A US$100 billion war chest is likely to court the type of Chinese investors previously barred from involvement in strategic technologies
Japanese technology tycoon Masayoshi Son announced late last year he would set up the US$100 billion SoftBank Vision Fund to pour money into promising new technologies and undervalued technology companies worldwide.
Already contributing are the Saudi Arabian sovereign wealth fund, Apple, Qualcomm and Oracle founder Larry Ellison. The fund’s creation dovetails with Son’s move in February to acquire Fortress Investment Group, a Wall Street private equity firm that oversees around US$170 billion in assets.
Some analysts say it is only a matter of time before investors from China are involved. They have highlighted Son’s ties with Jack Ma’s Alibaba and other Chinese Internet companies. “I see the Chinese being part of the SoftBank Vision technology fund,” said Stanley Chao, business consultant and author in Los Angeles. “I suspect part of the US$100 billion for the fund is going to come from China.”
Chao worked for Son as an executive vice president of Kingston Technology, in charge of its operations in the Asia-Pacific region. Kingston Technology is a maker of memory boards that SoftBank owned in the 1990s.
Emerging markets specialist Gary N. Kleiman also thinks Chinese investors will be interested in the SoftBank fund. “Son is looking for deep pockets,” Kleiman said. Kleiman heads Kleiman International in Washington.
Chao predicts the Chinese cash coming from companies or venture capital funds. “It’s an indirect way for Chinese to invest in overseas technology as silent partners,” he said. If Chinese were not among the first wave of contributors, they might be among subsequent waves, he said. The US$3.3 billion Fortress deal, which US regulators have not yet approved, may open another conduit for Chinese investment. “Fortress is going to be another way for Chinese to indirectly invest,” Chao said.
Chao and other analysts say adding Chinese cash to that of a bigger group of investors in the SoftBank fund will help avoid the official scrutiny, especially from US authorities. The US Congress has opposed Chinese takeovers of US tech companies on the grounds of national security and the need to preserve economic competition.
Chinese involvement in the SoftBank Fund may be acceptable to the US because of an action a plan that he and US President Donald Trump have devised. Son hopes to create 50,000 new jobs by investing US$50 billion in technology startups.
Bloomberg says SoftBank is on the verge of closing the first round of investments in the fund. The fund expects to have US$45 billion from Saudi Arabia and another US$25 billion from SoftBank. Apple, Qualcomm and Oracle chairman Larry Ellison are said to be contributing US$1 billion each. Blomberg’s sources said the initial investment would likely exceed US$80 billion. They said it had yet to be decided when the first round would be closed.
So far, there have been no reports of Chinese involvement. SoftBank did not respond to a request for comment.
Chao said the Fortress deal and the SoftBank Vision Fund allowed Son to pull together his widely dispersed investments in tech. “Son is bringing everything together now into a global strategy,” Chao said. He said Son had previously invested piecemeal in tech. Chao said that before the Fortress purchase, Son had had a unit in Japan overseeing his investments in technology there.
SoftBank venture capital groups in China and Europe oversaw Son’s investments in technology. Chao said nobody in the US had managed Son’s investments there and that Japanese were sent to ventures there.
Now, Chao said, those in charge of investments in Japan, China, the United States and Europe all reported to Fortress. “Fortress will be the main overseer and it will be Son’s worldwide investment leader,” Chao said. “If the Chinese unit wants to invest locally now, it will have to get clearance from Fortress and show how the move fits with SoftBank’s global investment strategy.”
On the Fortress front, the US Securities and Exchange Commission added a new wrinkle on March 1, when it said it had frozen the assets of traders in London and Singapore on suspicion that insider trading before the announcement of the agreement for SoftBank to acquire Fortress had reaped illegal profits of US$3.6 million.
While some in Washington will welcome the involvement of SoftBank’s fund in tech startups, Chao thinks a national security flap is possible. US regulators are increasingly worried about Chinese investment and broader involvement in strategically important companies and networks.
Those concerns led to a ban on Huawei, a Chinese maker of communications gear, from selling products in the US network market in 2012. The fear is that ties between Huawei and the Chinese defense establishment mean Huawei products could be rigged to snoop into US defense and other systems. Huawei says the fear is groundless.
Suspicions such as these set the stage for a confrontation between SoftBank and US officials, Chao says. He predicts that Son, who owns 80% of US wireless telecommunications giant Sprint, will use mergers, buyouts and the new fund to establish beachheads in a swath of technological fields, including Chinese technologies, making all of them nodes in SoftBank’s network of investments.
If Son were to take a sizable stake in Huawei, for example, it might lead to Huawei servers in China being used to run the Sprint wireless network. “This is how [the Chinese] could get in the back door and it raises national security concerns,” he said.
Scott B. MacDonald, an economist and risk consultant who focuses on Asia, agrees with Chao. “In the current environment, buying Chinese and Japanese tech and fishing for investments in the US will get you noticed by US authorities,” MacDonald said. “The US view hardened under Obama and is even more sharp-elbowed under the Trump administration.”
Kleiman believes one more matter with implications for US national security is the US Treasury securities primary dealer’s license held by Fortress. The license makes Fortress a direct player in the US$18 trillion US debt market. That Japan and China are now the biggest holders of US Treasuries “could become another issue,” Kleiman said.
Kleiman also remarked that Japan has not allowed a US company to take over a Japanese investor the size of Fortress. “Reciprocity could become an issue with US regulators,” he said.