Can companies still accept investment from Saudi Arabia?

Saudi reporter event continues. The executives of “unicorns” who have received or seek to receive big investments from SoftBank’s Vision Fund may now have very complex feelings.

Without Saudi Arabia, Public Investment Fund (PIF) wouldn’t exist; without PIF, there would be no SoftBank’s Vision Fund; and without the Fund, global tech field would have developed very differently in the past two years.

Common Interests

The 61-year-old Masayoshi Son might wonder whether it was a mistake to meet Mohamed Ben Salman (MBS), the current Saudi crown prince, two years ago.

Back to 2016, both Son and MBS made important transition plans.

Son believed that it was harmful to rely too heavily on the home market and wanted SoftBank to grow for at least 300 consecutive years. He thus proposed the “SoftBank 2.0”, and Vision Fund is part of the plan. It aims to invest large sum of money in tech companies that could influence the future.

In 2016, SoftBank purchased ARM, a British chip designer, at $32 billion. In order to raise money, Son dumped Alibaba shares at $10 billion for the first time, and then it sold Supercel, a Finnish mobile game developer, to Tencent for $8.6 billion. Then SoftBank faced a cash crunch.

Also in 2016, MBS, the then deputy crown prince, proposed the Saudi Vision 2030. The vision has 3 main pillars: the status of the country as the “heart of the Arab and Islamic worlds”; the determination to become a global investment powerhouse; and finally to transform the country’s location into a hub connecting the 3 continents (Asia, Europe, and Africa).

It is very difficult to achieve these three goals. Saudi Arabia is a country heavily dependent on oil, and for years, its economy has been directly linked to oil prices. Rising oil prices lead to a booming economy, while falling prices cause recessions. Saudi Arabia is like a country on a roller coaster of oil prices.

There are difficulties elsewhere: non-oil industries lack international competitiveness and rely on fiscal subsidies; Saudi Arabia has very weak entrepreneur tradition, lacks professional education, and has increasing sluggishness among its people due to the high welfare in past two generations. Besides, women have extremely low participation in the labor market, while the enhancement of women’s status faces powerful obstacles from religious forces.

But Saudi leaders have long recognized that oil dependence alone is not sustainable, and that resistance must change no matter how strong it is.

MBS led a 500-people delegation to Tokyo in September 2016. Seizing the opportunity, Son outlined a blueprint which could help Saudi to change its economic model and explained how SoftBank’s reform plan fitted in with Saudi Vision 2030.

It was reported that after the 45-minute talk, they reached an agreement, and decided to meet again in Riyadh weeks later to launch the world’s largest private fund, a joint project worth $100 billion.

In May 2017, SoftBank raised its first-stage fund worth $93 billion jointly with Saudi Arabia, which was the largest equity investment fund in history. PIF contributed $45 billion, SoftBank contributed $28 billion, and Mubadala in ABU Dhabi, UAE, another famous sovereign wealth fund in the Middle East, contributed $15 billion.

Had it not been for the Saudi reporter event, Son had a very pleasant cooperation with the Saudi Arabia.

At the dinner party held on SoftBank World in this July, Son said the Vision Fund’s return on investment in its first year was 60 percent. For such high returns, MBS did not hesitate to decide to invest again when Son set up his second Vision Fund.

Just three days after the journalist disappeared (on October 5), MBS announced that PIF would put another $45 billion into SoftBank’s second Vision Fund.

MBS also said investing in the second phase of the Vision Fund would help PIF expand its assets, which grew to more than $300 billion. “Our assets are now approaching $400 billion,” MBS said, “Our goal is to reach $600 billion by 2020, and I think we will exceed that goal by then.” “

It is conceivable that the Future Investment Initiative (FII) would have been a victory conference but for the missing of reporter.

“Shareholder” Saudi Arabia

With the help of the Vision Fund, PIF has become the shareholder of many “most promising” Internet companies. As of June 30, PIF accounted for about $12 billion of the total $27 billion that Vision Fund invested, according to SoftBank official figures.

Vision Fund holds a 15 percent stake in Uber, making it the largest single shareholder, according to Uber’s shareholder structure released in January 2018. SoftBank and PIF invested about $10 billion in Uber.

In June 2016, before the Vision Fund was set up, Uber received $3.5 billion from PIF in F-round financing. Because of the huge amount, PIF also got a seat on Uber’s board.

Through direct investment and investment made by Vision Fund, PIF now owns about 14 percent of Uber. Saudi Arabia has yet to say anything about Uber’s exit from the FII, but Bahrain, Saudi ‘errand boy’ in Gulf Area, has called on its people to boycott Uber in protest of its “unrighteous” behavior.

As PIF directly invested in Uber, Didi, Grab, Ola and other travel giants were all invested by SoftBank alone, without the Vision Fund. But in this April, Son said he would transfer SoftBank’s stake in the ride-hailing giants to the Vision Fund, worth about $20 billion.

The shares have been transferred to the Vision Fund, which means that PIF is already the shareholder of these travel giants, according to an August interview with an executive of Vision Fund.

Companies in investment negotiations, including WeWork

On October 11, Wall Street Journal reported that SoftBank was in talks with WeWork, a U.S. sharing office giant, to buy a majority stake of it. SoftBank may invest $15 billion to $20 billion in WeWork through the Vision Fund.

The deal, if completed, would be one of the biggest and most significant deals in the start-up investment boom in recent years. But WeWork is likely to reject the investment in the face of growing backlash in Silicon Valley against Saudi Arabia.

Recently, the Vision Fund has made frequent investments, such as its $1 billion investment in Oyo, an Indian hotel chain and guestroom integrator. Vision Fund also led the $450-million financing of Compass, a real estate tech company, and the $400-million funding of start-up Opendoor.

In addition, Vision Fund once invested in Indian company Flipkart, and has successfully sold it when Walmart spent huge sum of money to acquire Flipkart. Vision Fund also sold ARM China to a Chinese consortium. It was for those two deals that SoftBank had soaring profits in 2017, and PIF also profited a lot from it.

Dangerous dreams

The Saudi government may not be as rich as people think. MBS had been planning the listing of Saudi Aramco, and the huge amount of money raised from IPO would be injected into the PIF. However, the listing was not as smooth as expected.

There was another sensation: from November to this January, 381 Saudis, including Prince Alwaleed bin Talal, the richest man in the Arab world, were locked up at the Ritz-Carlton. It was for simple reason: give a sum of money before you could leave.

At the time, SoftBank already felt a bit uneasy. Prince Alwaleed was not directly involved in politics, after all. Just like Son, he is an investor. He is a major shareholder in Citibank, Four Seasons Hotel, the Plarizonaa Hotel, News Corporation, Time Warner, Twitter, AOL, Apple, eBay, lyft and others, and his is friend with Bill Gates and Rupert Murdoch. Even so, Prince Alwaleed could not escape jail.

In addition, Momentum Works has learned from friends in Indonesia also told that Saudi Arabia recently donated significantly less amount of money to Islamic organizations in Indonesia, which may have some influence on the future political situation

Sources close to SoftBank say privately that the worst case scenario would be to cut ties with the Saudis and that SoftBank might not accept any more Saudi money, foreign media reported.

If things continue, perhaps they really do not dare to accept it.

If you have watched the third season of TV series Billions, you might understand what it feels to be limited partner with Russian oil oligarchs. And it might be similar to how Son feels now.

Will Son’s dream of changing the world, and MBS’s dream of transforming Saudi Arabia come to an end?

We hope they won’t.