Elon Musk's latest salvo in public-private debate
As we leave behind another Australian profit reporting season, it's a poignant time to reflect on Tesla founder Elon Musk's ill-fated attempt to take his company private again.
Elon Musk may have backtracked on any plans to take Tesla into private hands, but his flirtation with de-listing has exposed some growing disillusionment with public markets. Musk has made it clear that he considers public markets too short-term for a "visionary" business such as Tesla, while also expressing his exasperation with short-sellers.
Musk is not alone in his irritation with the short-termism of the market. In June this year, business leaders Jamie Dimon and Warren Buffett wrote a Wall Street Journal article called “Short-Termism is Harming the Economy”, saying the pressure to meet short-term earnings estimates had "contributed to the decline in the number of public companies in America over the past two decades".
Julian Chillingworth, chief investment officer at UK-based asset manager Rathbone Investment Management, sees some notable dissatisfaction public markets. “It is costly to get a quote and markets can be mercurial, particularly in their treatment of smaller companies.
"There aren’t as many analysts following them, so they don’t get a lot of coverage and people don’t recognise their value. There is also the problem of short-selling, which can cause real volatility in stock prices," he says.
The question is whether companies can opt out of public markets. There remains plenty of private equity capital willing to fund the right business. Workplace chat app Slack raised US$427 million in mid-August from private equity, while technology unicorns Uber and Airbnb remain in private hands.
The private equity sector continues to attract capital following strong returns. There are also options such as Softbank’s giant Vision fund, dedicated to technology businesses.
That might suggest that these companies can avoid the public markets permanently, but venture capitalists and private equity groups still need to decide on an exit strategy.
Chillingworth says a quote is often the "cleanest" way to achieve that exit. As such, companies may ultimately come under pressure to list on public markets even if they can avoid it in the short-term.
Equally, Simon Edelsten, manager of the Mid Wynd International Investment Trust (MWY) points out that this capital may not be available to all businesses. The large takeovers by private equity firms have generally been of very stable, proven, low-growth companies, such as tobacco companies.
He adds: “Tesla is a capital-intensive growth company – public markets, rather than private equity, generally suit companies with these financing needs and we believe the company could find sufficient long-term stable shareholders as long as its route to profitability is clearly being achieved.” While Musk said he had private funding secured for Tesla from Saudi Arabia’s Public Investment Fund, the sovereign wealth fund played down the possibility.
Tesla stock vulnerable to sentiment
There are also elements of Tesla’s case that are unique. Laith Khalaf, senior analyst at Hargreaves Lansdown, believes Tesla is particularly subject to sentiment because it isn’t currently profitable: “Its share price is predicated on its potential to deliver earnings in the future, and anything which might hinder that possibility can therefore knock the share price considerably.”
Peter Sleep, senior portfolio manager at another UK asset manager, 7IM, says concerns about short-termism in markets are nothing new and it is not that markets, but human nature, that is short-term.
The short-selling argument is also not compelling. He says: “Any company can have short sellers and they all continue to function perfectly well. According to Bloomberg, Tesco, HSBC and GVC have the largest short positions on the FTSE and they are among the strongest companies in the world. Tesla has a market value of $53 billion and also seems to be doing extremely well.”
Khalaf doesn’t see a wave of companies being taken private as a result of the Tesla issues. There are too many investors who can’t hold private shares in their portfolios, while passive funds could become forced sellers. While companies may rid themselves of one problem, they could give themselves others. At the same time, private equity ownership, or ownership by a sovereign wealth fund also brings responsibilities. There are few ownership structures that would leave Musk free to run the company uninhibited.
Public markets are shrinking, but this is more as a result of a wave of buybacks than because companies have become disillusioned with the constraints of a listing. Data from Goldman Sachs forecasts that US buybacks alone will reach a record-breaking $1 trillion in 2018. This has not been matched by new stock issuance, which has been subdued.
Public markets have their constraints, but as Musk has found, they may be better than the alternative. While companies already in private hands are in no hurry to list, there is unlikely to be a rush for listed companies to go private.
Cherry Reynard is a financial journalist writing for Morningstar.co.uk.
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