By Echo Wang
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.
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.
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.
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.
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.
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.
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.
"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
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.
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.
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.
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.
SPACEX UPENDS TRADITIONAL IPO PROCESS
While underwriting transactions, banks typically drive the investor outreach process using their own relationships and considerable discretion — reaching out to investors, gauging interest and making recommendations to the issuer on how much to allocate to each. During a company's roadshow, investors express indications of interest within a set price range, and the final price is determined based on that demand. The process puts a semblance of checks on the offering.
SpaceX turned the process on its head, assigning banks to specific investor pools and geographies in what market participants describe as a “lane” structure, directing firms to focus on defined parts of the offering rather than compete broadly across the deal. It then set a fixed offering price before the launch of the roadshow.
A source familiar with the deal defended the arrangement, saying it was born out of a desire by the company to make its army of underwriters — SpaceX has 23 banks on the IPO — handle their fair share of work and assign “accountability and ownership.”
The person said some bankers were camped at SpaceX’s headquarters for more than six months, designing the process as a “great collaboration.”
Another unusual feature of the offering is the large allocation to retail investors. During a kickoff virtual meeting with its entire syndicate of IPO banks on April 6, Johnsen told attendees that SpaceX was doing so “intentionally.”
“Those are folks that have been incredibly supportive of us and of Elon for a long time, and we want to make sure that we recognize that,” he said, according to a transcript of his comments seen by Reuters.
One of the bankers at the meeting said SpaceX was planning to market to retail investors internationally, including in the European Union, Australia, Canada, Japan and Korea, without a listing.
By many accounts, demand for the stock is expected to be high. Analysts working on the deal were fielding as many as 20 calls a day from investors, above the 10 to 15 typically seen on in-demand offerings, one of the sources said.
"I can see both sides of this. But betting against Elon Musk has been a mistake, in hindsight," said Bradford Briner, North Carolina state treasurer, in an interview. Briner expects his $149 billion state retirement system will wind up owning about $30 million worth of SpaceX shares as the company is added to the Russell 1000 index, tracked by a portion of the system.
(Reporting by Echo Wang in New York; Additional reporting by Anirban Sen in New York and Ross Kerber in Boston; Editing by Paritosh Bansal, Anna Driver and Matthew Lewis)
