Speaker 1: Bloomberg Audio Studios, podcasts, radio news, and the Times.
Speaker 2: Gave change, and so Gat walks them as.
Speaker 3: Once upon a time, companies went public to raise money.
Speaker 3: You'd go on a roadshow to pitch your story and
Speaker 3: drum up interest. You'd float a big pile of stock,
Speaker 3: and then you're off to the races to go build
Speaker 3: your company. Turns out that's not really the case anymore.
Speaker 3: I'm Barry Retolts, and on today's episode of At the Money,
Speaker 3: we're going to talk about the upcoming I p o
Speaker 3: s for trillion dollar companies like SpaceX, Anthropic, and open Ai.
Speaker 3: To help us unpack all of this and what it
Speaker 3: means for your portfolio, let's bring in Dave Nadig. He
Speaker 3: is president and director of research at ETF dot com,
Speaker 3: and he shares with us how investors should be navigating
Speaker 3: not only these IPOs, but what they're going to mean
Speaker 3: for various indexes like the Nasdaq one hundred and the
Speaker 3: S and P five hundred. So, Dave, you wrote a
Speaker 3: fascinating piece and essentially you claimed SpaceX is breaking capitalism
Speaker 3: and indexing. What is exactly broken? Is it the IPO process,
Speaker 3: the index process, or both.
Speaker 4: I gotta say, I think it's both. Sadly, I think
Speaker 4: it's both. The IPO process, I think most people can
Speaker 4: understand steam's pretty broken.
Speaker 2: Right.
Speaker 4: We now live in a world where the private equity
Speaker 4: space is where most of the growth in capitalism is captured.
Speaker 2: Right.
Speaker 4: If I had a great idea, if Berry, if you
Speaker 4: and I were going to just launch a company tomorrow,
Speaker 4: go raise a bunch of money and do something, we
Speaker 4: wouldn't go to Wall Street. We would go to some
Speaker 4: private equity firm and we would say, hey, we've got
Speaker 4: this great idea, and they would say, awesome, give us
Speaker 4: seventy five percent of your company for a couple million bucks,
Speaker 4: and we'd be off to the races. And then when
Speaker 4: we need more money, we would go back to that
Speaker 4: same private equity person, who would probably connect us to
Speaker 4: their favorite private credit person who would then loan us
Speaker 4: another fifty million dollars for us to do the next
Speaker 4: stage of our business, and so on until we had
Speaker 4: accumulated so many shareholders, so many mouths to feed that
Speaker 4: if eventually we have to go public so that all
Speaker 4: those people can get paid. That is the reality of
Speaker 4: the modern IPO market, which works out pretty well for
Speaker 4: the private equity capital, but no longer really rewards the.
Speaker 1: Public as a public market the way it used to.
Speaker 3: So let's talk about that contrast between old IPOs that
Speaker 3: raised growth capital. You very much imply in your piece
Speaker 3: SpaceX is breaking capitalism and indexing, which, by the way,
Speaker 3: I stole that opening paragraph of you very much imply
Speaker 3: that modern IPOs essentially exist to provide insiders and early
Speaker 3: investors with liquidity. So first, when did this shift occur?
Speaker 3: And second is it an issue? Is it a structural problem?
Speaker 4: I think we can trace this back to pretty much
Speaker 4: every IPO since the Great Financial Crisis. I mean, I
Speaker 4: think any IPO in the last fifteen or twenty years
Speaker 4: has followed a pretty similar pattern. We've seen the steady
Speaker 4: growth of the size of IPOs. They're bigger and bigger
Speaker 4: and bigger companies. Now we're talking about trillion dollar IPOs.
Speaker 4: So when I went in the dotcom era, the average
Speaker 4: IPO was about one hundred and twenty million dollars. That
Speaker 4: was the value of the company post IPO, and the
Speaker 4: amount being floated averaged around thirty or forty percent. So
Speaker 4: big chunks of these companies went public, people could assess them,
Speaker 4: they traded for a significant period of time, sometimes profitable,
Speaker 4: sometimes not profitable, and then they would end up in
Speaker 4: the hands of the public in an indexes and that
Speaker 4: was a that was a lengthy process. It took, you know,
Speaker 4: a year or two of being a public company for
Speaker 4: people to get familiar with you.
Speaker 1: That's all.
Speaker 4: That's all gone now and so now what we have
Speaker 4: are these sort of headline making IPOs of big companies,
Speaker 4: whether they're you know, a Karna or a Reddit or
Speaker 4: now a SpaceX. And so everybody now feels like these
Speaker 4: are lottery tickets that you want to get in super
Speaker 4: early on the ipo, get some purported pop, which no
Speaker 4: longer really happens, and that that is your key to riches. Increasingly,
Speaker 4: what actually happens is the op deposite. Companies come public,
Speaker 4: they trade down initially, sometimes they ramp up. Tesla famously
Speaker 4: had a great first year after the initial selloff. So
Speaker 4: it's not that all IPOs go this way, but it
Speaker 4: is no.
Speaker 1: Longer like the dot com era.
Speaker 3: So you mentioned SpaceX. People have described this company as
Speaker 3: kind of unique, in part because it involves commercializing space,
Speaker 3: in part because Elon Musk still despite the past couple
Speaker 3: of years, has a cult following courtesy of his work
Speaker 3: at Tesla, and then also because it's just an immense valuation.
Speaker 3: What makes SpaceX unique.
Speaker 1: Or is it not unique?
Speaker 4: Well, I don't want this to be about whether SpaceX
Speaker 4: good or SpaceX bad. SpaceX is unique for a bunch
Speaker 4: of structural reasons. It is already a multi business conglomerate.
Speaker 4: It's pretty rare we see a multi business conglomerate come
Speaker 4: out as an IPO that tends to be what you
Speaker 4: do after UIPO and start accumulating new companies. So inside
Speaker 4: the SpaceX wrapper, we've got Twitter X, We've got Grock
Speaker 4: and Xai, which is increasingly now a data center story,
Speaker 4: I guess unless a development of AI story. We've got
Speaker 4: the providing commercial internet right nine million startlink subscribers. That's
Speaker 4: a very real business that makes real money. And then
Speaker 4: the near monop monopoly on at least United States Space
Speaker 4: Launch is virtually completely monopoly now for SpaceX. So whether
Speaker 4: that's a great business or not, that makes it a
Speaker 4: bit unique already out of the gate. But more unique
Speaker 4: is how it's coming to market. It's only floating five
Speaker 4: percent of its stock, so ninety five percent of this
Speaker 4: company will still be privately held after they float the IPO.
Speaker 4: And yet despite that very very thin float, it's getting
Speaker 4: accelerated entry into the NASTAQ one hundred and is being
Speaker 4: considered for accelerated entry into the S and P five hundred.
Speaker 4: So we're breaking all sorts of rules.
Speaker 3: So let's talk about the Nasdaq one hundred. If you've
Speaker 3: been an investor in the queues as they're known, uh,
Speaker 3: the Nasdaq one hundred index ETF, you have done tremendously
Speaker 3: well over the past fifteen years outperform the S and
Speaker 3: P outperformed just about every historical period, including the nineties,
Speaker 3: where the cues were just you know, a giant home
Speaker 3: run except for that little, you know, eighty three percent
Speaker 3: crash at the end. So, so, what what did Nasdaq
Speaker 3: do wrong in admitting SpaceX to the cues and what
Speaker 3: should they have done instead?
Speaker 4: Well, so what they did was over the spring they
Speaker 4: did what's called the consultation, which is they go to
Speaker 4: all the people who actually pay for the index. I mean,
Speaker 4: it's important to point out Nasdaq's in a business. They
Speaker 4: licensed the Nasdaq one hundred two folks like the investco
Speaker 4: to run the cues products that people know and so
Speaker 4: they went out to all the people who licensed that
Speaker 4: index and said, would you be okay if we did
Speaker 4: this thing? And everybody said yes, and so now we
Speaker 4: have new rules. What the new rules did was accelerate
Speaker 4: how quickly a company can get in if they're very large,
Speaker 4: to fifteen days. It used to be six months. And
Speaker 4: they've also changed how they think about the float. It
Speaker 4: used to be if you really floated a very thin
Speaker 4: amount of stock, they just wouldn't consider you at all. Now,
Speaker 4: at five percent float, they're going to pretend that your
Speaker 4: float is fifteen percent or three x, just because reasons.
Speaker 4: And then over time, as the float increases, as shares
Speaker 4: come off lock up and more shares trade, that will
Speaker 4: ramp until thirty three percent of the fund the company
Speaker 4: has floated, at which point it receives full weight in
Speaker 4: the index. Because the Nasdaq one hundred, unlike most other indexes,
Speaker 4: is not free float adjusted. So normally, if they didn't
Speaker 4: do anything and they let SpaceX in, it would come
Speaker 4: in at one point seventy five trillion. Instead, it's going
Speaker 4: to come up at fifteen percent of that when it
Speaker 4: finally launches, and then that will increase with every unlock
Speaker 4: The percentage that the funds need will go up, and
Speaker 4: so it creates this kind of ramp that as more
Speaker 4: shares come out, there's more guaranteed buying, which I gotta
Speaker 4: say feels like bad liquidity for the insiders.
Speaker 1: Well, what motivates them to do this?
Speaker 3: I mean, what harm would befall the index or the
Speaker 3: IPO or NASDAK generally if they waited the six months
Speaker 3: that they're supposed to wait for every other IPO.
Speaker 1: I mean, basically none.
Speaker 4: The only argument you can make is that by having
Speaker 4: SpaceX in the ETFs in the index itself, that people
Speaker 4: will be more attracted to that index, and therefore people
Speaker 4: will put more money in those funds, and ultimately that's
Speaker 4: what people really care about. They want money tracking those funds.
Speaker 4: From a performance perspective, it's not like every human being
Speaker 4: on the planet won't be able to buy these shares
Speaker 4: the day after at IPOs. They'll be If you want
Speaker 4: to go buy one hundred shares the day after the.
Speaker 3: IPO, therebore the day of the IPO. You don't even
Speaker 3: have to wait till the KAY.
Speaker 4: There'll be a price. Anybody will be able to buy it.
Speaker 4: So it's not like it is this rarefied thing that
Speaker 4: can only be bought through this index. It's going to
Speaker 4: be everywhere. It's going to be like applestock, It'll be
Speaker 4: easily tradable all over the world. So all this is
Speaker 4: doing is guaranteeing the existing money that is tracking that
Speaker 4: index will have to sell a whole bunch of other
Speaker 4: things in order to buy this new slug of SpaceX,
Speaker 4: which will be something like seven ish billion dollars on
Speaker 4: that one day that they have to buy it all.
Speaker 4: So they're just going to be a big whale buyer
Speaker 4: in the market on one day. Guess which way the
Speaker 4: price will go? Honestly, who knows? Because who everybody knows this,
Speaker 4: So it's gonna get front run. So do you buy
Speaker 4: it the day before this? Do you wait until after this?
Speaker 4: It's going to be one of those get the popcorn
Speaker 4: moments and markets?
Speaker 3: Is this an attempt to get ownership of SpaceX in
Speaker 3: an index before the S and.
Speaker 1: P five hundred.
Speaker 4: Sure, it's a chance to build a pool of assets
Speaker 4: with a reasonable weight before the rest of the index
Speaker 4: world is piled on. Although we should point out SMP
Speaker 4: is now considering accelerating their rules too, to include a
Speaker 4: company like SpaceX after six months not nearly as egregious,
Speaker 4: And the SMP has a committee that could say no,
Speaker 4: and they always free float weight everything, so even if
Speaker 4: they did let it in early, it's only going to
Speaker 4: be in at five percent of its nominal real value.
Speaker 4: So what could happen in the SMP is much less dramatic, thankfully,
Speaker 4: than what could happen in the queues.
Speaker 3: So really this raises the question is this just a
Speaker 3: one off, one time technical distortion or is this going
Speaker 3: to be a recurring tax on index ownership for people
Speaker 3: who don't want to play the ipo game, don't want
Speaker 3: to play the stock picking game.
Speaker 4: Well, historically, I should point out the academic research would
Speaker 4: suggest that getting IPOs into your index earlier is bad
Speaker 4: for the in the investor who's standing there before the transaction.
Speaker 4: So oddly, Vanguard's CRISP indexes from the Chicago Research Center
Speaker 4: for Pricing, those indexes have some of them are accelerated
Speaker 4: to five day intra induction after the IPO, and there's
Speaker 4: been a study around that and it says that's kind
Speaker 4: of a bad idea. You're very likely to be buying
Speaker 4: the pop and then sort of sitting on a long,
Speaker 4: slow decline back to what becomes some market value market
Speaker 4: fair value, but the index tends to be the top tick.
Speaker 1: I think it's very easy to create.
Speaker 4: A scenario where you could see something like that in
Speaker 4: the cues as these IPOs get added. But again, given
Speaker 4: that everybody knows precisely when the trade's going to happen,
Speaker 4: which is market on clothes, fifteen days after the IPO,
Speaker 4: you're probably going to see the ramp up well before
Speaker 4: that because everybody's going to try to be the one
Speaker 4: selling into that index buying.
Speaker 3: So how do you solve this problem. Is it simply
Speaker 3: a matter of adjusting this for the full float. Hey,
Speaker 3: you're only going to put five percent out right, that'll
Speaker 3: be reflected in in the waiting or do you just
Speaker 3: follow your existing rules in terms of how soon we
Speaker 3: add an IPO to the index after it goes public,
Speaker 3: so SpaceX has to wait the usual six months.
Speaker 1: Well, you know, the question is the should here is
Speaker 1: for who? Right?
Speaker 4: As an as an investor, as a lowly end investor.
Speaker 4: What this is doing is creating more differentiation between indexes
Speaker 4: than we have previously seen. Right, So we're going to
Speaker 4: look at the world as it is now, well, now
Speaker 4: the cues. The NASDAQ one hundred is for sure the
Speaker 4: hyper ipo get everything in fast, get everything in big.
Speaker 4: As long as it's listed on NASDAK and it's not
Speaker 4: a financial company, you're going to get it in the cues,
Speaker 4: and so that's going to be the go go go
Speaker 4: S and p is Somewhere in the middle, they're they're
Speaker 4: sort of trying to acknowledge this reality of the broken
Speaker 4: IPO market and maybe do things a little sooner. I
Speaker 4: would say most investors can probably ignore most of that
Speaker 4: because they're adults in the room. And then institutions, I
Speaker 4: should point out, aren't playing with any of the stuff.
Speaker 4: They all use MSCI indexes, right, and those have very
Speaker 4: static rule books that are very carefully adjudicated, and nobody's
Speaker 4: even talking about MSCI changing their rules about this stuff.
Speaker 4: So what this means is we're going to have much
Speaker 4: more differentiation between what passive means, and as an investor,
Speaker 4: that means you can no longer just say I'm index,
Speaker 4: I'm fine, You're gonna have to have an opinion.
Speaker 3: Huh. Really really fascinating. I'm deeply concerned about the everybody
Speaker 3: knows massive buying cloth on clothes for SpaceX. What does
Speaker 3: this mean for price discovery? What does this mean in
Speaker 3: terms of distorting the true demand and supply relationship.
Speaker 1: It's hugely distortive.
Speaker 4: And the problem is that normally what you could say
Speaker 4: is something like, all right, we'll let this transaction get
Speaker 4: out of the way, and then things will calm down,
Speaker 4: and then everything will be and then we'll find out
Speaker 4: what prices really are like when natural buyers and sellers
Speaker 4: actually show up in the market and have to think
Speaker 4: about it. The problem is that implies there's some future
Speaker 4: time when we can say things are now normalized. I
Speaker 4: would usually have said something like, ah, three to six months,
Speaker 4: things will settle down, because in markets three months is
Speaker 4: a long time, But I should point out six months
Speaker 4: after this IPO, we get two things happening at the
Speaker 4: same time. Traditionally, when a lot of stock unlocks, right,
Speaker 4: one hundred and eighty days is a very common unlock window.
Speaker 4: And second, Nazac's gonna have to rebalance the index again,
Speaker 4: and if those things time perfectly, we're gonna end up
Speaker 4: with a bunch of shares unlocking, meaning the flight float
Speaker 4: might go from say five to fifteen percent. At the
Speaker 4: same time, NASAK will have to take theirre from fifteen
Speaker 4: percent to save forty five percent because they're gonna be
Speaker 4: three x whatever the float is on that read balance.
Speaker 4: So we're gonna have the exact same problem all over
Speaker 4: again as shares unlock and the index rebalances.
Speaker 3: I assume the three x was just for the thin
Speaker 3: IPO float. If that goes to fifteen percent or twenty
Speaker 3: five percent, it's three x again.
Speaker 1: That's until it until it.
Speaker 4: Hits a third, at which point obviously you're at one
Speaker 4: hundred percent r right. So but that's that's the way
Speaker 4: it happens linearly. But as float unlocks, three times that
Speaker 4: amount gets added to the index until.
Speaker 3: Okay, what's the motivation for that?
Speaker 4: Because the as TEK one hundred has never been free
Speaker 4: float adjusted. Now, it hasn't usually mattered because nobody really
Speaker 4: cares that Nvidia's ninety five percent float and Apple is
Speaker 4: ninety two percent float, but the index has always just
Speaker 4: included them at.
Speaker 1: One hundred percent.
Speaker 4: Right, It's only it's only a problem when it's very
Speaker 4: very small. So what historically there's been as a floor.
Speaker 4: If only ten percent of your shares are floating, you
Speaker 4: don't get to play at all, that's what they're getting
Speaker 4: rid of to replace it.
Speaker 1: With this sort of weird multiplier effect.
Speaker 3: It seems like, you know, we're talking about an index.
Speaker 3: It seems like this isn't a passive decision, and it's
Speaker 3: coming from the folks at Nasdaq are making a very
Speaker 3: active bet. Hey, this Elon guy with Tesla was a
Speaker 3: giant win and SMP was late to the party adding them.
Speaker 3: Let's not make the same mistake with SpaceX. Is that
Speaker 3: the thinking.
Speaker 4: Yeah, I think that's exactly what's going on. It will
Speaker 4: for sure be a marketing tool for the index, certainly
Speaker 4: if SpaceX tears out of the gate, which with all this.
Speaker 1: Buying you know is more likely now.
Speaker 4: It definitely puts some tailwind behind the price of the
Speaker 4: stock when you have these known buyers, that's going to
Speaker 4: just take some time to roll through. And look, I
Speaker 4: think it makes it a very active index.
Speaker 1: It already was.
Speaker 4: It has weird selections all through it, like non financials
Speaker 4: only on Nasdaq. It's a bizarre set of rules, and
Speaker 4: now it's got this weird timed trading thing that you
Speaker 4: just mentioned. I think this makes it very tough for
Speaker 4: anybody to think of this as a long term buy
Speaker 4: and hold investment where everything will just work out in
Speaker 4: the long run.
Speaker 1: It's now making some very active trading bets.
Speaker 3: All right, So I'm gonna make you the philosopher king
Speaker 3: of index inclusion rules. What does that look like in
Speaker 3: terms of waiting period, minimum flow, profitability, governance, and just
Speaker 3: do we have different rules from mega IPOs than regular IPOs.
Speaker 4: I if I was running the universe, if it was
Speaker 4: Dave Noddig's index company, companies would have to trade for
Speaker 4: a year. They would have to have a year of
Speaker 4: trailing profitability, which is what the S and P currently has.
Speaker 4: They're talking about getting rid of that too. I would
Speaker 4: free flow adjust everything without question, all the way down
Speaker 4: to nothing. Like you can float one percent of your
Speaker 4: stock and you get a one percent presence Like, I
Speaker 4: think that's fine, And I would not count non voting shares.
Speaker 1: At all period. Huh.
Speaker 3: Fascinating fascinating stuff. So for investors interested in the SpaceX ipo,
Speaker 3: there are gonna be a lot of trading anomalies around
Speaker 3: this IPO. It seems like the structure is very much
Speaker 3: set up by Nasdak and others to goose the price higher.
Speaker 3: If you're a holder of cues. Well, maybe this has
Speaker 3: some impact around the edges. Some of it's going to offset,
Speaker 3: some of it could drive prices higher. But regardless, the
Speaker 3: IPO of SpaceX is going to impact your passive index.
Speaker 3: I'm Barry Riddolts. You're listening to Bloomberg's at the Money,
Speaker 3: any ti