As startups, they were financed by federal grants and bailed out with federal loans. As fledgling private companies, they soaked up state and local tax credits and cash subsidies to become dominant market actors. After capturing huge swaths of the market, pumping money into elections, and lobbying concessions out of lawmakers and agencies, they reinvented themselves as the federal government’s contractors of choice. Now, as the Prospect has been reporting the past month, Elon Musk’s $2 trillion bundle of tech companies has been backstopped again by the taxpayer, this time on the shoulders of millions of passive investors and pensioners with no choice other than to own a piece of SpaceX.
The company’s initial public offering (IPO), which is now the biggest in history, has managed to spook almost everyone orbiting around it. Sen. Elizabeth Warren (D-MA) has warned it “may threaten the integrity and stability of our capital markets” and cements the “most rigged corporate structure in history.”
The Council of Institutional Investors (CII), a trade group representing dozens of retirement funds, endowments, and money managers, seems to agree with that assessment. The group has balked at SpaceX’s two-class shareholder voting structure, which leaves Musk in total control of corporate board appointments, and at the offering’s fairly overt suggestion that the board expects huge conflicts of interest to arise in the future, which it doesn’t intend to police. CII also has highlighted a provision requiring shareholders to take practically all disputes to a single, newly created specialty court in Texas, where Musk can expect a huge home-field advantage. Texas Gov. Greg Abbott (R), a key Musk ally, handpicks its judges, who, subject to approval by the state legislature, serve two-year terms and can be reappointed in perpetuity.
Taken together, the structure of the offering may pave the way soon enough for a merger of SpaceX and Tesla, which at least one Musk acolyte is saying could birth the first $100 trillion company. (Combined today, the new entity’s market cap would miss that mark by about $96 trillion, though it would still approach Nvidia, Apple, and Google parent Alphabet as the highest-valued company in the world.)
The Nasdaq rule changes may usher in a brave new world for passive investors and pensioners, who now find themselves exposed to a huge amount of risk at the center of the economy.
SpaceX’s $2 trillion blockbuster offering won’t be the last of the fast-tracked mega-IPOs propped up by institutional investors. The tech-heavy Nasdaq stock exchange, which, besides its newly formed Texas offshoot, is the only exchange where SpaceX is listed, bent its own rules out of shape to allow any company valued at $200 billion or higher to join in a matter of weeks instead of months, and to artificially inflate the volume of its publicly traded stocks, boosting its footprint in index funds. The day after those rule changes passed, SpaceX submitted its first paperwork to the Securities and Exchange Commission to go public. Bay Area behemoths OpenAI and Anthropic, both eyeing IPOs later this year, may be next to join the Nasdaq at greater than $1 trillion valuations, drawing on index funds as captive shareholders yet again.
The Nasdaq rule changes may usher in a brave new world for passive investors and pensioners, who, tied up in index funds once thought to be the most responsible way to play the market, now find themselves exposed to a huge amount of risk at the center of the economy. In the grander scheme, the bet may never have been so safe, argues Australian National University sociologist Melinda Cooper in a new paper.
COOPER, WHO’S BEST KNOWN FOR HER WORK on the history of capitalism in the second half of the 20th century, traces the story back to the late 1970s and early ’80s, when Congress passed the Employee Retirement Income Security Act (ERISA) and amended a New Deal–era securities law to allow capital to flow from institutional investors to private money managers.
Public pension funds soon forged alliances with private investment firms and began collaborating on leveraged buyouts. For players in the field, it became basically impossible, Cooper writes, not to “acknowledge the arrival of institutional investors as a game changer.” To illustrate the point, she looks at private equity firm Kohlberg Kravis Roberts (KKR), which now holds over $750 billion in assets but was just a boutique back in the 1970s.
In 1978, KKR had raised less than $50 million in capital, which it used to complete an infamous $380 million debt-financed buyout of auto parts manufacturer Houdaille Industries, eventually leading to that company’s implosion. KKR made a killing off the deal, though, recording a 33 percent annual return until the recession of the early ’80s led the group to scrap and sell the industrial parts seller for parts. After that, it was off to the races, and pension funds provided enormous amounts of capital to scale the business model, which went something like this: use the raised capital as collateral for loans, leverage the loans to buy companies, take them private, load them up with more debt and strip them down for quick-and-dirty profits. In 1982, partnering with state pension funds in Michigan, Oregon, and Washington, KKR was able to raise over $350 million in capital, which produced close to a 40 percent return.
Private investment firms like hedge funds really took off after the National Securities Markets Improvement Act of 1996, signed by Bill Clinton, which removed the limit on how many clients hedge funds could take money from, and made institutional investors with over $25 million in assets, like pension funds, “qualified purchasers.” After the law passed, hedge fund assets increased tenfold to $1.2 trillion within seven years.
Pension funds and private investment firms developed a kind of symbiosis with one another. But according to Cooper, it’s always been a “conflicted symbiosis … Although they need each other to achieve their aims at scale, their business models and economic objectives remain distinct.”
Since the New Deal, federal law has imposed different regulatory regimes on private money managers, who answer to a self-selected group of investors and partners, and institutional investors, who represent millions of public workers and small savers. That distinction over time has created a partisan divide between venture capitalists, hedge fund managers, private equity firms, and real estate investment trusts on the one hand, and asset management firms like mutual and index funds on the other, Cooper argues. The former group assails regulations and taxes, while the latter depends on them.
The partisan split has typically been boiled down to Blackstone backing Republicans and BlackRock backing Democrats. Blackstone CEO Stephen Schwarzman has been one of the biggest individual donors to the GOP in recent years. The special relationship between BlackRock and Democrats has been more pronounced. “Many plausibly describe the firm as a fourth branch of government when Democrats are in power,” writes Cooper. “A whole generation” of advisers in both the Obama and Biden White Houses either came from BlackRock or went to the firm after their stints in government, as the Prospect has covered.
(There are occasional exceptions: Before he tapped Kevin Warsh to be chair of the Federal Reserve, President Trump was contemplating giving the job to Rick Rieder, one of BlackRock’s chief investment officers, even as right-wing groups and lawmakers have derided the asset manager as “woke” for the last five years; meanwhile, Jonathan Gray, Blackstone’s president, bundled a few hundred thousand dollars for Kamala Harris’s 2024 presidential campaign.)
But partisanship has not stopped a “growing porosity of boundaries between these two factions of financial capital,” Cooper told the Prospect. They may often vote differently, staff different administrations, and have different policy priorities, but they remain tied at the hip on the ledger. BlackRock formed when it split with Blackstone and still holds a massive stake in the private equity firm, as do state pension funds.
The SpaceX IPO has made the contradictions lurking amid these blurry boundaries all the more apparent, as public-sector workers are poised to subsidize the architect of the most aggressive campaign against the civil service in recent memory, maybe ever, with little say in the matter.
“Someone like Musk and the Big Tech founders, it seems to me what they’re doing is creating these massive infrastructural monopolies, whether it’s over AI data centers, satellites, things that should be kind of natural government monopolies,” says Cooper. “And they’ve done it in a way where although you have this mass of institutionally invested money leveraging these infrastructural monopolies, the distribution of profits is completely asymmetric, so that you have these founders or small groups, groups of general partners who are laying claim to the vast amount of capital gains.”
Citing that asymmetry of risk and reward, state pension fund leaders in Oregon, California, and New York have rallied against the Nasdaq rule changes that helped greenlight the IPO, to no avail.
Most efforts to get large pension funds to divest from alternative equity investments like private equity or hedge funds have failed. But Cooper says the moment may be ripe for rethinking the relationship writ large. “Instead of investing or detouring this money through the private markets, maybe public pensions should be performing their own investments, but also performing investments in public goods that have no appreciable asset value, that is simply there to be consumed, as, say, free public housing or free health care,” she told the Prospect.
There are signs of change. Earlier this year, New York City’s pension fund announced it would begin a program along those lines, setting aside $4 billion for targeted investments in affordable housing over the next four years.