This article by Barry Pasikov is excerpted from a letter of Hazelton Capital Partners.
After scaling back in the 2nd Quarter of this year, Hazelton Capital Partners closed out of its Softbank position over the summer. The Fund’s thesis did not change, as we still believe there to be a discount between the sum of Softbank’s parts and its share price. However, the trajectory to achieve that valuation is now less certain as Softbank’s CEO, Masayoshi Son, launched a $100 billion fund to invest in artificial intelligence (AI), connected devices, “integration of computers and humans,” and other technology companies. Son’s Vision Fund gives him access to a pool of capital that is equal to the five largest global private equity funds put together. The concern is not with Masayoshi Son’s ability to allocate capital, as he has proven himself to be a gifted investor, but that Son will be incentivized to invest the money quickly, at a time when market valuations are not cheap.
With interest rates at historic lows for the past ten years, investors have grown impatient for investment yield as an abundance of capital has been flowing into both public and private equities. The American Investment Council reported that private equity capital reserves are up more than 50% since 2012 to an estimated $1.55 trillion, considerably changing the funding landscape for startups over the past number of years. By the late 1990s, the average age of a startup before it went public was 4 years. Today, that number has risen to nearly 12 years. With access to a seemingly endless supply of private and venture capital, startup companies are becoming “Unicorns,” private companies that quickly achieve a market valuation of over $1 billion. A startup company can go through multiple funding rounds, improve its market valuation, avoid regulatory scrutiny, achieve liquidity for its early investors and employees, all without ever having to go public. In fact, the lure of young companies to go public has been tempered by growing expenses, activist investors and a bureaucratic regulatory environment.
The changing landscape for private companies is also having an impact on public companies as well. In the 1990s, the average number of US companies going public was approximately 400/year; for the past 10 years that number has dropped to roughly 170/year. Combined with an active merger and acquisition environment, bankruptcies, and non-qualification, the number of listed US domestic stocks have fallen by over 50% from its 1996 high of 7,322, achieving the lowest level over the past 42 years.
The environment of too much money chasing too few assets is seen by many as a reason for the longevity of the of the recent market rally and the motivation of why a private company like Uber, an on-demand ride-hailing service founded in 2009, is now worth approximately $69 billion. If Uber were a public company, it would be ranked around the 75th largest company in the US based on market capitalization and the 2nd largest transportation company ahead of FedEx. When one buys shares of FedEx, with a market capitalization of $60 billion, one invests in a company that employs roughly 400 thousand full and part-time employees that own and operates nearly 600 planes and over 66,000 vehicles and truck trailers. But for just $9 billion more one can invest in Uber, which does not own or maintain its fleet of cars and whose drivers are independent contractors. A bullish Uber investor sees an investment in the future of ondemand transportation that is disrupting the livery car industry, with profitability taking a back seat to market share. For someone who is bearish, it is impossible to justify paying $69 billion for a company with a ride hailing app whose business model has yet to be profitable that is disrupting an industry that has historically been unprofitable. In the long-run, this Uber Bull/Bear battle will rage over the foreseeable future as ride-hailing accounts for less than 0.5% of US passenger car miles traveled. In the short-run the only clear winner will be the consumer.
Masayoshi Son has not hidden the fact that he has a strong desire to be in the ride-hailing space, as Softbank is already the largest shareholder in the foreign companies (Ola in India, Didi Chuxing in China, Grab in Southeast Asia and 99 in Latin America) and is anxious to establish a foothold in North America. It has been widely reported that the Vision Fund is actively pursuing a 15% investment in Uber which is expected to cost in the range of $9 – $10 billion.
Son’s vision for the future is that AI and robotics will inexorably change our world, and his goal is to own the companies that will play a significant role in that outlook. With a 300 year plan to build softbank into the world’s most valuable company, even Masayoshi Son could easily justify paying a market premium for an acquisition.
Hazelton Capital Partners’ plan has always been to lighten its Softbank position in the low to mid $40/share range. Above $40/share, the discount between Softbank’s assets and its share price is less substantial as when the Fund first purchased shares. Once Hazelton Capital Partners began selling shares, and with Son’s new focus on investing the Vision Fund’s capital, the decision was made to sell the entire position.
We will continue to review Softbank and its valuation and welcome the opportunity to reinvest in Masayoshi Son.