Elon Musk has said he is considering taking Tesla private. Does this say something about the constraints investors are placing on company management?
- Musk has complained about the short-termism of Wall Street and also how it treats companies such as Tesla
- Does this mean that public markets could lose some of their most innovative companies?
- Private markets continue to go from strength to strength
It’s difficult to see the multi-billionaire Elon Musk as a victim, but his recent statement on the future of Tesla suggests otherwise: he has been forced to conform to Wall Street’s quarter on quarter growth expectations, to the potential detriment of the long-term interests of the company. He has seen Tesla shares become the most shorted in the history of Wall Street. As he looks to take the company private, does he have a point about the problems of a public listing?
Musk’s problem isn’t new. Plenty of companies complain about the short-termism of equity markets, the need to meet analyst numbers come hell or high water, but it does seem to have been a particular problem for Tesla. The development of electric cars is, by its nature, a long term game. Musk has had to reimagine driving in the future. This, along with Musk’s unconventional style, does not sit easy with analysts who prefer conformity and predictability.
The question is whether others decide to follow Musk’s example. Setting aside any personal views on Tesla, if the strongest and most innovative companies turn their back on public markets because they believe they aren’t working properly, this could be a problem for fund managers. Inevitably they will see their choice reduced and may miss out on companies with the strongest potential growth.
Private markets continue to grow. A recent report by McKinsey found that private markets’ assets under management (AUM), which include committed capital, ‘dry powder’, and asset appreciation, passed $5 trillion in 2017, up 8% year on year. While there have been IPOs this year, many of the so-called ‘unicorns’ (private companies with valuations of over £1bn) have shown apparent reluctance to come to market, possibly because of the strictures it imposes.
In the end, what gives? Does the public market recognise that it is losing good companies and start to be more flexible and long-term in the way it treats earnings expectations? Or is there a clearer delineation between those companies that should be private and those that should be public? Either way, it has implications for investors in funds, who may no longer have access to the strongest ideas.