SoftBank Group Corp. (“SBG”) is a strategic investment holding company that manages an investment portfolio formed through investments, made either directly or through investment funds, in a large number of companies. The investment portfolio encompasses SBG’s subsidiaries and associates (“Group companies”) and investments not included in the former (collectively, “portfolio companies,” including Group companies). These portfolio companies operate in a wide range of markets globally. Accordingly, a variety of risks accompany the execution of SBG’s investment activities and the portfolio companies’ business activities. The major risks that SBG believes could significantly affect investors’ investment decisions as of June 25, 2020 are outlined below. However, these risks do not include all the risks that SBG and portfolio companies could face and additional risks may arise in the future. Forward-looking statements were determined as of June 25, 2020, unless otherwise stated.
(1) Business Model
Based on its unique organizational strategy, the Cluster of No. 1 Strategy (see “Medium- to Long-term Strategies” under “Management Policy”), SBG endeavors to enhance shareholder value.*1 For that purpose, SBG has built an investment portfolio consisting of companies engaged in diverse businesses in the information and technology sectors, through direct investments (including investments made through wholly owned subsidiaries), including investments in Group companies (for example, SoftBank Corp., Arm, and Alibaba), as well as investments made through investment funds such as SoftBank Vision Fund 1. Through this process, SBG aims to increase the asset value of its portfolio companies by promoting business collaborations among them, leveraging its extensive network and expertise developed over the years. SBG also exits from those equity investments whenever deemed appropriate and allocates the proceeds to new investments based on its growth strategies. Those funds are also allocated to shareholder returns and debt repayments at appropriate times. If the stock markets deteriorate or portfolio companies’ business development and results of operations fall substantially below expectations at the time when SBG made its investment decisions, the value of those assets (i.e., the equity value of SBG’s holdings) could decrease and thereby lead to a decline in shareholder value and deterioration in LTV (loan-to-value).*2 In parallel, the recording of valuation losses on assets such as equity holdings could cause SBG’s consolidated results of operations and financial position to deteriorate, thereby adversely affecting SBG’s ability to make new investments and the success of its financial policies.
(2) Fund Procurement
SBG aims to meet the funding requirements for new investments on an ongoing basis, through measures such as selling equity assets, receiving dividends from portfolio companies, obtaining distributions from investment funds, and raising funds through asset-backed financing. This also applies to SBG’s wholly owned subsidiaries that procure funds for SBG. If SBG is unable to dispose of equity assets or procure funds when the funds are needed for new investments, it could miss investment opportunities and its ability to continue to increase shareholder value may be compromised. For certain asset-backed financing, in the event that the value of its eligible holdings declines due to a deterioration in the stock market or other factors, SBG may be required to post additional cash collateral or incur prepayment obligations. In addition, the company could find it difficult to raise fresh funds.
SBG also raises funds through sources including loans from financial institutions and the issuance of bonds to meet funding needs for its investment activities. If interest rates rise due to changes in monetary policies or in financial markets, or SBG’s creditworthiness declines, due to a decrease in the value of owned assets or a deterioration in its results of operations, which could lead to a downgrade in SBG’s credit ratings, SBG’s financing costs could increase, thereby adversely affecting SBG’s consolidated and non-consolidated results of operations. Further, an inability to raise funds at the planned timing, scale, or conditions could adversely affect SBG’s investment activities (including investments through investment funds) and financial position.
SBG (including wholly owned subsidiaries that procure funds) may raise new funds, refinance, sell some of its assets, or take other measures to secure resources to repay its debt. SBG strives to maintain a sufficient cash position in a stable manner based on financial discipline, by raising funds at times it deems appropriate based on careful monitoring of market conditions. However, if faced with prolonged unfavorable funding conditions, SBG may be forced to dispose of equity assets on unfavorable terms or to execute unplanned equity asset disposals in order to secure resources for repayment, which could adversely affect the equity value of SBG’s holdings, shareholder value, consolidated and non-consolidated results of operations, and investment performance.
Various covenants may be attached to SBG’s debt, including loans from financial institutions and corporate bonds. If the possibility of a breach of any of these covenants arises and SBG is unable to take steps to avoid such breach, SBG may forfeit the benefit of the term with respect to such obligations and, accordingly, may be requested to make lump-sum repayments with respect to other obligations. As a result, SBG’s creditworthiness and financial position could be significantly adversely affected.
(3) Management Team
The major portfolio companies and investment funds, in which SBG invests, are run autonomously by management teams led by their respective CEOs and other leaders. For example, Ken Miyauchi (Board Director of SBG) serves as President & CEO of SoftBank Corp., and Simon Segars (Board Director of SBG) serves as CEO of Arm. In addition, Rajeev Misra (Corporate Officer, Executive Vice President) serves as CEO of SoftBank Investment Advisers, the manager of SoftBank Vision Fund 1.
Nevertheless, unforeseen situations with respect to key members of SBG’s management, particularly Representative Director, Corporate Officer, Chairman & CEO and Group Representative Masayoshi Son, could impede the overall activities of SBG.
(4) Investment Activities (Updated on November 13, 2020)
SBG engages in investment activities such as corporate acquisitions, establishment of subsidiaries and joint ventures, and investments in operating companies (including listed and unlisted companies), holding companies (including companies that effectively control other companies through various contracts), and investment funds. In addition, in order to diversify assets held by the Company and manage surplus funds, the Company has been investing in highly liquid listed stocks from the first quarter of fiscal 2020. These investments were made by SBG in the first quarter of fiscal 2020, but from the second quarter, asset management subsidiary SB Northstar has been acquiring and selling listed stocks, and engaging in derivative and credit transactions related to listed stocks. The interest in SB Northstar is indirectly held 67% by SBG and 33% by SBG’s Representative Director, Corporate Officer, Chairman & CEO Masayoshi Son.
These investment activities are subject to risks such as those stated in subsections a. through e. below, and, if these risks materialize, the asset value of portfolio companies (i.e., the equity value of SBG’s holdings) could decrease, resulting in a decrease in shareholder value and deterioration of LTV. In parallel, the recording of valuation losses on assets such as SBG’s equity holdings could adversely affect its consolidated results of operations and financial position.
See “(5) SoftBank Vision Fund 1” and “(6) SoftBank Corp.” for the specific risks related to SoftBank Vision Fund 1 and SoftBank Corp., which have a particularly large impact on consolidated operating results.
a. Political situations, monetary and fiscal policies, and trends in international conditions
SBG invests in entities that operate not only in Japan, but also in countries and regions overseas, such as the United States, China, India, Europe, and Latin America. Therefore, if economic situations or financial markets in such countries and regions deteriorate due to changes in political situations, monetary and fiscal policies, international conditions such as trade disputes or conflicts, natural disasters, or public health crises such as the spread of infectious diseases (see “b. Outbreak of COVID-19”), the investment activities of SBG and the business activities of portfolio companies may not develop as expected. For example, SBG’s execution and realization of investments could be delayed, the terms and conditions of investment realizations could deteriorate, or the businesses and results of operations of each portfolio company could be adversely affected by a decrease in demand for or a stagnation in the supply of their services and products. Further, with respect to investments in unlisted companies with low liquidity, if market conditions deteriorate sharply or other similar issues arise, SBG may not be able to sell its interests in such companies at the timing, scale, or conditions desired by SBG. As a result, the equity value of SBG’s holdings, shareholder value, LTV, consolidated and non-consolidated results of operations and investment performance may be adversely affected.
Apart from this, SBG’s foreign currency-denominated investments in overseas companies could incur losses due to changes in foreign exchange rates. Further, in the preparation of SBG’s consolidated financial statements, the local currency-based revenues, expenses, assets, and liabilities of Arm and other overseas Group companies are converted into Japanese yen. Consequently, fluctuations in foreign exchange rates could adversely affect SBG’s consolidated results of operations and financial position.
b. Outbreak of COVID-19
A specific example of the public health crisis referred to in “a. Political situations, monetary and fiscal policies, and trends in international conditions” is the outbreak of the novel coronavirus (COVID-19). The pandemic that began in early 2020 still does not appear to be under control, and it remains difficult to forecast the specific medium-term impact on the investment activities of SBG and the business activities of portfolio companies. The equity value of SBG’s holdings has already been adversely affected, with SoftBank Vision Fund 1 recording an investment loss of JPY 1.1 trillion in the fourth quarter of fiscal 2019 due to a decline in the fair value of its investees. If it takes longer than anticipated for the pandemic to end, the outlook for investment activities and the business activities of portfolio companies may remain uncertain for a long time into the next fiscal year. At this stage, the impact on the telecommunications business of SoftBank Corp., a core portfolio company, is expected to be immaterial. At Z Holdings Corporation, SoftBank Corp.’s subsidiary, while the use of e-commerce is expected to increase, the placements of advertising and the use of lodging and restaurant reservation services are expected to decrease. Arm, another core portfolio company, expects that a decline in shipments of consumer electronic devices could have an impact on technology royalty revenue, and that a delay in new licensing decisions of customers could have an impact on technology licensing revenue.
While many countries have implemented lockdowns and curfews, or similar restrictions, as well as border restrictions, SBG and many of its portfolio companies have actively continued their respective activities using video conferencing systems, business chat tools, etc. In such an environment, however, investment and business activities may be constrained, and if the impact of COVID-19 continues for a prolonged period, the equity value of SBG’s holdings may decline, which could adversely affect shareholder value, LTV, consolidated and non-consolidated results of operations, and investment performance. For information on the impact of COVID-19 on SoftBank Vision Fund 1, see “k. Impact of COVID-19, etc.” under “(5) SoftBank Vision Fund 1.”
c. Investment regulations
The investment activities of SBG may require approvals and permissions from regulatory authorities of relevant countries or may be subject to restrictions on involvement in portfolio companies. In addition, new or stricter regulations on investment activities may be enacted in relevant countries. SBG addresses each of these regulations by ensuring close cooperation between its legal department and concerned parties, including external advisers. However, if the necessary approvals and permissions cannot be obtained or other restrictions cannot be avoided, SBG may be unable to successfully implement its investment plans.
For example, with respect to certain U.S. investments, SBG has entered into national security agreements with the companies that are considered covered investments (herein subsection c, the “covered companies”) and the relevant regulatory authorities and agencies of U.S. government. Pursuant to these national security agreements, SBG and the covered companies have agreed to implement measures to safeguard U.S. national security. Implementing these measures could result in increased costs or constraints on selection of facilities, contracts, personnel, suppliers, and business operations within the U.S.
d. Investment decisions
SBG makes direct investments (including investments through wholly owned subsidiaries) without going through investment funds (for example, SoftBank Vision Fund 1). In the investment decision-making process, SBG seeks to appropriately estimate the investment target’s equity value and to assess risks related to the target’s businesses, finances, corporate governance, compliance, and internal controls, by conducting due diligence on the target’s business, technology, business model, market size, business plan, competitive environment, financial condition, legal compliance, etc. For this purpose, SBG ensures the involvement of, for example, outside financial, legal, and tax advisors, in addition to the relevant internal departments. In addition, an objective review of the adequacy of the due diligence findings is carried out by a dedicated review department. Based on the results of such reviews, investment decisions are made by the Board of Directors or the Investment Committee to whom authority is delegated by the Board of Directors (see “Corporate Governance”).
Particularly, with respect to the risks associated with the corporate governance of portfolio companies, SBG has set out its “Portfolio Company Governance and Investment Guidelines Policy” to clarify the standards related to the corporate governance of portfolio companies that should be taken into account when considering an investment by SBG and its subsidiaries (including, in principle, SoftBank Vision Fund 1 and other investment subsidiaries managed by SBG’s subsidiaries). This policy covers a wide range of important corporate governance issues, addressing matters such as a portfolio company’s composition of directors, founder and management rights, rights of shareholders (including matters on super-voting shares), and mitigation of potential conflicts of interest. The policy sets forth general principles, and allows for each investing entity to exercise discretion with certain limitations. Each investing entity is required to monitor the corporate governance of each portfolio company and regularly report the results to SBG.
However, even with such a prudent investment decision-making process in place, there is still a possibility of overestimating the corporate value, technology, business model, or market size of an investment target, or underestimating risk. Investment decisions could also be made while misjudging the integrity of founders and managers who have a crucial influence. Consequently, after making an investment, the asset value of the investment (i.e., the equity value of SBG’s holdings) could decrease, thereby leading to a decrease in shareholder value and deterioration of LTV. In parallel, the recording of valuation losses on assets such as SBG’s equity holdings could adversely affect its consolidated results of operations and financial position.
e. Decrease in the asset value of portfolio companies
Even after making investments, SBG has a system in place in which major risk factors of portfolio companies are continuously monitored and reported to management, including financial and management information, key performance indicators, differences between business plans at the time of the investment decision and actual progress, and the status of corporate governance. In addition, based on the findings of the monitoring, SBG takes the necessary measures to improve the management of portfolio companies, such as providing the necessary advice, dispatching human resources at various levels, including officers and managers, and introducing business partners.
However, portfolio companies may be unable to develop businesses as envisioned by SBG at the time of the investment decision, due to factors including the obsolescence of portfolio companies’ technologies and business models and intensified competitive environments, in addition to the macro external factors described in “a. Political situations, monetary and fiscal policies, and trends in international conditions” and “b. Outbreak of COVID-19.” This may lead to a significant deterioration in business performance or a drastic revision of their business plans. There is also a possibility that the portfolio companies may increase their capital, which could result in a significant dilution of the per-share value of such portfolio companies’ shares. In such cases, the asset value of portfolio companies may decrease, and SBG may record valuation losses on financial assets such as shares, or impairment losses on goodwill; property, plant and equipment; and intangible assets incurred in connection with the investment, and may not receive the expected returns, such as profit sharing, from portfolio companies or be able to recover the investment.
Moreover, on a non-consolidated basis, any decline in the value of assets that were acquired through investment activities, including equity interests, could cause SBG to recognize a valuation loss, which could adversely affect SBG’s results of operations and the distributable amount. Furthermore, a deterioration in the results of operations of portfolio companies could result in an inability to receive dividends from portfolio companies as expected, which could adversely affect cash flows.
In addition, SBG may provide temporary loans, loan guarantees, or whatever other financial supports it deems necessary to improve the shareholder value of portfolio companies, if they are unable to develop businesses as envisioned by SBG at the time of the investment decision, are unable to create desired synergies with other portfolio companies, or need more funds than anticipated for business development. This could increase SBG’s exposure to those companies.
(5) SoftBank Vision Fund 1
SoftBank Vision Fund 1 (“SVF1”) invests primarily in equity-related investments in the technology sector (including telecoms, internet and media). SVF1 is managed by SBG's wholly owned subsidiary in the U.K., SB Investment Advisers (UK) Limited (“SBIA”), which is authorized and regulated by the U.K.'s Financial Conduct Authority. SBG invests in SVF1 as a limited partner. Also, SBIA is entitled to receive management fees and performance fees, each of which is measured by reference to the investment activities of SVF1.
As of March 31, 2020, the total committed capital for SVF1 was USD 98.6 billion (including USD 33.1 billion from SBG and its subsidiary), *4 cumulative contributions from limited partners were USD 78.3 billion (including USD 28.6 billion from SBG and its subsidiary), and remaining committed capital was USD 20.3 billion (including USD 4.5 billion from SBG and its subsidiary).
SVF1 and SBIA are subject to particular risks, including those stated in subsections a. through k. below. SBIA has established a Risk Management Framework (“RMF”) to embed risk management in the business and decision-making procedures across SBIA globally, but it may not be able to fully avoid the emergence of such risks. If any of these risks were to emerge, they could adversely affect the value of the investment portfolio of SVF1, thereby deteriorating the financial results of SVF1 and SBIA. A decrease in the value of investments in SVF1 could also adversely affect the equity value of SBG’s holdings and thereby lead to a decline in shareholder value and deterioration in LTV. In parallel, the recording of such valuation losses on equity holdings could adversely affect SBG’s consolidated results of operations and financial position.
In this section (5), the term “portfolio companies” refers to the investees of SVF1.
RMF of SBIA
This framework covers all aspects of risk management (both operational and investment) and sets a framework for identifying, assessing and mitigating risks.
The principles underlining SBIA’s RMF are:
- “Tone from the top” (i.e., the Board is ultimately responsible for risk management and risk should be taken into account in key business decisions)
- The establishment of an effective risk culture across the organization which supports the business to meet investors’ expectations, the firm’s strategic objectives, and regulatory requirements
- Identifying and mitigating risks in a forward-looking manner, allowing management to take proactive action as required to safeguard assets of limited partners and SBIA’s reputation
- Ensuring that material existing or emerging risks are actively identified, measured, mitigated, monitored and reported
- Meeting the risk management requirements of local and Group regulators
a. Impact on the results of operations
All entities that comprise SVF1 are consolidated by SBG. Investments held by SVF1 are measured at fair value at the end of every quarter. Changes in fair value are recognized as gain and loss on investments (except for gain and loss on investments in subsidiaries) in operating income from SoftBank Vision Fund and other SBIA-managed funds in the consolidated statements of income. Fair value is measured by combining multiple methods, such as the price of recent transactions, discounted cash flow, and market comparable companies. A decline in the fair value of the investments—due to factors such as a deterioration in the results of operations of portfolio companies or a downturn in financial markets and economic conditions—could lead to a deterioration in the results of operations of SVF1, which could have an adverse effect on SBG’s consolidated results of operations and financial position. For fiscal 2019, operating loss from SoftBank Vision Fund and other SBIA-managed funds in SBG’s consolidated results totalled JPY 1.9 trillion. Further, on a non-consolidated basis, a deterioration in the results of operations of SVF1 could cause SBG to record a valuation loss on investment made as a limited partner, which could have an adverse effect on its results of operations and distributable amount.
The portfolio companies in which SVF1 has invested that SBG is deemed to control under IFRSs, are treated as subsidiaries of SBG. The results of operations as well as assets and liabilities of said subsidiaries are reflected in SBG’s consolidated financial statements. Therefore, a deterioration in the results of operations of said portfolio companies that are subsidiaries could have an adverse effect on SBG’s consolidated results of operations and financial position. Gain and loss on investments in said subsidiaries that are recognized at SVF1 are eliminated in consolidation.
To ensure the appropriateness of fair value measurements, SVF1 has a robust valuation process, which is overseen by SBIA’s Valuation and Financial Risk Committee (“VFRC”). VFRC follows SVF1’s valuation policy when valuing SVF1’s investments and valuations are prepared in line with IFRS 13 Fair Value Measurement and the International Private Equity and Venture Capital Valuation Guidelines. In addition to this, independent valuations of SVF1’s portfolio companies are conducted on a semi-annual basis by independent third-party valuation firms who have been appointed by SVF1’s investor advisory board. SBIA is required to take into account (to the extent appropriate in accordance with SBIA’s regulatory obligations) all valuations received from such independent third-party valuation firms.
b. Investment performance
Net proceeds from the investment performance of SVF1 are distributed to limited partners, who comprise SBG and third-party investors. They are also distributed to SBIA as performance fees. If SVF1 experiences a deterioration in investment profitability and is unable to generate investment performance as planned, SBG could be unable to receive performance-based distributions as a limited partner in accordance with its expectations or could be unable to recover its capital contributions. SBIA may also be unable to receive performance fees in accordance with expectations.
Further, SBIA receives performance fees on the realization of gains, including after the disposition of investments, receipt of dividends from investments, and monetization of shares. Performance fees to SBIA from the monetization of investments were not paid to SBIA during the investment period of SVF1 (which ended on September 12, 2019). Instead, an amount equivalent to the performance fees attributable to SBIA was temporarily paid to the limited partners during the investment period, under the Limited Partnership Agreement. After the investment period, the equivalent amount was fully paid to SBIA as performance fees by March 31, 2020. After the investment period, however, the performance fees received are still subject to a clawback provision (a provision requiring the return of performance fees received in the past), which is triggered under certain conditions based on future investment performance. Therefore, if the investment performance of SVF1 does not exceed a certain level, SBIA may be unable to receive performance fees in accordance with expectations. Also, if the investment performance at the time of liquidation of SVF1 does not exceed a certain level, the amount of performance fees that have been received by SBIA up until then could be reduced, or SBIA may not be able to receive performance fees.
SVF1 may utilize borrowings to bridge capital calls and incur leverage on a portfolio basis. For the purpose of this disclosure, “leverage” refers to any method by which SVF1’s exposure is increased and may take the form of direct borrowing, issuance of debt or mezzanine securities, trading on margin, use of derivative instruments and other forms of direct and indirect borrowings. All of these uses or exposures to leverage will increase the exposure of SVF1’s investments to adverse economic factors such as significantly rising interest rates, severe economic downturns or deterioration in the condition of the corresponding market of the investment. In the event an investment is unable to generate sufficient cash flow to meet principal and interest payments on its indebtedness, the value of SVF1’s equity in such investment could be significantly reduced or even eliminated and, if such leverage has recourse to multiple investments, it may also reduce or eliminate the value of these other investments. In the event SVF1 is unable to generate sufficient returns to meet its obligations under borrowings, SVF1 may have to realize investments prematurely, adversely impacting returns to investors. During fiscal 2019, SVF1 borrowed USD 3.65 billion for the purpose of monetizing a portion of its investments in July 2019. In March 2020, in light of market conditions and the corresponding significant decrease in the market value of the listed shares pledged as collateral for the borrowing, USD 1.1 billion was repaid using funds sourced by a capital call issued to all limited partners of SVF1, including SBG.
SBIA closely monitors SVF1’s leverage levels and associated cash flows, both in compliance with limitations set out in the SVF1 fund and facility documentation, and from an ongoing liability and pipeline investment perspective. Such leverage levels and any potential cash flow issues are reported to senior management by both the finance and investment risk teams for action. SVF1 has a strong liquidity position, with certain uncalled limited partner capital reserved in order to meet loan interest payments and other SVF1 liabilities. SBIA always aims to continue to maintain an adequate cash buffer for SVF1.
d. Lack of opportunity to exit from investments
Due to the illiquid nature of many of the investments that SVF1 may acquire, SBIA is unable to predict with complete certainty what the exit strategy will ultimately be for any given position. Accordingly, there can be no assurance that the fund will be able to realize such investments in a timely manner. Consequently, the timing of cash distributions to investors is uncertain and unpredictable. Exit strategies that appear to be viable when an investment is initiated may be precluded by the time the investment is ready to be realized due to economic, legal, political or other factors. SVF1 may be prohibited by contract or other limitations from selling certain securities for a period of time which may mean that SVF1 is unable to take advantage of favourable market prices.
Approval of an exit strategy is a key part of the SBIA Investment Committee’s considerations and exit strategies are regularly reviewed and updated by SBIA’s investment teams. Exit strategies are also stress tested under various market conditions by the investment risk team to allow for forward planning. SVF1 is a long-term investment fund vehicle with a life that ends on November 20, 2029, in principle. In setting up a long-term fund structure, it was anticipated that multiple economic downturns could occur and that some investments may take longer to exit than others.
e. Non-controlling investments and limited rights as shareholder
SVF1 may hold non-controlling interests in certain portfolio companies and, therefore, may have a limited ability to protect its interests in such companies and to influence such companies’ management. In addition, SVF1 may invest alongside financial, strategic or other third-party co-investors (including Group companies) through joint ventures or other entities which may have larger or controlling ownership interests in such entities or portfolio companies. In such cases, SVF1 will rely significantly on the existing management and board of directors of such companies, which may include representatives of other financial investors with whom SVF1 is not affiliated and whose interests may at times conflict with the interests of SVF1.
f. Securing and retaining human resources
SBIA seeks to maximize the equity value of the investment funds that it manages, including SVF1, by carefully selecting investments and promoting growth after investment through the provision of a wide range of support. For the success of these investment activities, it is essential to secure and retain capable personnel who possess broad knowledge of technology and financial markets as well as specialized skills in managing investment businesses. SBIA has broad investment and management capabilities, and ensures staff retention through various HR support programs; from training and development to moving staff across the organization to ensure they fulfil their potential. SBIA and its Remuneration Committee have a total compensation philosophy linked to performance that is believed to be very competitive against the market. However, the inability of SBIA to secure or retain an adequate number of such capable personnel (including in light of increasing competition among alternative asset firms; financial institutions; private equity, growth equity and venture capital firms; investment managers and other industry participants for hiring and retaining qualified investment professionals and other factors) could have an adverse effect on the maintenance or expansion of the investment scale and future investment performance of the investment funds it manages.
g. Limited partners
For each of SVF1's investments, SBIA issues capital calls to its limited partners. The inability of limited partners to contribute capital for any reason could restrict the investment amounts of SVF1 and could result in it being unable to invest as planned. Whilst other limited partners are required to meet shortfall amounts, subject to certain limitations, as the interests in SVF1 are concentrated amongst a few significant investors, including SBG itself, the adverse impact of such limited partner’s failure to comply with a capital call may be greater than it would be if the interests were held across a more diverse group of investors. In addition, certain third-party limited partners that provide large committed capital amounts have a veto for investments above a certain threshold amount, and the exercise of a veto could result in SBIA being unable to conduct investments as planned.
h. Regulation of new technologies or business models
SVF1's portfolio includes companies that are advancing the use of or are conducting research and development in relation to new technologies such as AI and big data and companies that are rolling out new business models that are different from existing business models. The business fields in which these types of new technologies and business models are offered (for example, autonomous vehicles and ride-sharing services) may be subject to specific and strict regulations and licencing regimes in many countries and regions. With the development of related laws, the introduction of, or changes in, regulations could have an adverse effect by creating financial burdens or restrictions on portfolio companies' business development and their results of operations by, for example, requiring portfolio companies to change, suspend, or discontinue the deployment of technologies, business models, or related research and development plans. Licenses and permits required to provide certain technology related services are subject to various conditions and there is no assurance that SVF1’s portfolio companies will be able to satisfy such conditions.
i. Concentration of investments in specific business fields
SVF1 holds investments in multiple companies in specific business fields, which in some cases leads to a high level of concentration of investments in said business fields. For example, SVF1 has invested in companies that provide ride-sharing services, including Uber Technologies, Inc., Xiaoju Kuaizhi Inc., and GRAB HOLDINGS INC. In such business fields, a deterioration in the business environment, such as sluggish demand or intensified market competition (including competition among portfolio companies), could result in a deterioration in the results of operations, such as a decrease in the profitability of a portfolio company, an inability to develop a business in accordance with expectations at the time of SVF1's investment, or a deterioration in the market's valuation of said business fields. Such developments could adversely affect the results of operations or the fair value of portfolio companies.
Concentration risk is measured and reported by the SBIA investment risk team to SBIA senior management and considered by the members of SBIA’s Investment Committee and board. Diversification is implemented or the risk is accepted through the investment process, including review by SBIA’s Investment Committee and, as required, SVF1’s investor advisory board.
j. Listed company holdings
SVF1’s investment portfolio may contain securities and debt issued by listed companies. Such investments may subject SVF1 to risks that differ in type or degree from those involved with investments in privately held companies. Such risks include greater volatility in the valuation of such companies resulting from the availability of quoted market prices, increased obligations to disclose information regarding such companies, limitations on the ability of SVF1 to dispose of such securities and debt at certain times, increased likelihood of shareholder litigation and insider trading allegations against such companies’ executives and board members, including employees of SBIA, and increased costs associated with each of the aforementioned risks. In addition, securities traded on a public exchange are subject to such exchange’s right to suspend or limit trading in certain or all securities that it lists. Such a suspension could render it temporarily impossible for SVF1’s positions to be liquidated, and thereby expose SVF1 to losses.
The primary mechanism employed to mitigate the market risk posed by the listed securities held by SVF1 following a liquidity event is to follow a deliberate plan for selling down the positions so as to minimize the market impact of SBIA’s activity and maximize the value of the proceeds. In some cases, SBIA will also reduce its exposure by entering into derivative contracts (for example, by selling a covered call option). SBIA also examines whether to hedge the foreign-exchange risk should the securities be denominated in a currency whose exchange rate relative to USD is volatile.
The operational and compliance risks that arise while managing SVF1’s listed securities positions are managed through an appropriate control framework involving SBIA’s middle office, compliance and operational risk functions, including the investment risk team. These controls include pre-trade approval processes, such as the approval of trading counterparties, and post-trade reconciliations and monitoring.
k. Impact of COVID-19, etc.
Concerns about the spread of COVID-19 and other outbreaks of health epidemics and contagious diseases in the past have caused governments at various times to take measures to prevent the spread of viruses, including restrictions on travel and public transport, tightened quarantine requirements, prolonged closures of workplaces, and mandatory arrangements for working from home. The outbreak of communicable diseases such as COVID-19 on a global scale may affect investment sentiment and result in volatility in global capital markets or adversely affect regional or global economies which may in turn give rise to significant costs to SVF1 and adversely affect SVF1’s business and financial results and reduce returns to limited partners, including SBG. In fiscal 2019, SVF1 recorded a net investment loss of JPY 1.1 trillion for the fourth quarter primarily due to a decline in the fair values of its investments caused by the spread of COVID-19 and resulting global economic shock. It is possible that continued measures to prevent the spread of COVID-19 and other outbreaks of health epidemics and contagious diseases and/or absence due to illness and other impacts among portfolio companies’ executives and employees will affect the business and financial returns of the portfolio companies in which SVF1 has invested.
In response to the COVID-19 pandemic, SBIA has been working closely with SVF1 portfolio companies and providing them operational support and guidance on strategy to help them prepare for further deterioration in business conditions including a possible decrease in revenue and the deterioration of liquidity, in order to reduce the adverse effects on their businesses due to the deterioration of the economic situation caused by the pandemic. SBIA has also advised portfolio companies to develop a clear plan for their currently available cash balance in order to optimize cost structures and create contingency plans and flexibility. SBIA has assessed companies by reference to their cash reserves and COVID-19 sensitivity based on their sector and business model, and made recommendations on (i) cash preservation, (ii) cost reductions, (iii) immediate actions and assessments, (iv) short-term considerations, (v) physical and remote work space management and (vi) identifying available government initiatives. In addition, SVF1 is a long-term investment fund vehicle with a life that ends on November 20, 2029, in principle, and the remaining life of SVF1 means that it has the ability to look past short-term unrealized mark-to-market volatility resulting from quarterly valuations and to focus on generating medium- and long-term realized returns. However, these efforts and the long-term nature of SVF1 may not be able to completely prevent the adverse impact on the business operations of all of SVF1’s portfolio companies.
Meanwhile, these factors may also affect or occur at all or a significant number of SVF1’s portfolio companies, including certain identified key persons of such companies, which could in turn lead to a disruption of SBIA’s business activities and its ability to adequately source, conduct due diligence on and monitor new and existing portfolio companies and otherwise perform its functions in respect of SVF1. Similar considerations may also apply to other service providers of SVF1, which could also adversely affect SVF1 and in turn, SBG’s activities. SBIA has put in place a business continuity strategy and a crisis management team to ensure minimal disruption to its business processes as a result of a business continuity event, such as COVID-19.
(6) SoftBank Corp.
SoftBank Corp. and its subsidiaries (Z Holdings Corporation, for example) (collectively, “SoftBank Corp.” in this section (6)) mainly conduct telecommunications, Internet advertising, and e-commerce businesses. There are particular risks associated with SoftBank Corp. including those stated in subsections a. through c. below. If the following risks materialize, SoftBank Corp.’s results of operations could be deteriorated, which could result in a decrease in asset value (i.e., the equity value of SBG’s holdings), and thereby lead to a decrease in shareholder value and deterioration of LTV. In parallel, the recording of impairment losses on goodwill; property, plant and equipment; and intangible assets acquired through investment and the incorporation of SoftBank Corp.’s performance could also adversely affect SBG’s consolidated results of operations and financial position.
a. Steady provision of services
(a) Capacity enhancement of telecommunications networks
To maintain and enhance the quality of its telecommunications services, SoftBank Corp. needs to, and systematically continues to, increase the capacity of its telecommunications networks (by securing required spectrum, for example) based on the forecast on future network traffic (communication volume). However, if the actual traffic is significantly higher than expected, or if SoftBank Corp. fails to increase network capacity in a timely manner, the quality and reliability of its services and corporate image may deteriorate, which may adversely affect its ability to acquire and retain customers. In addition, additional capital investment may be required, which may adversely affect the business development and results of operations of SoftBank Corp.
(b) Service disruptions or decline in quality due to system faults and other factors
If human error, equipment or system problems, cyberattacks by third parties, hacking or other unauthorized access occurs in the various services provided by SoftBank Corp., such as telecommunications networks and systems for customers, there is a possibility that a serious problem could occur, including an inability to provide services continuously or a decline in the quality of services. SoftBank Corp. has taken measures such as building redundancy into systems, clearly defining restoration procedures in preparation for incidents such as system faults, and creating appropriate capabilities that facilitate rapid recovery from system faults and similar problems should they occur. Even with these measures in place, if such disruptions or a decline in quality are not avoided and/or if significant time is required to restore services, SoftBank Corp.’s credibility or corporate image could deteriorate, making it difficult to acquire and retain customers. This could adversely affect SoftBank Corp.’s business development and results of operations.
(c) Natural disasters, accidents, and other unpredictable events
SoftBank Corp. constructs and maintains telecommunications networks, information systems, and other systems necessary for the provision of various services, including Internet and telecommunications services. Natural disasters such as earthquakes, typhoons, floods, tsunamis, tornadoes, heavy rainfall, snowfall, or volcanic activity; other unexpected disruptions such as fires or power outages or shortages; or unpredictable events such as terrorist attacks or the spread of infectious diseases could interfere with the normal operation of telecommunications networks, information systems, and other systems. This could hinder the provision of various services by SoftBank Corp. In order to ensure that it can provide a stable telecommunications environment even in the aforementioned circumstances, SoftBank Corp. has introduced measures to build redundancy into networks and mitigate power outages at network centers and base stations. In addition, SoftBank Corp. has implemented measures such as spreading out network centers, data centers, and other key facilities throughout Japan, as part of efforts to mitigate the impact of the aforementioned circumstances on the provision of various services. Even with these measures in place, if the provision of various services is hindered, and these impacts become widespread and/or if significant time is required to restore services, SoftBank Corp.’s credibility or corporate image could deteriorate, making it difficult to acquire and retain customers. Moreover, significant costs may be incurred by SoftBank Corp. for recovery and repair of telecommunications networks, information systems, and other systems. This could adversely affect SoftBank Corp.’s results of operations.
b. Dependence on management resources of other companies
(a) Use of facilities, etc. of other companies
SoftBank Corp. makes use of certain telecommunications lines and facilities owned by other operators when constructing the telecommunications networks required for providing telecommunications services. While SoftBank Corp. principally uses the telecommunications lines and facilities of multiple operators, SoftBank Corp.’s business activities and results of operations could be adversely affected if it becomes difficult to continue to use the facilities of these operators, or if usage agreements are revised on disadvantageous terms for SoftBank Corp., by, for example, increasing utilization or connection fees for those facilities.
(b) Use of Yahoo! brands
In the businesses of SoftBank Corp. and Yahoo Japan Corporation, SoftBank Corp. makes use of Yahoo! brands belonging to a subsidiary of U.S. company Verizon Communications Inc. in certain service names, such as Yahoo! JAPAN, Y!mobile, and Yahoo! BB. If SoftBank Corp. becomes unable to use these brands due to a drastic change in its relationship with the company or other reasons, SoftBank Corp.’s business activities could be adversely affected.
(c) Procurement of various equipment
SoftBank Corp. procures telecommunications equipment, network devices, and so forth (mobile devices and radio equipment for base stations, for example). As a general rule, SoftBank Corp. procures equipment from multiple suppliers to build its network. In some cases, however, it may remain highly dependent on specific companies for equipment. SoftBank Corp. may be unable to switch suppliers or equipment in a timely manner without requiring large cost outlays should problems occur with the procurement of equipment in a case where SoftBank Corp. relies heavily on a specific supplier. Such problems could include supply interruptions, delivery delays, order volume shortfalls, and defects. Suppliers may also cease to provide the maintenance and inspection services required for telecommunications equipment to maintain performance. Either of these situations could impede SoftBank Corp.’s provision of services, making it difficult to acquire and retain customers, or cause SoftBank Corp. to incur additional costs for changing a supplier, or cause a decline in sales of mobile devices. This could adversely affect SoftBank Corp.’s results of operations.
(d) Consignment of operations
SoftBank Corp. consigns certain sales activities, acquisition and retention of customers mainly for telecommunications services, and execution of other related operations in whole or part to subcontractors. In addition, SoftBank Corp.’s information search services make use of other companies’ search engines and paid search advertising placement systems. SoftBank Corp. conducts credit investigations when it selects subcontractors and regularly monitors their results of operations and other conditions. If these subcontractors are unable to execute operations in line with SoftBank Corp.’s expectations, SoftBank Corp.’s business activities could be adversely affected.
As these subcontractors are responsible for the sale of SoftBank Corp.’s services and products, damage to the credibility or corporate image of these subcontractors would also have a negative impact on SoftBank Corp.’s credibility or corporate image. This could hinder business development and the acquisition and retention of customers, which could adversely affect SoftBank Corp.’s results of operations.
Furthermore, if these subcontractors should fail to comply with laws and regulations, SoftBank Corp. could receive a warning or administrative guidance from the relevant regulatory authorities, or be investigated for non-fulfillment of its supervisory responsibility, and SoftBank Corp.’s credibility or corporate image could deteriorate as a result, making it difficult to acquire and retain customers. As a result, SoftBank Corp.’s results of operations could be adversely affected.
c. Leaks and inappropriate use of information
In its business operations, SoftBank Corp. handles customer information (including personal information) and other confidential information. SoftBank Corp. strives to build a framework to protect and manage information assets appropriately through measures including the appointment of a Chief Information Security Officer and educational and training sessions on information security for officers and employees. SoftBank Corp. maintains and controls this level of information security through various measures. Specifically, SoftBank Corp. implements physical security control measures such as restricting access to work areas that involve customer information and other confidential information, and establishing room access management rules specific to those restricted areas. Certain conditions, such as the use of business PCs and the intranet and the status of access to internal servers by officers and employees, are monitored. SoftBank Corp. also conducts monitoring and defensive measures against unauthorized access via cyberattacks from outside the company.
Even with these measures in place, this information could be leaked, lost, or be used inappropriately in breach of laws and regulations or policies, or involved in a similar incident, either intentionally or accidentally by SoftBank Corp. (including officers and employees and people related to subcontractors), or through a malicious cyberattack, hacking, computer virus infection, or other form of unauthorized access by a third party or other means. Such an occurrence could damage SoftBank Corp.’s competitiveness, and incur significant costs to SoftBank Corp. for payment of damages and modification of security systems, in addition to having an adverse impact on SoftBank Corp.’s credibility or corporate image and making it difficult to acquire and retain customers. These outcomes could adversely affect SoftBank Corp.’s business development and results of operations.
(7) Laws, Regulations, and Systems
SBG is subject to the laws, regulations, systems, and so forth (“laws and regulations”) in each country where it conducts its investment activities. Moreover, portfolio companies conduct business activities under laws and regulations in various fields in each country. Specifically, these range from laws and regulations pertaining to investments through to various laws and regulations pertaining to businesses such as telecommunications services, Internet advertising, e-commerce, energy, AI, robotics, ride sharing, finance and settlement services, and other business activities (including but not limited to laws and regulations related to business permits, import and export activities, protection of personal information and privacy, the environment, product liability, fair competition, consumer protection, anti-bribery, labor affairs, intellectual property, prevention of money laundering, taxation, and foreign exchange). SBG and its portfolio companies are affected by these laws and regulations both directly and indirectly.
Revisions to laws and regulations, the enforcement of new laws and regulations, or new interpretations and applications of laws and regulations (including amendments thereof) could hinder SBG’s investment activities or its portfolio companies’ business activities. For example, SBG may be unable to develop its investment activities, portfolio companies may be unable to develop their business activities in accordance with expectations, new investments or businesses may be restricted, or monetization of investments may be delayed or become impossible. In addition, incurring an increased financial burden could adversely affect SBG’s consolidated and non-consolidated results of operations. The legal department of SBG collects information on new or revised laws and regulations, mainly related to investment activities, and receives advice from outside advisers.
Further, in countries and regions in which SBG or its portfolio companies conduct business activities, the introduction of or changes to tax laws or regulations or changes to their interpretations or enforcement or the incurrence of additional tax burdens due to differences of views with tax authorities could adversely affect SBG’s consolidated and non-consolidated results of operations or financial position.
In addition, SBG has been undertaking measures to strengthen its Group compliance structure for complying with the law and to facilitate an improvement in the knowledge and awareness of officers and employees through training sessions and other means. In spite of such efforts, if SBG and its portfolio companies (including officers and employees) conduct activities in breach of those laws and regulations, regardless of whether they were aware of the breach or not, SBG and its portfolio companies may be subject to sanctions or guidance by government agencies (including deregistration, revocation of licenses, and fines), or may face cancellation of business agreements by business partners. As a result, SBG’s and its portfolio companies’ credibility and corporate image may be impaired, or its business activities may be hindered. In addition, SBG may incur a financial burden, which could adversely affect SBG’s results of operations and the asset value of its portfolio companies.
(8) Intellectual Property
Infringement of SBG’s SoftBank brand by a third party could impair the corporate image or credibility of SBG and subsidiaries that employ the SoftBank brand. Additionally, infringement of Arm’s intellectual property by a third party could have a negative impact on Arm’s business development or results of operations. On the other hand, if portfolio companies were to unintentionally infringe on intellectual property rights held by a third party, such portfolio companies may be prevented from using the intellectual property or subjected to claims for compensatory damages, license fees, and so forth from the third party. In all cases, the equity value of SBG’s holdings, shareholder value, LTV, and consolidated and non-consolidated results of operations could be adversely affected.
SBG faces the possibility of lawsuits by third parties claiming compensatory damages for the alleged infringement of rights or benefits. These third parties may include shareholders (including current and past shareholders of portfolio companies), portfolio companies, customers, business partners, and employees (including current and past employees of portfolio companies). Such lawsuits could hinder SBG’s investment activities or may impair SBG’s corporate image, as well as create a financial burden that could adversely affect SBG’s consolidated and non-consolidated results of operations.
Shareholder value = equity value of holdings – net interest-bearing debt. For details on calculation methods and the latest numbers, see “NAV (Net Asset Value) per share”.
LTV = net interest-bearing debt ÷ equity value of holdings. For details on calculation methods and the latest numbers, see “NAV (Net Asset Value) per share”.
Includes USD 5.0 billion earmarked for use in an incentive scheme related to SVF1.
“Co., Ltd.,” “Corporation,” etc. are generally omitted from the names of companies and organizations.
Company names or abbreviations, except as otherwise stated or interpreted differently in the context, are as follows:
|Company names / Abbreviations||Definition|
|SoftBank Group Corp. or SBG||SoftBank Group Corp. (stand-alone basis)|
|The Company||SoftBank Group Corp. and its subsidiaries|
|*Each of the following abbreviations indicates the respective company and its subsidiaries, if any.|
|SoftBank Vision Fund 1 or SVF1||SoftBank Vision Fund L.P. and its alternative investment vehicles|
|SBIA||SB Investment Advisers (UK) Limited|
|Alibaba||Alibaba Group Holding Limited|