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PE Panorama: WeWork didn’t work and SoftBank is still softening

By Paul Mackintosh   
November 20, 2023

The nearly US$19 billion bankruptcy of WeWork, which filed for protection in the first week of November, marked a fresh low in the fortunes of SoftBank and its credibility. Privately valued at some $47 billion at the height of its fame, the coworking office space company was worth around $45 million when it filed for Chapter 11. Just pause for one moment and consider that colossal value destruction.

SoftBank certainly isn’t an isolated case in the troubled world of venture capital. According to a recent report from private assets data provider PitchBook, the internal rate of return of US-based VC funds was minus 16.8% in the fourth quarter of 2022, the worst quarterly return delivered by the asset class in over a decade. What’s more, PitchBook expects figures based on distributrions to paid-up capital to be even worse as VC investors struggle to find exits for their investees.

And this, from one of those alternative private asset classes that so many institutional investors have counted on to goose their returns from traditional investments and deliver outperformance. In fact, performance figures for 2023 are so late in coming partly because many VC firms trim their asset values during fourth-quarter audits. SoftBank itself lost around $6.2 billion in the third quarter of 2023, according to PitchBook.

Not to worry, though: VCs have apparently come up with a new way to achieve liquidity and return money to their limited partners. According to a new paper published by tech-focused investment bank Clipperton Finance, a growing number of startups are exiting to private equity funds rather than to the public markets or to strategic buyers.

Clipperton’s figures suggest that the total number of European VC-invested startups exited via buyouts by private equity funds has risen from 8% of total exits between 2006 and 2010 to 24% in 2021-2023. As well as indicating what dire straits the traditional exit routes are in, these figures also paint a picture of assets invested at now-unsustainable valuations being handed from one private capital pool to another without having their value tested outside the world of private fund investment at all.

The famous adage runs that venture funds will only see returns from three out of every ten investments, and just one star performer out of those will pay back everything spent on the other nine. Fine, but while all this is going on, the VC firm’s general partners will be 100% likely to reap the 2-and-20 returns from managing the fund’s money.

It’s just as well that LPs invest such small amounts in VC funds - or did, until SoftBank came along and upset the entire asset class’s economics. Now look where that’s led.