Bloomberg Audio Studios, podcasts, radio news, and the Times.
Gave change, and so Gat walks them as.
Once upon a time, companies went public to raise money. You'd go on a roadshow to pitch your story and drum up interest. You'd float a big pile of stock, and then you're off to the races to go build your company. Turns out that's not really the case anymore. I'm Barry Retolts, and on today's episode of At the Money, we're going to talk about the upcoming I p o s for trillion dollar companies like SpaceX, Anthropic, and open Ai. To help us unpack all of this and what it
means for your portfolio, let's bring in Dave Nadig. He is president and director of research at ETF dot com, and he shares with us how investors should be navigating not only these IPOs, but what they're going to mean for various indexes like the Nasdaq one hundred and the S and P five hundred. So, Dave, you wrote a fascinating piece and essentially you claimed SpaceX is breaking capitalism and indexing. What is exactly broken? Is it the IPO process, the index process, or both.
I gotta say, I think it's both. Sadly, I think it's both. The IPO process, I think most people can understand steam's pretty broken.
Right.
We now live in a world where the private equity space is where most of the growth in capitalism is captured.
Right.
If I had a great idea, if Berry, if you and I were going to just launch a company tomorrow, go raise a bunch of money and do something, we wouldn't go to Wall Street. We would go to some private equity firm and we would say, hey, we've got this great idea, and they would say, awesome, give us seventy five percent of your company for a couple million bucks,
and we'd be off to the races. And then when we need more money, we would go back to that same private equity person, who would probably connect us to their favorite private credit person who would then loan us another fifty million dollars for us to do the next stage of our business, and so on until we had accumulated so many shareholders, so many mouths to feed that if eventually we have to go public so that all
those people can get paid. That is the reality of the modern IPO market, which works out pretty well for the private equity capital, but no longer really rewards the.
Public as a public market the way it used to.
So let's talk about that contrast between old IPOs that raised growth capital. You very much imply in your piece SpaceX is breaking capitalism and indexing, which, by the way, I stole that opening paragraph of you very much imply that modern IPOs essentially exist to provide insiders and early investors with liquidity. So first, when did this shift occur? And second is it an issue? Is it a structural problem?
I think we can trace this back to pretty much every IPO since the Great Financial Crisis. I mean, I think any IPO in the last fifteen or twenty years has followed a pretty similar pattern. We've seen the steady growth of the size of IPOs. They're bigger and bigger and bigger companies. Now we're talking about trillion dollar IPOs. So when I went in the dotcom era, the average IPO was about one hundred and twenty million dollars. That was the value of the company post IPO, and the
amount being floated averaged around thirty or forty percent. So big chunks of these companies went public, people could assess them, they traded for a significant period of time, sometimes profitable, sometimes not profitable, and then they would end up in the hands of the public in an indexes and that was a that was a lengthy process. It took, you know, a year or two of being a public company for people to get familiar with you.
That's all.
That's all gone now and so now what we have are these sort of headline making IPOs of big companies, whether they're you know, a Karna or a Reddit or now a SpaceX. And so everybody now feels like these are lottery tickets that you want to get in super early on the ipo, get some purported pop, which no longer really happens, and that that is your key to riches. Increasingly, what actually happens is the op deposite. Companies come public,
they trade down initially, sometimes they ramp up. Tesla famously had a great first year after the initial selloff. So it's not that all IPOs go this way, but it is no.
Longer like the dot com era.
So you mentioned SpaceX. People have described this company as kind of unique, in part because it involves commercializing space, in part because Elon Musk still despite the past couple of years, has a cult following courtesy of his work at Tesla, and then also because it's just an immense valuation. What makes SpaceX unique.
Or is it not unique?
Well, I don't want this to be about whether SpaceX good or SpaceX bad. SpaceX is unique for a bunch of structural reasons. It is already a multi business conglomerate. It's pretty rare we see a multi business conglomerate come out as an IPO that tends to be what you do after UIPO and start accumulating new companies. So inside the SpaceX wrapper, we've got Twitter X, We've got Grock and Xai, which is increasingly now a data center story, I guess unless a development of AI story. We've got
the providing commercial internet right nine million startlink subscribers. That's a very real business that makes real money. And then the near monop monopoly on at least United States Space Launch is virtually completely monopoly now for SpaceX. So whether that's a great business or not, that makes it a bit unique already out of the gate. But more unique
is how it's coming to market. It's only floating five percent of its stock, so ninety five percent of this company will still be privately held after they float the IPO. And yet despite that very very thin float, it's getting accelerated entry into the NASTAQ one hundred and is being considered for accelerated entry into the S and P five hundred. So we're breaking all sorts of rules.
So let's talk about the Nasdaq one hundred. If you've been an investor in the queues as they're known, uh, the Nasdaq one hundred index ETF, you have done tremendously well over the past fifteen years outperform the S and P outperformed just about every historical period, including the nineties, where the cues were just you know, a giant home run except for that little, you know, eighty three percent
crash at the end. So, so, what what did Nasdaq do wrong in admitting SpaceX to the cues and what should they have done instead?
Well, so what they did was over the spring they did what's called the consultation, which is they go to all the people who actually pay for the index. I mean, it's important to point out Nasdaq's in a business. They licensed the Nasdaq one hundred two folks like the investco to run the cues products that people know and so they went out to all the people who licensed that index and said, would you be okay if we did this thing? And everybody said yes, and so now we
have new rules. What the new rules did was accelerate how quickly a company can get in if they're very large, to fifteen days. It used to be six months. And they've also changed how they think about the float. It used to be if you really floated a very thin amount of stock, they just wouldn't consider you at all. Now, at five percent float, they're going to pretend that your float is fifteen percent or three x, just because reasons.
And then over time, as the float increases, as shares come off lock up and more shares trade, that will ramp until thirty three percent of the fund the company has floated, at which point it receives full weight in the index. Because the Nasdaq one hundred, unlike most other indexes, is not free float adjusted. So normally, if they didn't do anything and they let SpaceX in, it would come
in at one point seventy five trillion. Instead, it's going to come up at fifteen percent of that when it finally launches, and then that will increase with every unlock The percentage that the funds need will go up, and so it creates this kind of ramp that as more shares come out, there's more guaranteed buying, which I gotta say feels like bad liquidity for the insiders.
Well, what motivates them to do this?
I mean, what harm would befall the index or the IPO or NASDAK generally if they waited the six months that they're supposed to wait for every other IPO.
I mean, basically none.
The only argument you can make is that by having SpaceX in the ETFs in the index itself, that people will be more attracted to that index, and therefore people will put more money in those funds, and ultimately that's what people really care about. They want money tracking those funds. From a performance perspective, it's not like every human being on the planet won't be able to buy these shares the day after at IPOs. They'll be If you want to go buy one hundred shares the day after the.
IPO, therebore the day of the IPO. You don't even have to wait till the KAY.
There'll be a price. Anybody will be able to buy it. So it's not like it is this rarefied thing that can only be bought through this index. It's going to be everywhere. It's going to be like applestock, It'll be
easily tradable all over the world. So all this is doing is guaranteeing the existing money that is tracking that index will have to sell a whole bunch of other things in order to buy this new slug of SpaceX, which will be something like seven ish billion dollars on that one day that they have to buy it all. So they're just going to be a big whale buyer in the market on one day. Guess which way the price will go? Honestly, who knows? Because who everybody knows this,
So it's gonna get front run. So do you buy it the day before this? Do you wait until after this? It's going to be one of those get the popcorn moments and markets?
Is this an attempt to get ownership of SpaceX in an index before the S and.
P five hundred.
Sure, it's a chance to build a pool of assets with a reasonable weight before the rest of the index world is piled on. Although we should point out SMP is now considering accelerating their rules too, to include a company like SpaceX after six months not nearly as egregious, And the SMP has a committee that could say no, and they always free float weight everything, so even if they did let it in early, it's only going to be in at five percent of its nominal real value.
So what could happen in the SMP is much less dramatic, thankfully, than what could happen in the queues.
So really this raises the question is this just a one off, one time technical distortion or is this going to be a recurring tax on index ownership for people who don't want to play the ipo game, don't want to play the stock picking game.
Well, historically, I should point out the academic research would suggest that getting IPOs into your index earlier is bad for the in the investor who's standing there before the transaction. So oddly, Vanguard's CRISP indexes from the Chicago Research Center for Pricing, those indexes have some of them are accelerated to five day intra induction after the IPO, and there's been a study around that and it says that's kind
of a bad idea. You're very likely to be buying the pop and then sort of sitting on a long, slow decline back to what becomes some market value market fair value, but the index tends to be the top tick.
I think it's very easy to create.
A scenario where you could see something like that in the cues as these IPOs get added. But again, given that everybody knows precisely when the trade's going to happen, which is market on clothes, fifteen days after the IPO, you're probably going to see the ramp up well before that because everybody's going to try to be the one selling into that index buying.
So how do you solve this problem. Is it simply a matter of adjusting this for the full float. Hey, you're only going to put five percent out right, that'll be reflected in in the waiting or do you just follow your existing rules in terms of how soon we add an IPO to the index after it goes public, so SpaceX has to wait the usual six months.
Well, you know, the question is the should here is for who? Right?
As an as an investor, as a lowly end investor. What this is doing is creating more differentiation between indexes than we have previously seen. Right, So we're going to look at the world as it is now, well, now the cues. The NASDAQ one hundred is for sure the hyper ipo get everything in fast, get everything in big.
As long as it's listed on NASDAK and it's not a financial company, you're going to get it in the cues, and so that's going to be the go go go S and p is Somewhere in the middle, they're they're sort of trying to acknowledge this reality of the broken IPO market and maybe do things a little sooner. I would say most investors can probably ignore most of that because they're adults in the room. And then institutions, I should point out, aren't playing with any of the stuff.
They all use MSCI indexes, right, and those have very static rule books that are very carefully adjudicated, and nobody's even talking about MSCI changing their rules about this stuff. So what this means is we're going to have much more differentiation between what passive means, and as an investor, that means you can no longer just say I'm index, I'm fine, You're gonna have to have an opinion.
Huh. Really really fascinating. I'm deeply concerned about the everybody knows massive buying cloth on clothes for SpaceX. What does this mean for price discovery? What does this mean in terms of distorting the true demand and supply relationship.
It's hugely distortive.
And the problem is that normally what you could say is something like, all right, we'll let this transaction get out of the way, and then things will calm down, and then everything will be and then we'll find out what prices really are like when natural buyers and sellers actually show up in the market and have to think about it. The problem is that implies there's some future
time when we can say things are now normalized. I would usually have said something like, ah, three to six months, things will settle down, because in markets three months is a long time, But I should point out six months after this IPO, we get two things happening at the same time. Traditionally, when a lot of stock unlocks, right, one hundred and eighty days is a very common unlock window.
And second, Nazac's gonna have to rebalance the index again, and if those things time perfectly, we're gonna end up with a bunch of shares unlocking, meaning the flight float might go from say five to fifteen percent. At the same time, NASAK will have to take theirre from fifteen percent to save forty five percent because they're gonna be three x whatever the float is on that read balance. So we're gonna have the exact same problem all over again as shares unlock and the index rebalances.
I assume the three x was just for the thin IPO float. If that goes to fifteen percent or twenty five percent, it's three x again.
That's until it until it.
Hits a third, at which point obviously you're at one hundred percent r right. So but that's that's the way it happens linearly. But as float unlocks, three times that amount gets added to the index until.
Okay, what's the motivation for that?
Because the as TEK one hundred has never been free float adjusted. Now, it hasn't usually mattered because nobody really cares that Nvidia's ninety five percent float and Apple is ninety two percent float, but the index has always just included them at.
One hundred percent.
Right, It's only it's only a problem when it's very very small. So what historically there's been as a floor. If only ten percent of your shares are floating, you don't get to play at all, that's what they're getting rid of to replace it.
With this sort of weird multiplier effect.
It seems like, you know, we're talking about an index. It seems like this isn't a passive decision, and it's coming from the folks at Nasdaq are making a very active bet. Hey, this Elon guy with Tesla was a giant win and SMP was late to the party adding them. Let's not make the same mistake with SpaceX. Is that the thinking.
Yeah, I think that's exactly what's going on. It will for sure be a marketing tool for the index, certainly if SpaceX tears out of the gate, which with all this.
Buying you know is more likely now.
It definitely puts some tailwind behind the price of the stock when you have these known buyers, that's going to just take some time to roll through. And look, I think it makes it a very active index.
It already was.
It has weird selections all through it, like non financials only on Nasdaq. It's a bizarre set of rules, and now it's got this weird timed trading thing that you just mentioned. I think this makes it very tough for anybody to think of this as a long term buy and hold investment where everything will just work out in the long run.
It's now making some very active trading bets.
All right, So I'm gonna make you the philosopher king of index inclusion rules. What does that look like in terms of waiting period, minimum flow, profitability, governance, and just do we have different rules from mega IPOs than regular IPOs.
I if I was running the universe, if it was Dave Noddig's index company, companies would have to trade for a year. They would have to have a year of trailing profitability, which is what the S and P currently has. They're talking about getting rid of that too. I would free flow adjust everything without question, all the way down to nothing. Like you can float one percent of your stock and you get a one percent presence Like, I think that's fine, And I would not count non voting shares.
At all period. Huh.
Fascinating fascinating stuff. So for investors interested in the SpaceX ipo, there are gonna be a lot of trading anomalies around this IPO. It seems like the structure is very much set up by Nasdak and others to goose the price higher. If you're a holder of cues. Well, maybe this has some impact around the edges. Some of it's going to offset, some of it could drive prices higher. But regardless, the IPO of SpaceX is going to impact your passive index.
I'm Barry Riddolts. You're listening to Bloomberg's at the Money, any ti