Capital Investment Advisors

What Could Tesla’s Potential Move Towards Privatization Mean For The “De-Equitization” Of U.S. Capital Markets?

It was the tweet heard around Wall Street. Tesla’s Elon Musk said he was considering taking the company private for $420 a share, while also implying that he has the funding in place to do so, pending a shareholder vote.

Musk’s phrase “funding secured” in his tweet is what really caused market ripples. Why did he use this line? In a blog post on Tesla’s website, Musk claims there is “no question” Saudi Arabia’s Public Investment Fund will provide funding for a deal to convert Tesla into a private company. Musk’s confidence comes after a July 31 meeting with the fund’s managing director, and after the Saudi’s invested $2 billion in his company.

Why so public in the announcement, Musk? According to the same blog, he fired off the tweet because he wanted all Tesla investors to hear about the possibility of Tesla going private at the same time.

“As mentioned earlier, I made the announcement last Tuesday because I felt it was the right and fair thing to do so that all investors had the same information at the same time,” Musk said in his statement. “I will now continue to talk with investors, and I have engaged advisers to investigate a range of potential structures and options. Among other things, this will allow me to obtain a more precise understanding of how many of Tesla’s existing public shareholders would remain, shareholders, if we became private.”

If Musk pulls off this deal, another $80 billion to $100 billion company would disappear from the stock market.

For years we’ve talked about the “de-equitization” of the US capital markets – meaning the steady reduction in the number of publicly-traded stocks.  In 1997, there were 7,600 publicly traded companies in the US. That number has slowly dwindled to roughly 3,600.

While most of that is due to mergers and acquisitions amongst publically traded companies, Michael Dell famously took the company he founded, Dell Technologies, off the public markets in a more than $24 billion buyout in 2013.

There are some big household-name corporations that have not yet gone public, including Samsung ($305 billion); Cargill ($120 billion); Koch Industries ($115 billion); Aldi ($86.47 billion); State Farm ($71.2 billion); IKEA ($41.6 billion); Palantir ($20.5 billion); WeWork ($21.1 billion); SpaceX ($24.7 billion); Meituan-Dianping ($30 billion); Airbnb ($31 billion); Uber ($69.9 billion).and Publix ($32.36 billion).

This information could cause small investors to wonder whether they have enough options in the stock market.  But, remember, there are still thousands and thousands of companies from which to choose.

In my opinion, the move towards privatization doesn’t spell disaster. Instead, the trend could boost the private investment industry.  Private equity investment is currently reserved for “accredited investors,” meaning high-net-worth people with deep investment expertise. But at some point, if this move to the private side continues, all investors may have access to this growing and potentially powerful vehicle.

To me, this situation is analogous to robo-investing. When the first robo-advisors came on the scene, the software was only available to actual human advisors, who used the technology to automate the process – while still charging the same fees. Then, in 2008, access to robo-advisors became widespread, mostly as a mechanism for providing ways to rebalance investor assets within target-date funds and to give investors a modern, online interface.

Today, robo-advisors represent a new era of financial advice and investment management firms. By automating asset allocation and portfolio management, they give mainstream investors access to services once reserved only for high-net-worth individuals.

So, what was once limited to a select group ultimately became available to every investor. It just took some time.

And, just like always, the evolution of investing will continue. This evolution will no doubt be accompanied by the old stalwarts of American ingenuity and hard work, as it has been for more than 200 years.

Previous ArticleNext Article