ANNUAL REPORT 2021 Message from Our CEO
SoftBank Group = A capital provider driving the Information Revolution
Over the past three or four years, I have often been asked “What is SoftBank Group?” I have also heard comments like, “I like Masayoshi Son as an entrepreneur, but not so much as an investor.” While I am not simply an investor in the traditional sense, I had been providing the short explanation that SBG is an investment company. At the same time, I felt frustrated about how best to explain what the company really is. I would therefore like to take this opportunity to define SBG once again: Put simply, SBG is a capital provider driving the Information Revolution.
The Industrial Revolution, which began in the U.K. in the latter half of the 18th century, gained further momentum in other countries in the 19th century driven by the development of the steam engine. Providing the impetus for this revolution were inventors such as James Watt. In addition to inventors, capitalists including the Rothschilds, who took risks and provided capital to inventors, played an indispensable role. For example, while it was Mr. Watt who significantly increased the efficiency of the steam engine, it was the Rothschilds who took the risk and provided the huge amounts of capital that helped spur the popularity of railroads in Europe. In this manner, inventors and capitalists together drove the Industrial Revolution, which triggered ongoing global GDP growth. Now, about 200 years later, in the 21st century, the Information Revolution is about to bloom. In similar fashion to the role played by inventors during the Industrial Revolution, entrepreneurs such as Jeff Bezos of Amazon, Steve Jobs of Apple and Bill Gates of Microsoft have been instrumental in leading the Information Revolution. And just as in the Industrial Revolution, the Information Revolution is steadily advancing as capital providers invest more and more into entrepreneurs.
SBG is especially keen to focus on AI, which is the most advanced component of the Information Revolution. We are proud to say that SBG is likely the largest provider of capital to entrepreneurs in the field of AI. AI is redefining every industry, including autonomous driving, healthcare, finance, education, and retail. As of June 18, 2021, we have made 264 investments (including 44 that have been approved by the respective investment committees but have not yet been completed)*1 through SoftBank Vision Fund 1 and 2 as well as SoftBank Latin America Fund. Many of these portfolio companies are not yet profitable, but as a capital provider, we are taking risk and making investments.
Just as human power was replaced by machines in the Industrial Revolution, I suspect machines will be replaced by AI in the Information Revolution. And, just as the Rothschilds played a pivotal role in the Industrial Revolution, I would hope that SBG, as a capital provider, will become a key player in the Information Revolution.
This is what being a capital provider for the Information Revolution means.
*1: The sum of SVF1 (92 total portfolio companies), including JVs / affiliates among portfolio companies and SVF1 and 11 fully exited companies as of May 31, 2021; SVF2 (72 portfolio companies) as of May 31, 2021, 13 portfolio companies of SVF2 invested between June 1, 2021 and June 18, 2021, 44 companies post-investment committee approval but pre-investment closing of SVF2 as of June 18, 2021; and SoftBank Latin American Fund (43 total portfolio companies) as of May 31, 2021. Of this total and regarding pre-investment closing projects, there can be no assurances that any plans described herein will be realized, and all such plans are subject to uncertainties and risks. There can be no assurance that pre-investment closing projects will ultimately be acquired by SVF2 or any future fund managed by SBIA.
SoftBank Vision Funds have been driving NAV growth recently
As a capital provider, SBG’s most important indicator is Net Asset Value (NAV), which is the equity value of holdings less the net debt.*2 Many operating companies focus on net income, but for us this is not the most important indicator. While fluctuations occur on a daily basis, SBG’s NAV came in at ¥26 trillion as of March 31, 2021. Looking back over the past 20 years or so, Yahoo! Inc. and Yahoo Japan led SBG’s NAV growth from the late 1990s to the mid-2000s, SoftBank Mobile (currently SoftBank) then became the main driver from 2006, followed by Alibaba from 2014 when the company went public. Most recently, SoftBank Vision Funds, which I have been focusing on the most, are taking the lead in driving NAV forward. In this manner, the driving force has switched as the Information Revolution has evolved.
While SBG has made a lot of investments since the cradle of the Internet, we did not have enough capital at that time as a capital provider. Through investments in companies like Yahoo! Inc., Yahoo Japan, Alibaba, SoftBank Mobile, Sprint, and Supercell, we achieved an internal rate of return (IRR) of 43% over the 27 years from 1994 to 2021. As far as SoftBank Vision Funds are concerned, results fell short of expectations until the first half of 2020. Critics commented that my insight was not as good as before or that I had become too greedy. Owing to the subsequent V-shaped recovery, however, the net equity IRR of SoftBank Vision Fund 1 and SoftBank Vision Fund 2 came in at 43%*3 by the end of March 2021, which is in line with the result of SBG’s other investments and a level that we can be proud of. That said, there have been certain investments that make me feel embarrassed just recalling their names.
Accordingly, there are many lessons that we have learned, which we have applied to the next investment decisions and results have followed.
* The graph is color-coded by the major assets that have driven the NAV increase in each period for illustrative purposes.
*2: See page 65 for the assumptions used to calculate the equity value of holdings and net debt.
*3: Net Equity IRR (SBG LP + Manager’s Performance Fee). Net Equity IRR of SVF1 and SVF2, 43%, represents the aggregate combined performance since inception for SBG’s investments in SoftBank Vision Funds.
Net Equity IRR means the internal rate of return of Class A Equity Interests after taking into account management fees, performance fees (carried interest), preferred equity coupon, operational expenses, organizational expenses and other expenses borne by the Limited Partners. It is computed using the Limited Partners’ Class A Equity cash outflows (capital contributions) and inflows (distributions), net of investment-related financing, as well as the Net Asset Value attributable to Class A Equity Interests as of March 31, 2021. Net Equity IRR (SBG LP + Manager’s Performance Fee) reflects the Net Equity IRR specific to SBG’s Class A Equity Interests, modified to reflect the additional impact of performance fee payments and related accruals from the perspective of the Manager. With regard to SVF1, the Manager’s performance fee related to exits prior to the end of the investment period has been paid in full to the Manager and is subject to clawback provisions. As of March 31, 2021, SVF2’s committed capital comprises Class A Equity Interests, only, with SBG as the sole Limited Partner. SoftBank Vision Funds have a limited operating history and accordingly, performance information may not be representative and actual realized return on these unrealized investments may differ materially from the performance information indicated herein. SoftBank Vision Funds’ performance is based in part on valuations of certain investments that were collectively acquired recently by the funds from SBG; accordingly, the performance information herein, which is based in part on valuations of unrealized investments, is not indicative of future results. SBG is under no obligation to collectively offer similar assets to SVF1 or SVF2 in the future.
The goal of a capital provider is to create the future
The most important goal for investors is to make money, but for capital providers, it is to create the future. While similar in nature, there are significant differences. The Rothschilds, as a capital provider, laid the foundation for our lives in the Industrial Revolution, and the future (from then) up to the present.
Likewise, SBG, as a capital provider for the Information Revolution, has made it our mission to help shape the future.
Naturally, the focus of investors and capital providers is completely different.
Looking at global market capitalization by industry from 1994 to 2021, the real estate sector grew five times, retail eight times, finance 12 times, and manufacturing 13 times. Investors pay close attention to the daily movements of indicators that affect the stock prices of these industries, such as interest rates, exchange rates, and employment statistics, as well as the monetary policies of the authorities, and make decisions based on these indicators. However, for capital providers who are looking to shape the future over a 10- to 30-year span, these indicators are not necessarily important. As a capital provider, all I see is how technology is going to create a paradigm shift. In the formative years of the Internet, most Internet companies did not generate profits. Nevertheless, SBG took the risk and invested tens of billions of yen. At the time, investing in companies that were not making a profit was beyond the understanding of ordinary people, and even in the U.S., I was criticized as “the last bubble man from Japan.” However, buoyed by the advance of the Information Revolution, the Internet industry grew at a CAGR of 34%, or 2,000 times, from 1994 to 2021 (the same period that I mentioned earlier). My point here is that the greater the risk capital providers take to shape the future, the greater the expected return, and this is how they have been able to achieve a great return. Yet, the Information Revolution has only just begun. I am confident that AI will continue to expand the market capitalization of the Internet industry.
Bringing the “Information Revolution—Happiness for everyone” to fruition as a Vision Capitalist
In the Industrial Revolution, inventors and capital providers shared a vision to create the future. In the Information Revolution, especially the Information Revolution driven by AI, SBG will share a vision with AI entrepreneurs and aspire to shape the future together. For example, if autonomous driving using AI becomes widespread, we could see a world without traffic accidents; if medical science evolves dramatically through AI analysis, a world free of fatal diseases will be possible; and if online education using AI becomes widely available, all children can have equal access to education. In our daily lives, the way we spend money, work, and enjoy our leisure time is changing dramatically. AI is about to bring us a whole new lifestyle.
Recently, I am sometimes asked if SBG is a venture capitalist (VC). In simple terms, SBG may be a huge VC. From my perspective, however, I am not comfortable with this definition. I believe that SBG is a VC—“Vision Capitalist” that will shape the future of the Information Revolution over the course of several decades. Our corporate philosophy of “Information Revolution—Happiness for everyone” has not changed since our first day of business 40 years ago, no matter how many times our business has changed. As a capital provider for the Information Revolution and a Vision Capitalist, we will continue our efforts to make this philosophy a reality.
Q. What are your thoughts on share buybacks?
A: I believe that our announcements of a share buyback program totaling ¥2.5 trillion in March 2020 and the fact that we completed it by May 2021 have been well received by many shareholders and investors. Share buybacks as a means to provide returns to shareholders is an important theme that I always keep in mind. It is also an important agenda item and an ongoing topic of discussion among the management team. However, weighing when and to what scale a buyback should be conducted are equally important. It is vital that we adopt a balanced approach, taking into consideration a variety of factors including our financial condition and available investment opportunities at the time. With this in mind, I cannot say exactly when we will conduct share buybacks in the future.
I myself am the largest shareholder of SBG and believe that the stock price is important. At the same time, NAV is the most important indicator for SBG as a capital provider. So it is vital that the management team, including myself, work very hard to reduce the gap (discount) between the NAV per share and SBG’s stock price. I also recognize that it is our responsibility to do our best so that shareholders understand and appreciate our efforts.
However, if we look back, the amount of share buybacks conducted since 2011 totaled ¥3.8 trillion, including the ¥2.5 trillion conducted since March 2020. Together with dividends, we believe that the total shareholder return is quite high. I hope that our shareholders will take a longer view. It is sad that people are only interested in share buybacks and are mainly concerned with whether we will conduct another such initiative or how much the next buyback program will be.
Q. What are your thoughts on succession planning?
A: When I was 19 years old and still in college, I made a 50-year plan for my life. Put simply, my plans were to make a name for myself in my 20s, build up funds in my 30s, take on bold challenges in my 40s, complete my businesses in my 50s, and hand them over to the next generation in my 60s. I have been saying since I was 19 that the most difficult and most important of these five stages will be the final stage of handing over to the next generation. The mission of a founder is to establish a foundation that will ensure the company survives and prospers for a long time. With this in mind, I will work steadfastly to ensure a smooth succession of the business so that SBG can continue to grow for 300 years.
With advances in medical science and a full tank of motivation, I have started to comment that I may still be CEO after the age of 69 as a protective measure (I am 63 years of age as of June 30, 2021). Alternatively, I may hand over the position of CEO to a successor and remain deeply involved as Chairman. In any case, passing the baton successfully is the most important theme and I believe that I must identify a successor candidate during my 60s who will gradually take over the management of the company.
Chairman & CEO, SoftBank Group Corp.
Information on this page is as of the end of July 2021.