SoftBank's High-Stakes OpenAI Gamble Pays Off: Market Cap Soars Amid Dramatic Turnaround

SoftBank's Vision Fund 2 has seen a dramatic turn of fortunes thanks to its strategic bet on OpenAI. Despite an astonishing loss of $22 billion, recent developments have bolstered SoftBank's stock, pushing it to a record high, as Masayoshi Son orchestrates a comeback from the brink of financial disaster.

On Tuesday, SoftBank's shares reached a historic peak of 14,825 yen, with the company's market capitalization soaring to $146 billion. This marks an impressive 75% increase in share value over the year, largely attributed to Masayoshi Son's daring investment in OpenAI.

According to a report from "The Information," OpenAI is engaging discussions with investors, including Thrive Capital, about employee equity sales, increasing its valuation to a staggering $500 billion—double the previous round's valuation. This sharp valuation climb is crucial as it nearly doubles the worth of SoftBank's $9.7 billion investment in OpenAI, offering significant relief from Vision Fund 2's cumulative loss.

SoftBank's Vision Fund 2 has faced troubling performance since its launch in 2019, with a $22 billion loss across 280 various company investments. Yet, the OpenAI investment brings hope for a turnaround, leveraging Son's characteristic high-stakes approach.

Sophisticated financial maneuvers have enabled SoftBank's stake acquisition in OpenAI. The Vision Fund 2 borrowed billions from SoftBank itself, which in turn secured loans from Japanese banks. Furthermore, the fund tapped into loans from Apollo, a private lending institution that prioritizes repayment.

An even larger gamble is anticipated ahead, as SoftBank plans an additional $22.5 billion investment in OpenAI by the year's end—a deal locked at OpenAI's $260 billion valuation. Completion of this transaction could see SoftBank owning up to 12% of OpenAI.

The potential for financial gain before investing hinges on OpenAI's shift to a profit-oriented structure. The destination of this $22.5 billion equity—whether in Vision Fund 2 or on SoftBank's balance sheet—remains undecided, with repercussions for shareholders and Masayoshi Son's personal returns.

Unlike its predecessor, Vision Fund 2 lacks external investor participation, granting Masayoshi Son 17.25% ownership following its failure to raise outside capital. His personal wealth is deeply intertwined with the fund's performance, evidenced by his pledge of approximately 9 million shares of SoftBank stock as loan collateral.

Despite this arrangement linking his personal fortune to the fund's outcome, distribution waits until realized and unrealized values surpass investment costs by 30%—a distant benchmark given the fund's ongoing losses.

Concerns regarding governance have emerged, critiqued by analysts such as David Gibson of MSFT Financial. This setup could depress potential shareholder returns from the OpenAI investment, posing a governance challenge.

The substantial OpenAI investment raises SoftBank's risk exposure concerns. In light of past investment concentration problems, such as the infamous WeWork debacle, SoftBank had vowed to avert excessive concentration. But SoftBank appears to be risking heavily on a singular breakthrough prospect once again.

Currently, signs suggest the investment is heading towards spectacular success. However, as historical precedent uncomfortably hints, it could just as well culminate in tragedy.