Deep Dive
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Hi, I'm Kelly Cavaniaro, Managing Director, Head of North America Institutional Distribution. At Janus Henderson Investors, we believe working together is the way to work better. Like combining your portfolio plans and our in-depth strategy, your valued assets and our valuable insights, your mission and our vision. Working in harmony to seek the right investment opportunities. Janus Henderson Investors, investing in a brighter future together.
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Hello and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.
I'm Matt Levine, and I wrote the Money Stuff column for Bloomberg Opinion. And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television. Elon Musk. Elon Musk. When was the last time we talked about this man? More than a week ago, I think. I'm probably lying. It's been a minute. It's been a minute. Let's talk about him. We've talked about the Elon Musk premium before that's been built into the stock of Tesla.
I've asked the question. I mean, does Tesla still need Elon Musk? It sounds like the board was, according to the Wall Street Journal, was also asking that question. There's two very distinct questions, which are like,
does Tesla, the car company, benefit from having Elon Musk as CEO? And then there's the question of, like, does Tesla, the multi-hundred billion dollar stock, benefit from having Elon Musk as CEO? I think those questions have very different answers, right? Like, I think that if you were like, hey, here's this company that's selling cars, and its CEO is in the business of, like, making the people who buy its cars hate him, right?
And also not paying any attention to the company because he's doing 10 different other things. You might be like, hey, let's get a new CEO. But then if you look at the stock and you think about what would happen to the stock if Elon Musk wasn't the CEO, I think it would go down. Yeah. It's funny because if we were talking about a normal company with a very distracted CEO, of course you would expect that the board would be engaging firms to help look for a new CEO. Yeah.
Tesla, obviously, is not a normal company, and this is a special situation. Right. And I should say that Tesla has denied reports that it's looking for a new CEO, right? The Wall Street Journal reported that some members of the board had reached out to executive search forms. So you can sort of square that circle by saying, yeah, some board members are curious about the possibility of a new CEO, but there's not a formal process by the board to engage a search form, right? It's like somewhere in between. Yeah.
But, right, even though it's not a normal company, you would think that the board, when faced with this extremely distracted CEO, would look into a new CEO, even if they don't want a new CEO, just to be like, hey, buddy, could you spend a little more time with Tesla? Like, I think that...
It's very clear that the board would like him to spend more time with Tesla and the shareholders would like him to spend more time with Tesla and probably the customers and many voters in the United States would all like him to spend more time with Tesla. So as a way to put pressure on him to spend more time with Tesla, does this work? Maybe? I mean, we know that investors want him to spend more time with Tesla because after the earnings call in which he said, I'm going to spend more time with Tesla, significantly more time starting in May, the
the stock popped. So the reaction was clear. But I don't know. You think about the timing of this Wall Street Journal report when they were asking this question and potentially, you know, talking with firms about initiating a search. It seems like that happened before that earnings call where Elon Musk said that. Yeah. I mean, there's been conversations with him about spending more time with Tesla. Yeah. The other thing is like, this is not an all or nothing decision, right? The model is kind of Twitter where Elon Musk bought Twitter.
He installed himself as the CEO for a minute, and then eventually, after a flurry of activity, appointed Linda Yaccarino as the CEO.
Everyone kind of assumed that he was calling the shots at X, even though she was the CEO. But you unload some of the responsibilities onto the CEO who runs the thing day to day, and then you're the visionary gibbetzer. And I wrote this week, Tesla already has that model where Elon Musk's titles at Tesla, embarrassingly, are technically techno king and CEO. He's the techno king. Didn't realize that. Oh, yeah. Oh.
This happened a while ago. This happened in like 2021. And he was named the Techno King and the CFO was named the Master of Coin. Now it's coming back to me. I know. Everyone blocks it out because it's really embarrassing. But it's still, you know, you still look at the filings. It says Techno King. Wow. And so you could split those. That's.
That's true. He was once the chairman of the board as well as the CEO, as many powerful CEOs are. And then he had to stop being the chairman of the board because he got in trouble with the SEC. But he's now the techno king and CEO. So you can split those roles too and leave him as the techno king, make someone else the CEO. And I think in that split, the CEO runs the car company and the techno king is the guy who's like, we're going to
build humanoid robots. We're doing the AI stuff. Doing the AI stuff. Yeah. Another suggestion that I've seen in terms of how, you know, the structure could work at Tesla, I forget who exactly suggested this, but someone from the sell side suggested that maybe he could become chairman again and just be chairman. Yeah, but like in the traditional division of public company responsibilities, the chairman who is in charge of the board has a fiduciary responsibility and oversees management.
is not quite what he wants. And the CEO who runs the company as a full-time job is not quite what he wants. I think Techno King is a good description of what he wants to be, which is he wants to have absolute power, be focused on tech stuff, and not have the sort of full-time day-to-day responsibilities of either a CEO or a chairman. That's true.
I will say it kind of reminds me of MicroStrategy to an extent because Michael Saylor founded MicroStrategy. He was the CEO for a long, long time. He stepped down from being CEO and now I believe he's just chairman. Yes, that's a common thing. But I do think that MicroStrategy and Tesla are sort of at opposite ends of business complexity.
True. Like, MicroStrategy is in the business of buying Bitcoin and putting them in a pot. But hear me out. They actually have thousands of employees because that's not all they do. I understand. It's somewhat similar in that, okay, Tesla is a car company that also has this, like, AI stuff happening with it. MicroStrategy is nominally...
Yeah.
The thing that it is known for is being Elon Musk's company, and particularly the thing that drives its stock market valuation is not the current cash flows from cars, but the future projections of we're going to build humanoid robots and be the world's leading robotics and AI company and be pioneers in self-driving cars and all this stuff that Elon Musk promises. And the journal story about the board looking elsewhere also...
mentioned some texts that Musk sent to someone close to him.
Saying that he no longer wanted to be CEO of Tesla, but he was worried that no one could replace him atop the company and sell the vision that Tesla isn't just an automaker, but the future of robotics and automation as well. I think that's right, right? If you got a car person in to run it as a car company, it's much harder to sell that vision. The problem is not just that Elon Musk is a good salesman for that vision, and if you put someone else in charge, you wouldn't have that good salesmanship. There's also the problem that Elon Musk does a lot of stuff. And if someone else was running Tesla...
then when he wakes up in the morning and has an idea for robotics stuff,
he is more likely to do it somewhere else, right? He owns like six companies. He can always start more companies. If he wants to do the future of robotics somewhere else, he kind of just can. Believing him as the CEO of Tesla ties him a little bit more closely to Tesla and makes him more likely to do futuristic stuff within Tesla as opposed to at SpaceX or the Boring Company or in a new company. Or XAI. Or XAI. And if there was just like a coup, if the board was like, we're sick of you, you're fired,
We're getting a new CEO. That would be really bad for Tesla. You know, he has like a million things that he's doing. He'd do all of them elsewhere. He's sort of threatened to do it if he didn't get paid enough from Tesla. Like one aspect of this is like, you know, we've talked a lot about Delaware courts clawing back his compensation. Certainly have. Which is still kind of being litigated. And, you know, he sort of said, you know, if I had an extra $50 billion of Tesla stock, I'd be more motivated to do stuff within Tesla. Yeah.
But if he gets fired, less motivated. You coined a phrase for this. What was it? Was it like the Elon attention auction? Yeah, right. Like if you are an investor or a director at one of Elon's companies, the more of his attention you get, the more valuable the company is, right? And like you see that particularly with Tesla now where like they get less of his attention and the stock goes down a lot. And like partly because they want more of his attention and partly because when he directs his attention elsewhere, it's like bad for PR. Yeah. But, um,
How do you get that attention? The normal way is to give him stuff, like a big pay package. But some amount of threatening is also a possibility. I don't know that it's threatening exactly, but you gotta, as a board, have some amount of independence and maturity where you can say to the CEO, hey, it would be nice if you showed up to work. Maybe swipe your badge now and then.
Hi, I'm Kelly Cavaniaro, Managing Director, Head of North America Institutional Distribution. At Janus Henderson Investors, we believe working together is the way to work better. Like combining your portfolio plans and our in-depth strategy, your valued assets and our valuable insights, your mission and our vision. Working in harmony to seek the right investment opportunities. Janus Henderson Investors, investing in a brighter future together.
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Yeah, like a lot of people, probably including me, in like 2023 were like, this is like one of the worst leveraged buyouts ever. In like early 2023, you look at this and you're like, okay, like Elon Musk overpaid for a company. Twitter was not a traditional leveraged buyout company. It didn't have great cash flow. It wasn't like a, you know, money spinner. It was a, you know...
social media company that didn't make a lot of money. And so Elon Musk decided to buy it and they leveraged buyout and they got $13 billion over the debt, which is a lot of debt for Twitter. And then after he agreed to buy it, everyone agreed, including him, that he was overpaying for it. And he tried to get out of it by saying Twitter was a big fraud. And by the time the deal closed...
It looked like a very unpleasant deal to finance. And the banks that financed that couldn't sell or didn't sell the debt, presumably because there was not much market for it. And I don't think they ever marked it down formally, but the equity investors marked down their equity a lot. And there were news stories saying that the banks were getting offers at like 50 cents on the dollar. So it looks like they'd lost billions of dollars underwriting the Twitter deal.
And three years later, two years later, they've sold all the debt at like, you know, a round bar. The most recent sellout was like $0.98 on the dollar. They got paid big interest payments over that time period because there was expensive debt. So they've made an accounting profit on the deal, made an economic profit on the deal.
And they also like cozied up with Elon Musk and now probably get financing work for XAI, which is a giant company. I love it because if you just held onto this debt and kind of ignored it for three years, you made out fine, but it came with a lot of emotional turmoil. It's something I think about a lot, right? Like,
The pitch for private markets is you don't have so much emotional turmoil, right? And the individuals who underwrote the ex-debt, they did a great decision for their banks. They made a lot of money. But some of them got fired in the interim because it looked like a terrible decision. And the journal story about them selling the last slug of the ex-debt says –
The legacy of the hung debt might have longer-term implications. X and other hung loans prompted pay cuts and an exodus of bankers. They also forced some banks to pull back on lending, which gave room for competitors in the booming private credit space to muscle in. So it's like, did Elon Musk invent private credit? Not really, but like, you know. Kind of feels like perhaps he did. Will the story of private credit be like, yeah, and then Elon Musk hung a debt deal and so everyone had to, you know, all the banks had to stop lending and so private credit got to get into the game. Because it's true, like there was a big
uptick in private credit because banks did pull back because there's a string of hung loans. Yeah. And this was the big one. I had kind of traced a lot of the boom that we saw in private credit to the collapse of Silicon Valley Bank, but maybe the whole time it was just ex-debt, you know? In the LBO space, like the banks that did LBO lending, you have a small balance sheet for LBO lending and you have to turn it over a lot by selling all your loans. And if you stick...
$13 billion of loans on your LBO balance sheet, you can't do any more loans. And so, you know, you have to let private credit do it all. So you wrote that perhaps Elon Musk created private credit and perhaps he did. But when I read that, my initial thought was to think about the psyche, you know, what we're talking about, the private markets, investing in private markets. It's supposed to take out the emotional turmoil.
Because I was thinking about the past month in the equity markets and the S&P 500 in April actually amazingly was only down about seven, eight tenths of a percent, which is nothing. That's like the smallest move on a monthly basis that we've seen in a long time. But that came with so much hand wringing. It came with so much volatility that you could watch second to second that you ask someone how they felt at the end of April, they would probably say that was crazy.
But that mentality of, you know, if you just close your eyes for three years, you made out great on this X debt. You didn't have to think about it. But obviously, it wasn't actually private credit. So those banks probably thought about it a lot. One selling point of private assets is that they have lower volatility. And if you think about that for a second, it can't really be true. But what is true is that you don't mark them to market as frequently. And so you can't know how volatile they are on like a sort of like –
theoretical value. It's magic. And so it is true that because you don't market them to marketers frequently, you don't have to be as emotionally upset about them. And so a friend of the pod, Cliff Asness, has written about this, that there is an actual value from having private assets. Because if you're a human who might be prone to panic and sell when things are low, or if you're an institutional allocator who has some
rule where, you know, if you have a big drawdown, you have to sell or something like that. You know, some of the institutional structures of investing can, like, replicate irrational panic. A reader emailed me about this, like, um,
To the extent that the public markets are dominated by multi-strategy hedge funds, who's like one of their salient features is that if you have a 10% drawdown, you're fired. That creates potential bad incentives where you have months like this where you have a 5% drawdown every other day, but on net, nothing happens. You could have selling at the worst times because you are...
exposed to volatility that you can see. Whereas if you own assets that you can't see the volatility of, you can just be like, ah, that's great. And if the volatility is mostly washed out, then that works out better for you in the long run. I wonder how you quantify human emotion, though. Intuitively, one way you quantify it is that you think, well, in the long run, private assets and public assets should have the same returns, arguably. And if 90%,
90% of the volatility in public markets washes out, then that was all emotional volatility rather than real volatility. That's true. That's really not quite right, but yeah, this is the first cut. You could design a factor around that and then somehow launch an ETF. Let's see. There's also a Bloomberg report that XAI is in talks to raise $20 billion of equity, which would be the second biggest
startup fundraise ever. Second only to OpenAI. Yeah.
And one of the uses of proceeds might be to pay down the debt. It's a little unclear how much money Twitter is making. I mean, X, like the X portion of XAI, the social media company. But it's not a great business still. And AI businesses are still pretty speculative, hugely capital-intensive businesses. So you don't really want to spend a billion dollars a year on debt service if you're a company like that. And so it looks like they can get rid of the debt by raising $20 billion of equity. Now,
Not only did this debt all get sold, but also it might get paid back at par early. I think that the message is that it's fairly expensive to raise debt for a social media company and incredibly cheap to raise equity for an AI company. You can raise billions of dollars of equity at $100 billion valuations if you're a cool AI company. And so they're correcting the capital structure.
Thank you.
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Speaking of the appeal of private markets... Go on.
Capital Group and KKR. Well, everyone. I mean, right. So there's a story this week about Capital Group and KKR teaming up to launch mixed public-private debt funds, which is like a fund that's like 60% public bonds and loans and 40% direct lending and other private credit stuff. So it's a public-private credit fund. And, you know, Capital is a big mutual fund manager that I believe sells through financial advisors. And so like...
If you have a financial advisor, they might be like, "Oh, you should put your money in this capital mutual fund." Now the financial advisor can say, "Oh, you should put your money in this capital/KKR public private fund."
Yeah, that's like the wave of the near future, I think. Bloomberg reported yesterday that State Street and Carlisle are in similar talks. Which is interesting because State Street, you know, has this partnership with Apollo as well. Yeah, but like the private managers are kind of, they're providing paper. And then like these big asset managers are like, yeah, we'll sell lots of that paper, I think. I agree that it's a little weird because there are like partnerships rather than like pure issuers. But yeah, Capital and KKR.
State Street and everybody. That's just this week. You also had Blackstone, Vanguard, and Wellington team up in some JV to launch these sort of products. And the other thing that there is is Morgan Stanley this week and Goldman a couple weeks ago launched private wealth thingies. It's like their own alts businesses, their own private credit businesses or private equity businesses. I'm going to sell some paper to like their, not like
pure retail, but like they're, you know, high net worth retail-ish private wealth clients. And so there's a lot of emphasis everywhere in private credit and private equity managers to sell to individuals, right? Because like historically, this has been a business where they raise money from institutional allocators and now they're like so big that they need to tap trillions of dollars of individual wealth. And so there's just a lot of talk about like
putting private credit and private equity into 401ks and like target date funds and ETFs and retail financial advisors. And so this is like the big push. So-
When you and I were discussing what to talk about today, I called this sort of like the evergreen story because we're talking about Capital Group and KKR, this tie up. But it just feels like we're going to see more of these. And you talk about that push because they want to open up and raise trillions of dollars from retail investors. I mean, it just seems that this is like the inevitable march forward. We could talk about this story every single week. I think we will. And it's interesting, you know, you say like march forward, like
My cynical take on this is that people solve the problem of investing. It's a dispiriting solution, but it's like you buy all the companies and BlackRock or Vanguard will do that for you because it's a useful service for them to provide and they will charge you three basis points. You buy all the companies and then you own the market and no one's going to beat the market for you and
getting the market return with low fees is the right way to do it. And there's lots of reasons to object to that, but that's kind of as a first cut, like the solution. And a lot of people believe that for plausible reasons. And so a lot of people put their money in index ETFs. And if you are Wellington or Capital, and you're in the business of long-only public equity management, you've had a good...
50 or 100 year run. But like that business is really hard right now. It's really hard to sell an actively managed mutual fund through financial advisors because people are like, yeah, just self-directed, you know, account and buy S&P 500 ETF, right? And pay three basis points instead of... Several dozens. You know, it used to be like 2% for a mutual fund, but like those days are long gone. And so how do you address that?
The universal answer is private markets. Yeah. And like, what does that mean? What it means is like, you see like kind of medium-sized companies, youngish, medium-sized companies would go public. And now like companies stay private longer and grow bigger in private markets. And, uh,
And, like, why is that? Like, there are a lot of good reasons for it, right? There's a lot of capital in private markets. It's much less convenient. It's much more convenient to be private than to, like, have to deal with earnings calls and SEC report and shareholder lawsuits and all the… Boring stuff. I mean, like, short sale. There's a lot of stuff that companies don't like about being public. But I also do think that, like, if you're, like, you know, if you're, like, a big private company and you go talk to, like, investors or…
banks. And you're like, hey, should I go public? They'll be like, no, stay private. I'm like, why? The financial intermediaries make so much more money in private markets than public markets. In some ways, it feels like a step backward in progress, right? In some ways, it feels like what's happening here is that public markets are so cheap and efficient, for some definition of efficient, that it is kind of no fun to be an investor in the public markets. And so all these investment firms are like, how do we
get more stuff that isn't just like ruthlessly indexed and charges three basis points. And like the answer is like more private stuff. Yeah. I'm trying to decide what is the chicken and what is the egg because like there's two things happening. I mean, it's all self-reinforcing. It's not just one thing started. But yeah. What do you call when the snake is eating itself? Ouroboros. Ouroboros.
Ouroboros? Ouroboros? Ouroboros, yeah, that sounds good. Well, what I'm trying to say is you have, you know, the capital groups in the Wellingtons of the world, they want to tap into, reach
Right.
Oh, yeah, absolutely. And also, the other thing is there is retail demand for this. It's not just the issuers like it and the intermediaries. The retail customers are like, yeah, I get to own cool private companies, right? There is this perception based in fact that the...
the highest growing companies are in the private markets. MELANIE WARRICK: Stripe, SpaceX. MARK BLYTH: Yeah, and then also on the credit side. Because a company, what you're getting in private credit is a certain amount of flexibility and structuring and a certain amount of certainty. And you're paying for that with higher interest rates. And so if you're a retail client, and you're like, I could have a bond fund, or I can have a private credit fund that pays an extra 150 basis points, why not do the private credit? So there's some reality to the idea that private markets have higher returns, and so you should invest in private markets.
God, I had something to say and it just fluttered away. It went private. Yeah. I can't access it. Did I tell you that at Disney World I saw a snake? We haven't talked at all about your trip to Disney World. Yeah. How was it? Oh, I remembered what I wanted to say. Should I say it? Yeah. A mailbag question we got about adverse selection. Yeah. This was in relation to private credit ETFs. But, you know, the cynical suspicion that the private manager was just going to dump all their not so great stuff into these retail funds. Yeah. Yeah.
There's always some hierarchy of if you are a private investment manager running a bunch of different things, you'll have a natural inclination to allocate the very best things to your personal account and the next best things to the accounts of the important clients who pay you the highest fees and the worst things to the retail clients who pay you 80 basis points. But there are a lot of things to counteract that tendency, like regulation and the
the conflicts committees of these firms and like, you know, a lot of this stuff is like sort of vertical slices of everything. So it's like, I wouldn't, you can't really have this business where like you take the best loans and you put them in your private credit fund and you take the worst loans and you stuff them into the public private fund for retail. And also the partnerships guard against that a little bit where like,
The straight streets and capitals of the world have incentives to negotiate to get the good loans rather than just the bad loans. Yeah. They're doing due diligence and the like. But I don't know. I mean, if you're like a private credit manager, like your job is to like make good loans and then like you fund them with like a sort of undifferentiated pool of like the money that you get from, you know, wherever you get it from. Cool.
So maybe we shouldn't worry. It's not highest on my list of worries. Are we going to like talk about an SEC enforcement action against someone who like, you know, adversely selected their retail fund? Maybe one day. Six to 12 months, perhaps. Sort of. We're not going to be talking about it. Not in six to 12. Three and a half years. Three and a half years, you know, when we're on episode whatever. Yeah, we're sorry. We're not going to be talking about it. Sorry.
And that was the Money Stuff Podcast. I'm Matt Levine. And I'm Katie Greifeld. You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com. And you can find me on Bloomberg TV every day on open interest between 9 to 11 a.m. Eastern. We'd love to hear from you. You can send an email to moneypod at Bloomberg.net. Ask us a question and we might answer it on air. You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show. Thank you.
The Money Stuff Podcast is produced by Anna Masarakis and Moses Andam. Our theme music was composed by Blake Maples. Brendan Francis-Newden is our executive producer. And Sage Bauman is Bloomberg's head of podcasts. Special thanks this week to Dash Bennett. Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.
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