The Vision Fund has ratcheted back some of its ambitions in China due to political considerations.
The Chinese government had talks about possibly financing the world’s most ambitious investment project, SoftBank’s $ 100 billion bet on the future of technology known as the Vision Fund.
China’s largest sovereign wealth fund, the China Investment Corporation, last year spoke with the Vision Fund about making an investment, according to five people with knowledge of or briefed on the conversations. A contribution from CIC, which has $ 800 billion to invest, would have been very politically controversial, but it would also supply the Vision Fund, led by CEO Masayoshi Son, with a steady spring of capital for future versions of SoftBank’s project.
Sources differ on how serious the talks became, but a contribution has yet to materialize, leading many to believe that the chance of an investment at this point in this fund is unlikely. China could still strike a deal that would allow SoftBank to invest alongside it, these sources say, though SoftBank is said to be discouraged by the political and regulatory risks that would come with accepting Chinese investors into their fund.
SoftBank declined to comment. CIC spokespeople did not respond to repeated requests for comment.
SoftBank’s Vision Fund is also serious enough about China that it had been scouting last year for a new local partner to lead its investing in Chinese companies, two people familiar with the conversations tell Recode. The aim was to bolster SoftBank’s on-the-ground connections. The fund had deep recruiting conversations with at least one senior China candidate, the people said.
The moves shed light on the challenges for SoftBank in China, as well as China’s ambitions outside its borders. A deal would appeal to both sides for a few reasons, at least on paper.
To begin with, SoftBank, for all its riches, has been slow to do a final close on the Vision Fund, which currently stands at $ 92 billion, short of its $ 100 billion target. The firm originally said the fund would close by the end of 2017 but now says it will reach its financing target by this June. SoftBank has, of course, been pitching almost all the top sovereign funds as it works to close the fund.
A deal with China would also give Son a powerful ally in Beijing, where he has had at times a rocky relationship, and where he made his name with a landmark bet on Alibaba in 1999.
SoftBank failed to make headway in China when it first entered the market 18 years ago. Son made a play to invest in the country through the creation of a fund focused on early-stage investments there. But ties between SoftBank and the fund weakened as Son grew more interested in later-stage deals; the fund still exists but now has outside investors beyond SoftBank.
China could still be attractive for future Vision Funds. Saudi Arabia, which, like China, has eagerly sought to diversify its assets and invest overseas, has been expected globally to help finance SoftBank’s investments in part through the $ 1.5 trillion initial public offering of Aramco, the kingdom’s state-owned oil company.
But delays of the IPO, plus the general political upheaval in the nation, could mean that the Vision Fund needs to more aggressively court other sources of money.
What would a deal have offered the Chinese? The CIC needs places to park its cash, and there is no bigger repository than the Vision Fund. While the CIC has long been a limited partner in some of Silicon Valley’s top growth and private equity funds, the CIC’s budget means it does not have time for smaller placements of capital into smaller investment pools, like standard venture capital funds.
China’s CIC is also trying to become a big player in U.S. technology. It plans to open an office in San Francisco in order to more easily make direct investments into Silicon Valley. It is also staffing up in New York City.
But its track record in U.S. technology is considered by almost all veteran tech investors to be quite poor, mostly because it cannot get access to the best companies. That means the investments that it does make are generally in less-desirable startups. Decisionmaking within the sovereign wealth fund is also described as slow and bureaucratic.
Putting its money into SoftBank would give it access to the tech players it might not otherwise be able to reach.
Another reason why the CIC may want to work through the Vision Fund — politics. The U.S. government closely scrutinizes Chinese deals in the U.S. through the Committee on Foreign Investment in the United States (CFIUS). The CIC has criticized the Trump administration for what it sees as a tough, opaque crackdown, and running the deals under a SoftBank banner might solve the regulatory problem.
But the Vision Fund, according a source familiar with the fund, has ratcheted back some of its ambitions in China exactly due to CFIUS considerations. Chinese investment through a fund could still trigger government scrutiny.
The Trump administration, for instance, recently blocked the takeover bid of U.S company Qualcomm by the Singapore-based Broadcom, on national security grounds. Broadcom had already maneuvered to re-domicile in the U.S., potentially making a CFIUS review moot, but that didn’t sway the Trump administration from moving to block the deal.
These latest developments now suggest it may be too late for CIC to strike a deal with SoftBank. The Trump Administration’s tough stance toward China has scared Chinese investors trying to deploy cash in the U.S., sources say.
There is another option on the table, according to sources with knowledge of the talks. China and SoftBank could enter into what’s known as a “co-investing” relationship. Under that kind of understanding — formal or informal — CIC would be introduced to some of the best technology deals outside of China without having to pay management fees to the Vision Fund. And CIC could correspondingly help the Vision Fund hear about the best opportunities in China, where it similarly wants to do more.
CIC is said to be impressed with the prestige of the Vision Fund, according to multiple people who have spoken with the sovereign fund recently, and is attracted to the chance to tie its brand to Son much like the CIC did to Goldman Sachs. Last year, the two entities entered into a partnership for a $ 5 billion fund to invest in U.S. manufacturing. CIC also recently pulled out of an investment deal with Blackstone.
SoftBank has also been more aggressively chasing deals in China, sources say. The Vision Fund is planning to put money into at least two separate Chinese startups. Both those investments were part of the same funding rounds in which CIC also participated. It’s not known which companies received the funding, though the Vision Fund reportedly is considering an investment in Manbang Group.
Those deals drew notice because — with some notable exceptions — the Vision Fund and CIC have not historically invested in the same round of a startup, close observers of the relationship say. Going ahead with the investments is a sign of SoftBank’s renewed push into China.