Loss of $100 billion: Japanese Softbank may turn away from Saudi investors

Silicon Valley could lose Saudi venture capital, which in 2017 was involved in every other major US tech deal. Due to the scandal over the alleged murder of opposition Saudi journalist Jamal Khashoggi, Japan's Softbank has admitted it will not raise Saudi money for a new fund to invest in technology startups, Vision Fund II, Softbank COO Marcelo Claure said. The Saudis invested up to half of the funds in the first Vision Fund of about $100 billion.

Details

• "There is no certainty" that Softbank will form a new Vision Fund, a timeline has not yet been set for this initiative, Claure said. Back in September 2018, Softbank founder Masayoshi Son promised that a second fund would be created in the near future, and after that, similar funds of $100 billion would be raised every 2-3 years. Claure noted that Softbank is closely monitoring what is happening in Saudi Arabia after it became the target of international criticism over the alleged murder of a journalist. “Our decision will depend on how further events unfold,” said a Softbank top manager, noting that his company manages over $420 billion in assets: “The Vision Fund is important to us, but Softbank has other lines of business . And we continue to develop them.”
• The $100 billion Vision Fund was established in October 2016. About half of the funds were contributed by Saudi investors, Softbank manages the fund. In 2017, the fund took part in half of the largest venture deals in the United States and in 2018 is going at the same pace.
• Investors did not like Softbank's intentions - after Claure's statement, Softbank shares fell by 2.46%, and only since October 5, when investors began to massively sell the group's shares - by 11%. Market worries about the situation around Saudi Arabia were added to concerns about Softbank's development strategy and its intention to list its telecommunications business, as well as the fall in the value of some companies in which Softbank invested money (Nvidia, Alibaba).
• If Softbank is unable to attract investment due to geopolitical risks around Saudi Arabia, it will hit its growth, said Mana Nakazora, an analyst at BNP Paribas Securities. And this is possible - when forming a new fund, Softbank may lose not only Saudi investments, but also the money of other investors of the current Vision Fund, the Financial Times notes. “If they are so concerned [with the situation around Saudi Arabia] that they are ready to postpone their plans for the second Vision Fund, then you need to be prepared for the fact that there will be questions for the first fund,” said Morningstar analyst Daniel Baker. This could also trigger a drop in demand for investments from the Vision Fund, as more top managers of technology companies seek to distance themselves from Saudi Arabia.

Context

• Saudi journalist and prominent government critic Jamal Khashoggi disappeared on October 2, having not been seen since entering the Saudi consulate in Istanbul that day. Turkish authorities say Saudi Arabia is behind the journalist's murder. Several media outlets reported that there was evidence that Khashoggi was interrogated, tortured and killed during a visit to the embassy. Saudi Arabia denies the allegations. We wrote more about this here .
• The disappearance of the journalist caused a wave of indignation around the world and undermined business confidence in the reliability of Saudi Arabia as a partner. Now, one after another, investors are withdrawing from the Future Investment Initiative (FII) October forum, which is called "Davos in the desert." For Saudi Arabia, these are very bad signals. In recent years, the kingdom has invested a lot of money in Western companies and investment funds - only through Softbank, Saudi Arabia has invested about $ 90 billion in shares of technology companies. It has invested another $ 400 million in Endeavor and Magic Leaps and 3-5% of Tesla shares.
• The Bell recently wrote about the tens and hundreds of billions of Saudi petrodollars invested in the largest US tech startups. A significant part of the investment is made through the Vision Fund. Soon a second such fund was to appear, and then they would open every 2-3 years.

With hundreds of billions of dollars, largely funded by Saudi Arabia, shaping the future of successful tech companies like Uber and WeWork, pulling out of Saudi investment could cost Silicon Valley dearly.

Liana Faizova