Musk Plan to Take Tesla Private Poses Pitfalls for Investors

(Bloomberg) -- Elon Musk’s gambit to take Tesla Inc. private could present a quandary for some shareholders.

Musk, Tesla’s chief executive officer, floated the idea of going private at a price of $420 per share Tuesday on Twitter. The tweet, which does not represent a final decision, touched off a firestorm of speculation and sent shares of the electric-car maker to their highest price this year.

The possibility also leaves Tesla investors -- both big mutual funds and retail holders alike -- with a thicket of questions, risk and perhaps a big decision: They can sell now at a low premium or hang on and bet that in the long run a private Tesla will pay out even more.

“I’m not convinced that going private is the right move, but I would hold through that," retail investor Galileo Russell, founder of HyperChange, a financial talk show geared toward millennials, said in a Bloomberg Television interview. “I think going private is a step back in terms of transparency and liquidity.”

Musk, who wants relief from short-sellers and quarter-to-quarter pressures, said in a letter following the tweet that he would like to give shareholders a choice to either remain investors in a private Tesla or get bought out. But for retail investors, little precedent exists for converting public shares to private ones. Mutual fund operators might need to wrestle with limits on how much they can allocate to more illiquid holdings.

A Tesla spokesman declined to comment.

Retail Investors

Some of Musk’s big believers are mom-and-pop investors attracted to the entrepreneur’s vision and penchant for tackling moonshot projects. If Musk takes the company private, there’s reason for those investors to proceed with caution.

Musk could carefully engineer a way for existing retail investors to voluntarily keep their shares in a private vehicle, but they would lose some transparency on their value, said Erik Gordon, professor at the University of Michigan’s Ross School of Business.

“They are going to be buckled in for a long-term ride, blind-folded," Gordon said in an interview Wednesday. “They’ll be in a very fast car, going down a bumpy road, now blind-folded.”

Sean Cummings, an independent investor, said he bought Tesla shares in 2015 and has a $50,000 stake. He won’t sell his shares at $420 and will hang on even if Musk takes the company private.

“My faith in Musk can’t be overstated,” said Cummings, a former certified financial planner.

Even so, he said, removing the opportunities to trade Tesla shares freely on public exchanges could be an issue for smaller and short-term investors. They would also find it harder without the financial disclosures and updates that come with being public.

“For people who aren’t professional investors, it kind of turns the light out on them,” Cummings said. “They’ll essentially be operating on faith.”

A private vehicle could pose hurdles for some small investors too. Musk could continue to issue shares of a privately held Tesla to employees relatively easily. The private structure might keep out new mom-and-pop investors because private shares fall under securities law exemptions that most often require buyers to be an accredited investor -- with a high net worth and sophistication.

For some bullish Tesla shareholders, tendering their shares would leave too much money on the table. Ross Gerber, CEO of Gerber Kawasaki Inc., said his firm holds about $15 million in Tesla stock on behalf of his retail customers. He said he would only tender his shares if he had no alternative. Gerber said Musk’s suggested price if $420 a share is way too low and thinks the stock is worth $571 a share.

"No one bought Tesla to sell at $420," Gerber said in a interview. "They bought it because, over 10 years, it could be worth 10 times that. It could be the next Amazon or Google."

Moreover, because a CEO-led buyout could come with potential conflicts of interest, an independent board would have to ensure that the procedure is executed fairly, David Rubenstein, co-founder of the Carlyle Group Inc., said in a Bloomberg Radio interview Wednesday.

“If the CEO is going to lead it, the board would have to make certain everything is done fairly so it’s not just to the advantage of the CEO,” said Rubenstein, who has extensive experience with taking companies private and public.

Mutual Funds

Investment advisers account for 64 percent of ownership of Tesla shares, according to data collected by Bloomberg. Beyond Musk’s own personal 20 percent stake in the company, big holders include T. Rowe Price Group Inc. and FMR LLC, the parent of Fidelity Investments.

Regulatory limits dictate that mutual funds cannot have more than 15 percent of assets held in illiquid investments. But private securities may be treated as liquid.

Funds can enforce their own caps as well. For instance, Fidelity mutual funds can hold up to 10 percent of their assets in illiquid securities, according to spokesman Charles Keller. In practice most of its large funds hold only about 1 to 3 percent in such holdings.

Fidelity mutual funds have invested in Musk’s Space Exploration Technologies Corp., which isn’t publicly traded, through a series of private placements beginning in January 2015, according to filings. The Fidelity Growth Company Fund, for example, disclosed that it held about $107 million of SpaceX as of May 31. Fidelity also owns stakes in Uber Technologies Inc., Lyft Inc. and Airbnb Inc.

Russel Kinnel, director of manager research at Morningstar Inc., said that a number of mutual funds own shares in private companies on the assumption that those companies will eventually go public. But with Tesla the situation is murkier.

“With Tesla you would be going the other way, from public to private. That could be a tricky proposition,” he said. He speculated that most funds would opt to sell their shares or perhaps keep just a small stake in Tesla to stay informed about the company.

--With assistance from John Tucker, Dana Hull, Sarah Gardner, Julie Hyman and Scarlet Fu.

To contact the reporters on this story: Annie Massa in New York at amassa12@bloomberg.net;David Welch in Southfield at dwelch12@bloomberg.net;Charles Stein in Boston at cstein4@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Vincent Bielski

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