SpaceX IPO Threatens Passive Investors

SpaceX has filed to go public, but only 4% of the company will actually be available to the general public. Since Elon Musk is claiming the entire company has a $1.75 trillion valuation, the 4% would represent $75 billion. The full company valuation would make SpaceX America’s 7th largest company.

Index funds, passive investments that track a large number of stocks, are designed such that companies with small public floats - like SpaceX will have - are automatically added to the fund. What this means is that millions of passive investors with pensions or who have regularly invested in index funds will automatically also be invested in SpaceX whether they choose to be or not.

Analysis

This is a concern because passive investment into index funds exists as a means of low-cost diversification for ordinary people, i.e. a low risk way to have your money grow relative to inflation. The risk with companies like SpaceX is that they may be overvalued, loss-making, and have questionable governance.

On questionable governance, Musk retains control of the company even though it is going partially public through special-class shares that grant him strong voting power. Whereas public shareholders own the risk but cannot influence decisions, so if Musk makes reckless choices then passive investors are trapped holding deteriorating shares in a company whose leader they cannot remove or restrain.

What does this mean for capital markets and investors?

• Index providers’ rules creates forced buying of potentially overvalued companies by passive investors who cannot opt out
• Dual-class share structures allows founders to retain control while public shareholders bear economic risk
• The passive investing model risks being overtaken by billionaire-controlled companies like SpaceX if the SpaceX public float ends up being successful