Elon Musk’s Tactics Fuel Investor Demand and Risks in SpaceX IPO
By Echo Wang
Investor Access, IPO Dynamics, and Associated Risks
NEW YORK, June 12 (Reuters) - In recent years, Elon Musk has been picky about whom he allowed to buy in to SpaceX, the rocket ship company making its highly anticipated stock market debut this week.
Exclusive Entry to SpaceX Investments
One investor said that when SpaceX was privately held, he used a connection with a cousin of the billionaire entrepreneur to buy $10 million worth of stock in the satellite maker in 2018. A portfolio manager at a $500 billion U.S. fund said he had to use his relationship with a board member of the Musk-led Tesla for an allocation of SpaceX shares in 2023.
The Vetting Process for Pre-IPO Investors
Both pre-IPO investors said that even after getting their feet in the door, they had to visit SpaceX’s headquarters. There, in a reversal of roles, they were interviewed by Musk’s team, including CFO Bret Johnsen, before they were given the go-ahead to invest. Ultimately, they needed personal approval by the world’s richest person, and despite pouring in millions of dollars, they said they were given limited financial information about the company.
Both of the investors — and at least 10 other pre-IPO investors interviewed by Reuters — are happy with the way things have turned out so far because the value of their investment has skyrocketed. Worth about $30 billion in 2018 when Lyndon Rive — Musk’s cousin and the former CEO of SolarCity, which is now part of Tesla Energy — sold his stake to the fund manager, SpaceX is expected to list at a market valuation of $1.75 trillion.
Investor Sentiment and Control
Other investors described similar dynamics. “When we invested, it was straight up: Elon controls everything, and you're not going to know anything unless you put in $250 (million),” said Ross Gerber, CEO of Gerber Kawasaki, an investment firm that owns SpaceX and Tesla shares. Gerber said he invested anyway because his investment in Tesla had been extremely profitable.
Musk’s Influence Over the IPO Process
Now, as SpaceX debuts on public markets, Musk is dictating terms at every stage of the initial public offering process. The country’s largest and most powerful banks — including Goldman Sachs and Morgan Stanley — have been told how to market its stock and to whom. Some banks were told the specific order sizes they needed to “fill” — in some cases a few billion dollars — and were given instructions on what types of investors to bring, five sources familiar with the matter said. Banks signed on to underwrite the IPO without being told what they would be paid, the sources said.
The Nasdaq stock market’s CEO, Adena Friedman, lobbied Musk and SpaceX President Gwynne Shotwell over several months to secure the listing, sources familiar with the exchange said. In March, Nasdaq changed its index rules to speed up the entry of large-cap companies like SpaceX to become component stocks of the Nasdaq-100 soon after their listings.
Valuation and Retail Investor Exposure
This time, however, unlike the fund managers who got in early through their connections and are sitting on vast gains, the company’s lofty valuations have eroded the room for error — and 30% of the $75 billion offering is for individual investors, including mom-and-pop buyers.
Risks for Public Investors
Governance and Operational Concerns
SpaceX presents a multitude of risks to those who buy its public stock: weak corporate governance with Musk in absolute control, loss-making operations, deals between Musk’s companies, and hard-to-value goals such as colonizing Mars and putting data centers in space. But in the scramble to get a piece of the action, few are focusing on them.
Warnings from Investment Groups
"No fiduciary should accept this adverse combination of financial and governance risk," wrote Tejal Patel, executive director of the union-affiliated SOC Investment Group, in a June 4 letter sent to other prospective SpaceX investors.
SpaceX and Musk did not respond to requests for comment. Rive, the former SolarCity CEO, did not respond to a request for comment, nor did SpaceX's CFO, Johnsen.
Citi did not respond to requests for comment. Bank of America, Goldman Sachs, JPMorgan, Morgan Stanley and Nasdaq declined to comment.
Musk’s Unusual Screening Process
Windfall for Early Investors
The upcoming IPO promises to be a windfall for SpaceX’s early investors and employees. The fund manager who bought Rive’s stock for $10 million said he is now sitting on more than $200 million in gains. After the IPO, SpaceX would account for 20% of his $1.5 billion fund’s portfolio.
Investor Interviews and Information Access
The fund manager, who requested anonymity to speak freely, said that when he was first introduced to SpaceX as a possible investor, he was asked to visit the spacecraft company's headquarters for an interview with Johnsen, the CFO. During the meeting, he said, he was quizzed on a range of issues, including his fund’s finances, intention to participate in future fundraisings, and source of funds.
The fund manager received some information about the company from Rive, who needed SpaceX's approval before he could sell the shares. In order to learn more about SpaceX, the investor said he had to seek out information from other sources, including a vendor that manufactured parts for the satellite company.
Comparisons to Other Private Companies
While such tight screening of possible investors is becoming more common as private companies grow big and gain market power, it was unusual back then, the investor said, adding, “We felt like we were getting interviewed more than we were interviewing them.”
The investor said he eventually obtained high-level financial information — revenue and growth numbers — but no details, such as a copy of the balance sheet. This was a departure from most companies in his fund's portfolio, which give much more detailed information and frequent updates.
Ownership Structure and Shareholder Limits
SpaceX maintains a relatively concentrated ownership base for a company of its size, six of the investors in the stock said. Reuters could not determine how many shareholders are on SpaceX's official ledger, but private companies can have at most 2,000 shareholders before additional regulations kick in.
