Psupportive investors concerned about the trend for companies to do this grow into giants outside the public markets, a new problem could soon arise with these megacaps.
Companies like SpaceX, Stripe, OpenAI, and many more have created hundreds of billions of dollars—perhaps more than $1 trillion in SpaceX’s case—in shareholder value without deigning to raise money the old-fashioned way through an IPO and the public markets.
Employees have become millionaires and some venture capital funds have made fortunes. But the average investor has missed out on such wealth creation over the past decade.
Online platforms and software companies discovered that in the age of cloud computing, they needed little upfront capital to support their growth. Very different from the past, when growing companies had to build factories or dig mines.
But even the companies that had to spend big – like SpaceX and OpenAI – have been able to tap huge amounts of private money. This way they could continue to expand without the burden of public scrutiny or a volatile stock price.
Good for them, although I’ve thought before about the threat this poses to public stock markets as the engine for the democratic wealth creation we’ve enjoyed for a hundred years.
Whale sharks
Some of today’s largest and best-known AI-related startups are expected to finally go public in the US this year. thanks to the voracious capital requirements of AI infrastructure rollout.
But if you’re a passive investor in the S&P 500, you might wish this weren’t the case.
As venture capitalist Tomasz Tunguz points out, these companies grew so big before going public that it’s not clear how the market will find the money to take a stake:
Tunguz notes:
At standard float rates, these three companies would need to raise $432 billion to $576 billion in a single quarter from the public markets.
From 2016 to 2025, the entire U.S. IPO market raised $469 billion.
It’s like throwing a boulder into a pond. Standard floats are impossible, so these companies will debut with small floats, probably 3-8%.
It is a theme that will be discussed during the Financial timeswhere Craig Coben highlights how Nasdaq is proposing to adjust its listing rules to welcome these behemoths.
Broken houses
The problem is, as Joseph Stalin noted, “Quantity has a quality all its own.”
These companies are so ridiculously large that certain uncomfortable realities of the stock market listing process – such as being ahead of index funds that are required to buy the shares – become almost existential threats at this scale.
You’ll have to read Coben’s full piece for the details, but here’s his sobering conclusion:
In short, [Nasdaq’s] The proposed changes will allow founders and management to float fewer shares, maintain tighter control, and still benefit from the valuation population through rapid benchmark inclusion.
In the meantime, [index fund] holders are faced with the other side of the trade – forced to buy into a low free float after the market has already favored them.
Nasdaq may describe the consultation as modernization, but in practice it appears to be the blueprint for a new kind of market conquest.
I don’t feel like I’m qualified to judge what exactly will happen if a $1 trillion company wants to become the sixth largest company in the public markets overnight.
But I know the process wasn’t meant to work this way.
Supermassive
Some people are also concerned that all the potential value has already been created by these companies because they went public so late. Therefore, public market investors buying into it now are doing the same thing as securing it shares on Lastminute.com on the eve of the Dotcom crash.
That is clearly tautologically true. If SpaceX had been at, say, $1 billion 20 years ago, US small-cap index returns would have been in much better shape over the past few decades.
But it’s also true that the largest companies in the US will likely be larger than $10 trillion by 2040. There may still be room for even more multi-bagging.
Especially if, you know, AI ends up taking over all the work of every other company on the market…
Have a nice weekend.
From Monevator
The ISA allowance: how it works and how to use it – Monevator
Active investors are committed investors – Monevator
From the archiver: Debating FIRE – Monevator
News
When is the Spring Declaration and what might it contain? – BBC
Vanguard Plots Rollout of Size Factor ETFs in Europe – ETF flow
House tax starts to push UK house prices below key threshold – Hamptons
The New Scam That Turns Victims Into Insurance Frauds – Guardian
Jack Dorsey’s Block to Cut Thousands of Jobs as It Embraces AI – BBC
Burnley declared Britain’s real estate hotspot This is money
Increased asset prices increase economic risks, says Jamie Dimon – CNBC
How Korea’s President Revived His Stock Market – Bloomberg viaMSN
The Mag 7 trades at a price-to-earnings ratio against consumer staples – Chart Kid Matt
Products and services
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Melton BS launches a 0% deposit mortgage for first time buyers – TIM
Cancel Sky and Virgin TV and save hundreds – Be smart with your money
Get up to £1,500 cashback when you transfer your money and/or investments to Charles Stanley Direct via this affiliate link. Terms and conditions apply – Charles Stanley
Premium Bond price reduced to 3.3% – Be smart with your money
Explained: Why the student loan row is escalating and what it means – Guardian
UK investors will not be able to put crypto products into ISAs from April [Paywall] – FT
Get up to £3,000 cashback when you open or switch an Interactive Investor SIPP. Terms and fees apply, affiliate link – Interactive Investor
Lloyds Bank offers up to £2,300 in switching incentives – This is money
Houses a short walk from the sea, in photos – Guardian
Create a Tax Digital mini-special
Making Tax Digital for landlords and sole proprietorships [Podcast] – Real estate podcast
Which Making Tax Digital Software Should You Use? – Which one
Commentary and opinion
Everyday wine will soon taste like water – Life after the daily grind
Personal Finances Are Broken – The evidence-based investor
Stepping outside the cave – Meaningful money
Optimism as an investment strategy – A wealth of common sense
Is self-insurance ever a good idea? – Which one
It can be easier to fall into fraud on mobile than on desktop – Ignorant investor
No one trusts anyone anymore – Your brain about money
The Best Strategies for Consistent Retirement Spending – Morning star
Should gilts be free from inheritance tax? – This is money
FIRE will be back soon, thanks to AI disruption – Financial Samurai
Why static portfolios fail as risk regimes change – CFA Institute
Naughty angle: active antics
At least one analyst at Citadel isn’t convinced by the AI panic – Citadel
Annual Letter from Bill Ackman at Pershing Square [PDF] – Pershing Square Holdings
Revaluation in Japan – WHERE
The tax nerd who bet his savings against DOGE – WJ [h/t Abnormal Returns]
Three perspectives on US balance sheets – Apollo
US markets rarely do badly outside of recession years – Carson Group
Macroeconomics and stock market valuation [Nerdy, PDF] – Minneapolis Fed
Kindle Book Bargains
Deep work by Cal Newport – £0.99 on Kindle
Co-intelligence: living and working with AI by Ethan Mollick – £0.99 on Kindle
The prosperity ladder by Nick Maggiulli – £0.99 on Kindle
The Pension Manual by Ted Heybridge – £0.99 on Kindle
Environmental factors
Waitrose suspends mackerel sales due to overfishing Guardian
Earth’s energy to heat 10,000 homes is a first for Britain – BBC
The ghosts of the conservation past – Biographical
Extreme Heat Laboratory: Enduring the Climate of the Future – Guardian
Largest coral colony in the world discovered off the coast of Australia – CNN
Robotoverlord collection
Howard Marks Just Got AI Religion – Oaktree Capital
Anthropic has dropped its core security promise… – CNN
…although it is still at war with the Pentagon – Guardian
The AI-augmented scientist – The Climate Boundary
Technology leaders who envision the future [AI video but fun] – via X
British self-driving car manufacturer Wayve raises $1.2 billion This is money
AI cannot yet perform stock market analysis – Morning star
Only 1% of S&P 500 companies report the impact of AI on their revenues – Sherwood
Why is South Korea so in love with AI? – Politics
Not at the dining table
Four years later, the US has abandoned Ukraine – As an institution And Paul Krugman
Is there an endgame in Ukraine? [Podcast] – Foreign Affairs
The Greens’ victory means the future of British politics is more uncertain than ever – BBC
A good introduction to the supply/demand effects of immigration – Agglomerations
A British woman with a valid visa was detained by ICE for six weeks – Guardian
Attack of the Zombie Rates – Paul Krugman
Crime is the reason why the US feels worse than other countries – Noahpinion
If AI makes human labor redundant, who decides who eats? – Guardian
Out of our league
Why your brain has to work harder in an open office space Phys.org
Run like “a middle-aged rave”says Josh Widdicombe – Runner’s world
A Predicted War: How the CIA and MI6 Obtained Putin’s Plans – Guardian
What happens when you no longer feel needed? – Contessa Capital
It’s the end of the world as we know it (but I’m fine) – Tim Harford
No one is ever ready – The imperfection
And finally…
“Just as moats were dug around medieval castles to keep enemies at bay, economic moats protect the high returns on capital enjoyed by the world’s best companies.”
– Heather Brilliant, Why canals are important
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