SoftBank’s next $100 billion underscores Ray Dalio’s AI warning

Shuli Ren, Bloomberg

Skeptics of the artificial investment boom are doubling down. Billionaire Ray Dalio warned last week that the bubble was near its bursting point, while Michael Burry of the Big Short fame brought forward the timeline for his bearish thesis. SoftBank Group Corp. founder Masayoshi Son’s attempt to set up another $100 billion AI-focused venture capital fund will only give the doubters more ammunition.

Son is looking to raise up to $100 billion from the Gulf. He would deploy the money to set up a fund that would acquire companies and use AI and other advanced technologies to transform their operations, the Financial Times reported.

It won’t be an easy pitch. Investors in the region know all too well the track record of SoftBank’s first $100 billion Vision Fund. It was set up in 2017, with major backing from Saudi Arabia’s Public Investment Fund and United Arab Emirates’ Mubadala. It was followed by some high-profile blowups, including WeWork’s botched listing in 2019 and the collapse of trade financing startup Greensill in 2021. Since its inception, the fund has generated $26.6 billion in paper gains through the end of June, hardly a stellar return for almost a decade of investing.

That Son is willing to return to the Middle East and risk tough negotiations, and possible rejection, underscores a larger problem. Even SoftBank, among AI’s most fervent believers, is struggling to monetize its investments.

Public markets are no longer willing to accept sky-high valuations. OpenAI, into which Son has poured $65 billion, won’t list this year. SB Energy Corp., a subsidiary pursuing what would be the world’s largest data-center project in Ohio, has delayed its public debut as investors balk at the $50 billion valuation its bankers had sought. The exit route for these mega-unicorns is narrowing.

Meanwhile, with global bond yields on the rise, creditors are re-pricing risk, especially anything tied to AI. SoftBank is paying record yields on its junk bonds and has agreed to guarantee a $10 billion margin loan backed by OpenAI shares, an unusual feature given the debt is already collateralized.

This dilemma extends well beyond SoftBank. Any investment ultimately rests the following: the expected return, the cost of capital and how long it takes to get the money back. All three are increasingly turning against the case for pouring yet more capital into AI.

Granted, it’s curious that investors from the Middle East are entertaining Son’s pitches at all. My bet is that this reflects not lax investment discipline, but prospects of a bargain. SoftBank has done this before. It transferred existing assets at cost into the Saudi-backed Vision Fund as part of its contribution — and Son can do that again. His first $35 billion deployments in OpenAI are by all means lucrative. Buying into those gains at an attractive price would make sense. But that would look more like a special-situations trade than a resounding vote of confidence in the next wave of AI investment.

Speaking at the Forbes Global CEO conference in Singapore last week, Dalio made a telling observation:

“Everybody says ‘I’m worth a billion dollars’ but OK, try to spend that… you have to sell wealth in order to get money — and so the bubble usually pricks.”

Indeed, try turning these paper billions into actual cash. Son’s increasingly strenuous search for fresh capital may itself be a sign that the AI investment cycle is entering its late stages.

[Abridged]

Courtesy Bloomberg/Shuli Ren