Side Letter: Vision Fund’s $27bn loss; Thoma’s $20bn fund; BlackRock’s multi-asset impact

SoftBank is getting more selective about investments after its portfolio was battered by market volatility. Plus: Thoma Bravo seems unfazed by today's crowded fundraising environment, and BlackRock has taken an unusual approach to impact. Here's today's brief, for our valued subscribers only.

Just happened

SoftBank’s Masayoshi Son: Tightening investment criteria (Source: SoftBank earnings)

Playing defence
One of private equity’s main draws – its relative insulation against public market shocks due to a quarterly delay – can sometimes prove a double-edged sword for managers. Case in point: SoftBank’s Vision Fund unit, which is slowing its pace of investing this year amid a mismatch between private market valuations and the ongoing rout in public tech stocks.

The Japanese tech conglomerate’s chief executive, Masayoshi Son, said he’d entered “defence” mode on the firm’s Thursday earnings call, after its Vision Funds posted a ¥3.55 trillion ($27.6 billion; €26.2 billion) net investment loss for the year ended 31 March. Losses were attributed in part to “confusion” in the public markets stemming from Russia’s invasion of Ukraine, rising inflation and interest rate hikes, as well as China’s regulatory crackdown last year. A “wide range” of portfolio companies were written down in the fourth quarter (January through March), reflecting a decline in the share prices of public market comparable companies, according to the earnings statement.

Son said the Vision Funds had introduced “stricter investment criteria” in response to the decline, comprising additional due diligence into business plans and more emphasis on how pricing compares to public market peers. Investment pacing has slowed as a result of the extra scrutiny, he said, noting that ticket sizes have also decreased. “We are more conservative when it comes to pace of investment; I believe that global private funds are doing the same,” he added. “When it comes to private businesses, the values are not evaluated every day, so it’s difficult to change the mindset in terms of the values that they have in the private companies.”

Here are some additional takeaways from its results:

  • The Vision Fund unit invested just $2.5 billion in the fourth quarter, down from $10.3 billion in the preceding quarter and $11.3 billion in the equivalent period last year.
  • The $98.6 billion Vision Fund I posted unrealised losses of ¥1.65 trillion for South Korea’s Coupang and ¥911.4 billion for China’s DiDi Global.
  • That fund continues to hold 82 investments, including 22 listed companies, and has distributed $31.1 billion back to LPs.
  • The $56 billion Vision Fund II, which comprises only SoftBank and management company capital, deployed $40.8 billion throughout the year, and holds 250 investments, of which 14 were listed.
  • The unit completed a record 27 IPOs during FY21, a number Son expects to decline this year.

Speaking of tech…
If its latest flagship fund is anything to go by, Thoma Bravo does not appear to be feeling the strain from this year’s congested fundraising cycle. The software specialist has raised at least $20.2 billion for Thoma Bravo XV, per a Tuesday SEC filing. Fund XV launched in August, less than one year after the firm held a $17.8 billion final close on its predecessor, according to PEI data. The fund has a $22 billion target, our colleagues at Buyouts reported last year (registration required). If it closes on that figure, Fund XV would be the largest fund raised so far this year, edging out the $20 billion Insight Partners XII.

ICG earnings
The past year hasn’t been all doom and gloom for listed entities. ICG Enterprise Trust’s portfolio delivered a 24.4 percent return for the year ended 31 January, per its FY 2021 results this week. ICG also had its best realisation period in the last five years (as reported here), with total proceeds for the period of £342.9 million ($418 million; €400 million), 97 percent of which were exits from companies and the remainder from fund disposals. Its 54 full exits, which included US-based cyber security company Telos and Supporting Education Group, were completed at an average multiple to cost of 2.6x. It also deployed £303.7 million over the period.

Also of note is the buildout of its secondaries exposure, which accounted for 17.9 percent of the portfolio as of end-January against a 15 percent to 25 percent target allocation. Handy then that its manager ICG has participated in some of the largest GP-led deals of the past few years and won secondaries deal of the year in America in PEI’s 2021 awards alongside AlpInvest PartnersClearlake Capital and others for a single-asset process on DigiCert.

Essentials

Opportunity knocks for CalSTRS
The California State Teachers’ Retirement System intends to build an Opportunities Portfolio to take advantage of esoteric opportunities that do not easily fall into a single asset class or market, Buyouts reports (registration required). Many investors may miss opportunities due to difficulties placing some investments into specific, defined asset classes. CalSTRS’ proposed Total Fund Opportunities looks to remedy some of this problem facing the $323 billion fund. “Right now, we don’t have the structure to react to these opportunities quickly,” CalSTRS deputy chief investment officer Scott Chan said at a recent board meeting.

The pension allocates up to 2.5 percent of its assets to a portfolio for such opportunities and hopes to target bigger transactions on a longer-term horizon. According to investment adviser Meketa, US-based peers have similar portfolios with maximum allocations of 5 percent to 10 percent. It is of course common for investors to miss opportunities due to challenges faced when trying to place hard-to-pin-down investments into defined categories. This new improved model being examined by CalSTRS may well set a precedent for others to imitate.

BlackRock’s multi-asset impact
BlackRock has gathered $800 million against a $1 billion target for an impact fund that will invest in companies and projects owned or led by Black, Latinx or Native American teams in the US, our colleagues at New Private Markets report (registration required). BlackRock Impact Opportunities Fund will make direct investments across PE, private credit, infrastructure, real estate and other asset classes.

BlackRock is far from the only player channelling capital to underserved minority communities. New York-based Trident, for example, is raising $250 million to make PE investments with a focus on diverse-led businesses; pension funds such as Illinois Municipal Retirement Fund and Massachusetts Pension Reserves Investment Management frequently allocate pools of capital to diverse-owned asset managers. What makes BlackRock’s fund stand out is that it can invest across asset classes.


Today’s letter was prepared by Alex Lynn with Carmela Mendoza and Helen De Beer