Another Problem Emerges For Elon Musk

While it has yet to be seen if the SEC will crack down on Elon Musk, and whether the Tesla CEO can round up enough investors (which he allegedly already has a commitment letter from over a week ago) to participating in his going private transaction, remains to be seen but even in an ideal scenario where everything goes according to Elon’s plan, he may be facing a major hurdle once he begins executing his quasi public/private transformation, which keeps large investors but removes day to day gyrations in the stock (and only offers two “liquidity” events per year): most passive funds would have to drop Tesla if it were removed from stock indexes.

Meanwhile, according to Reuters, actively-managed funds might need complicated approvals to hold a stake in the mutated company.

“Our inclination is that if we could go private with him, we would, but it’s complicated,” a large Tesla investor told Reuters. “We would have to call clients and ask for approval, but it’s complicated. And I think it’s complicated for many funds.”

The reason: private shares are illiquid, and usually very hard to price, raising concerns of whether they are appropriate for public portfolios.

As a reminder, Musk’s grand scheme is to convert Tesla into a quasi-private company, whose shareholders are almost exclusively large funds even as smaller investors generally cash out. But his plan would be hindered by the very nature of the structure he hopes to lure his “whale” investors in to, making it prohibitively difficult to find enough equity investors in the transaction.

The uncertainty over how many investors could hold private shares, and would want to, would be a challenge for Musk because the final tally would dictate how much capital he would need to raise to buy out those who would sell the stock.

On Monday, Musk blogged he was reaching out to top investors to see “whether they had the ability and desire to remain shareholders in a private Tesla.” He may be disappointed very soon: