Here's how Softbank could continue investing from the Vision Fund without relying on Saudi money

Key Points
  • SoftBank's Masayoshi Son must decide whether or not to distance his Vision Fund from Saudi money.
  • The fund once carved out an investment vehicle that separated Saudi funds from the other investors.
  • SoftBank COO Marcelo Claure dropped out of the Saudi Investing Conference this week, Bloomberg reported.
SoftBank Group Corp. founder, Chairman and CEO Masayoshi Son.
Alessandro Di Ciommo | NurPhoto | Getty Images

SoftBank suddenly has a major problem on its hands as more details emerge about the Saudi kingdom's role in the death of Saudi journalist Jamal Khashoggi.

The largest investor in SoftBank's $100 billion Vision Fund, which is transforming Silicon Valley's start-up economy, is Saudi Arabia's Public Investment Fund (PIF). The PIF committed $45 billion to SoftBank's inaugural fund and said earlier this month that it plans to put about the same amount into a second fund.

But following the Khashoggi killing, which has captured headlines across the globe, SoftBank CEO Masayoshi Son is weighing his options.

"Like most companies that have a relationship with Saudi Arabia, we are watching the developments and seeing where this goes," Marcelo Claure, SoftBank's chief operating officer, told reporters during a contentious question and answer session last week at Arm TechCon's 2018 Roundtable. "We are anxiously looking at what is happening with the news, like everybody else is, and I think it's too early for us to have a judgment on it."

At the time of Claure's comments, Saudi Arabia hadn't yet settled on an explanation about how Khashoggi died inside the Saudi Consulate in Istanbul, even suggesting at one point that The Washington Post journalist left the building alive. Since then, the kingdom, under the de facto leadership of Crown Prince Mohammed bin Salman, has acknowledged Khashoggi was killed by Saudis inside the consulate.

Claure took a mostly symbolic step, following the lead of numerous top U.S. business executives, in pulling out of this week's Saudi Arabia's investment conference, Bloomberg reported on Monday, citing a person familiar with the matter. The New York Times reported Tuesday that Son will also skip the three-day conference, which is scheduled to end Thursday.

The harder part for Tokyo-based SoftBank is what to do if Son decides to no longer invest Saudi money or if companies start rejecting Vision Fund financing because of its backers.

Protests in Washington over the  disappearance of prominent Saudi journalist Jamal Khashoggi on Oct. 10, 2018. 
Umar Farooq | Anadolu Agency | Getty Images

Three major options

Should Son choose to make a major change, he has several options. SoftBank could liquidate the remainder of the fund, meaning it would return unused capital to limited partners. That would require getting approval from other limited partners, including Apple, Qualcomm and Foxconn.

The company could also opt to pause investments and wait for the situation to unfold. Or SoftBank could leave Vision Fund 1 unchanged, while rejecting Saudi money as it gears up for Vision Fund 2.

But there's another more nuanced option at Son's disposal — one that already has some precedent: He can invest out of the Vision Fund while quarantining the Saudi investment.

Here's how that worked in the past.

When SoftBank invested $5 billion in Chinese ride-hailing company Didi Chuxing last year, it created a separate investment vehicle, called the Delta Fund, to complete the transaction. The purpose was to carve out an investment away from the Saudi PIF, which had already put $3.5 billion in Didi rival Uber and wanted to avoid funding a competitor, according to two people familiar with the matter, who asked not to be named because the strategy is confidential.

SoftBank has investments in multiple ride-sharing companies — Uber, Ola and Grab — but those are on the company's balance sheet, not in the Vision Fund. Didi is the only investment that SoftBank lists in the Delta Fund.

The Vision Fund could use that same template to continue investing without the taint of Saudi money. The fund had invested $23.5 billion of about $92 billion in committed capital as of June 30. That number, which does not include more than $20 billion in ride-sharing investments, will jump to about $40 billion when SoftBank next reports earnings on Nov. 5, according to people with knowledge of the company.

There's about $35 billion to $40 billion left to invest out of Vision Fund 1. Excluding Saudi money, that number would be around $20 billion to $25 billion.

The remaining $15 billion to $20 billion could actually be held back as unspent money in the fund. This is common practice for large private equity and VC funds, which typically hold back about 15 percent of a fund's coffers in case some of its portfolio companies need capital. That would be a simpler way of dealing with the funds rather than returning the money to the Saudis, which could get legally messy.

The pressure is building on Son to make his intentions clear. SoftBank hasn't addressed any of its options publicly, and Claure declined to provide any details last week on whether the Saudis will be part of the Vision Fund.

"We'd rather not comment on the second, I mean, on when we plan to launch the second Vision Fund," he said. "I think neither Masa or myself, nobody has said there's a specific date. We will have conversations in the future. There's no certainty — we don't have a date, we haven't gone fundraising for now."

Shares of SoftBank, which operates a large telecom and tech conglomerate in Japan, have dropped 16 percent since Khashoggi disappeared on Oct. 2.

Softbank stock suffers amid Saudi Arabia fallout