technological change for the next 300 years, starting with the looming impact of artificial intelligence. The Vision Fund is the cornerstone of what Son calls the Cluster of No. 1s strategy — the idea of taking non-controlling stakes in industry-leading companies and encouraging them to cooperate. He recently said that SoftBank’s companies have a common mission: “Information revolution—happiness for everyone.” That narrative may be more difficult to maintain if he is close to an ostracized Saudi Arabia.

The Reference Shelf

• A QuickTake on Saudi’s young leader, another on his plans.
• A QuickTake Q&A on Jamal Khashoggi.
• The Saudi event hit by dropouts.
• Son explains the vision behind SoftBank’s Vision Fund.

--With assistance from Grant Clark.

To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Peter Elstrom, Reed Stevenson

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