Money Stuff: There’s a SpaceX Treasury Company

No no no no no, the time to do this was a year ago:

Triller Group Inc (Nasdaq: ILLR; ILLRW) (“Triller” or the “Company”) today announced that it has entered into definitive agreements to acquire a significant position providing economic exposure to SpaceX (Nasdaq: SPCX), to be held as a strategic treasury asset on the Company’s balance sheet.

The Company is acquiring the position — held through an established fund structure — through a wholly-owned special-purpose subsidiary, financed through a secured financing arrangement. The position was established well ahead of SpaceX’s public listing and is being acquired at a meaningful discount to its current market value.

“This is a transformational step for our Company,” said Wing-Fai Ng, Group Chief Executive Officer. “SpaceX is one of the most extraordinary companies of our generation, and we are securing meaningful exposure to it at a compelling entry point and placing it at the very heart of our balance sheet. We believe this fundamentally changes how investors should look at Triller, and we are proud to give our shareholders a stake in that story.”

The transaction establishes a dedicated SpaceX treasury position and positions Triller as one of the only Nasdaq-listed companies with disclosed, balance-sheet SpaceX exposure. The financing is secured by the underlying position, and the Company retains a portion of the position as treasury for the benefit of its shareholders.

When I say “the time to do this was a year ago,” I mean two things. First of all, a year ago, the “_____ treasury company” trade was hot. Mostly it was the “digital asset treasury company,” or DAT: A company would acquire a pot of crypto (say, $500 million of Bitcoin or Ether or Solana or whatever), and investors would get so excited that its stock would go up and it would be worth $1 billion. “The US public stock market will pay $2 or more for $1 worth of crypto,” as I put it, and a lot of companies noticed. There were many, many DATs, and the idea expanded beyond crypto. There was a gold treasury company, and a GameStop one. [1]

That trade is stone dead now; lots of DATs now trade below their net asset value, and investors have lost a lot of money.

Second, a year ago, the “pay a huge premium for exposure to SpaceX stock” trade was also hot. SpaceX was a private company, ordinary investors could not easily get their hands on shares, and they wanted to. There were all sorts of people peddling all sorts of ways — closed-end funds, special-purpose vehicles, forward contracts, tokenization, EchoStar — to get exposure to SpaceX stock, and the going rate for that exposure really was a 50% or 100% premium to the stock price. 

But now SpaceX is public; it did an initial public offering this month. You can just buy the stock. At the market price. On the same stock exchange where you can buy Triller. Why would you buy Triller instead? Why would you pay a premium?

Still, it worked! Triller’s stock closed yesterday at $0.7691 per share, for a market capitalization of about $15 million; it got as high as $5.30 per share this morning, for a market capitalization of about $104 million. [2] (By noon it was down to about $3.18 per share, or $63 million.) Good for them.

It is a strange transaction. Triller signed a deal with a Bahamas company called Capital Truth Holdings Ltd. to buy “100% of the membership interests … of SAC1, a Bahamian investment vehicle (‘Holdings’”) that owns certain common stock equivalent interests (the ‘Share Equivalents’), through the Holdings investment in the Fortune Offshore Fund – Gigafund in and to 3,917,185 shares of Space Exploration Technologies Corp.” That is, Triller is a sort of SPV-cubed: It is buying shares of SAC1, which owns shares of Fortune Offshore Fund, which owns shares of SpaceX. [3]  If you buy shares of Triller, you own shares of a company that owns shares of a company that owns shares of a company that owns shares of SpaceX. Presumably the Fortune Offshore Fund, as a pre-IPO shareholder of SpaceX, is subject to a lockup agreement preventing it from selling its SpaceX shares, but presumably Capital Truth Holdings, as an SPV-cubed itself, didn’t sign any lockups and can sell Triller its SPV-squared shares. 

Also, Triller appears to have about $2 million of cash, and “the purchase price for the Holdings Membership Interests is US $411,304,425.”  (That’s $105 per SpaceX share: Apparently exposure to locked-up SpaceX shares comes with a liquidity discount.) The purchase is “financed through a secured financing arrangement,” and “the financing is secured by the underlying position, and the Company retains a portion of the position as treasury for the benefit of its shareholders.” I don’t know what that means, but you can make a rough guess. If you’re paying $411 million to buy indirect exposure to 3.9 million SpaceX shares, and you have roughly no money, then that means you are borrowing roughly $411 million to buy the stock. Those 3.9 million SpaceX shares are worth about $600 million today, so perhaps someone would lend you $411 million against them, though (1) there should be a liquidity discount because the shares are locked up and (2) I’m not sure why they’d lend you 100% of the purchase price. “Retains a portion of the position as treasury” suggests that the “secured financing arrangement” involves giving the lender some (much?) of the upside in the SpaceX shares, since after all the lender is putting up all the money. [4]  Possibly Triller is not so much buying the SpaceX shares as renting them. 

Anyway it’s pretty cute. Triller is nominally “a technology and media company operating Triller App, a social media and live-streaming platform focused on music, sports, fashion and culture, together with AGBA Group, a Hong Kong-based financial-services and platform business with longstanding operations in wealth distribution, healthcare and related services across Asia”; last year it lost $174.5 million on revenue of $21.6 million, mostly from insurance commissions (?). There are all sorts of companies in the world, doing all sorts of things, but arguably one thesis of the modern artificial intelligence boom is that in the future there will be, like, five companies, all doing AI. Maybe SpaceX will be one of them. If you’re another company doing other stuff, maybe the best hedge to AI disruption risk is to buy SpaceX stock.

There must have been a moment in the 1980s when most financial firms employed teams of professionals who went around valuing companies using pencil and paper, but a few small scrappy startup firms started using Lotus 1-2-3 and bragging to journalists “it’s amazing, we can replace teams of a dozen analysts with a single spreadsheet, and we can do stuff like change our margin assumptions and see how that affects cash flows, a whole new world has opened up to us.” I wasn’t there. But here’s a 2020 paper in the IEEE Annals of the History of Computing, by William Deringer of MIT, titled “Michael Milken's Spreadsheets: Computation and Charisma in Finance in the Go-Go ’80s,” which rounds up a bunch of those stories:

Asked to explain the unprecedented financial turmoil of the 1980s, [Michael] Milken once claimed the true culprits were the creators of VisiCalc. Versions of this story appear in multiple print sources. Management researcher J. Christopher Westland describes how “Michael Milken once commented that Bricklin’s invention had single-handedly paved the way for the 1980s corporate megadeals.” Innovation guru Michael Schrage recounts how “Michael Milken … has privately credited spreadsheet software with making it possible to model and market so swiftly ‘high-yield’—aka junk—bonds he pioneered at Drexel Burnham Lambert.”

And:

According to business journalist George Anders, KKR executive Donald Herdrich stopped by a Manhattan electronics store in 1980 to purchase a personal computer as entertainment for his children. While there, an enterprising sales associate offered Herdrich a demonstration of VisiCalc. “Enthralled” by VisiCalc’s ability to recalculate projections instantaneously upon changing one cell, Herdrich purchased KKR’s first Apple IIe. It proved a “decisive advantage.” “In the 1970s, KKR couldn’t rapidly stalk several companies at once, because its financial blueprints required weeks of calculations by hand,” Anders explained. “Then microchips came to Wall Street. ... All of a sudden, giant companies’ finances could be picked apart in an afternoon.”

Buyout firms began invested heavily in computing technology, upgrading hardware and shifting to more sophisticated packages like Lotus’s 1-2-3 and Symphony. Wall Street Journal advertisements touted “$99 ‘LBO software packages’ that let even a neophyte race through the types of calculations that had once taken Herdrich and Kravis weeks.” This ability to “stalk” buyout targets through spreadsheets empowered upstart firms. As Ander put it: “the personal computer accomplished for Wall Street’s buyout boutiques what the advent of gunpowder did for Mongol warriors.” 

In the olden days, a giant institution would take weeks to calculate by hand how much a company was worth. But thanks to modern technology, for just $99, a couple of smart scrappy entrepreneurs could do it in minutes. The possibilities are dizzying. Were dizzying. This was in the 1980s.

Anyway Bloomberg’s Alice Atkins and Margaryta Kirakosian report:

Advances in artificial intelligence are leveling the field for fund managers, making it easier for boutique firms to compete with big macro and bond investors.

From digesting speeches in multiple languages and crunching global inflation numbers, to tracking company filings and the tone of investment committee discussions, AI is picking up much of the work once carried out by teams of analysts, according to five executives who have recently set up their own shops.

“Technology has changed the economics of building an investment firm,” said Dharmesh Maniyar, a machine-learning PhD who founded his second fund, MQT Asset Management, late last year. “AI allows a focused boutique organization like us to build powerful capabilities much earlier in our lifespan.” …

Five-person hedge fund Palinuro Capital, launched last year by Alfonso Peccatiello, aims to compete with desks of 20-50 people. It uses LLMs to parse speeches by central bankers from Hungary to South Korea, work that previously would have required regional specialists. “It’s effectively like having a set of unbiased analysts for a portion of the cost,” Peccatiello said.

Obviously in 40 years, histories of finance will be like “one underappreciated but important explanation for the rise of _______ in the late 2020s was the availability of AI bots to founders of small hedge funds,” but what will go in the blank?

One possibility is that funds that offer quarterly liquidity have more liquidity risk than funds that offer daily liquidity. Like: If you invest in a mutual fund, you can take your money out every business day, so you probably don’t. “Ehh, it’s fine, if things get bad I can take my money out tomorrow,” you think, so you leave your money in. Leaving your money in is not an irrevocable decision — you can change your mind tomorrow — so it has low stakes.

Whereas, if you invest in a non-traded business development company or interval fund, you can ask for your money back once per quarter, so maybe you do. “Things are a little dicey,” you think, “and if I don’t take my money out now who knows what will happen in the next three months, so I’d better take it out now.” Leaving your money in feels like an irrevocable decision, which might make you nervous enough to take it out.

From the fund’s perspective, keeping your money is good: It is bad for the fund to have to give you back your money; that can lead to forced sales and self-reinforcing declines in value. The fund would rather keep your money forever; if its liquidity terms could be “you can never get your money back,” it would do that. And of course some funds — publicly traded BDCs and closed-end funds — have terms like that. But there are tradeoffs: Those funds typically trade at a discount, and “you can never get your money back” is not a great marketing pitch. Instead, there is a norm for many type of funds — reinforced by US Securities and Exchange Commission regulation — that they offer to give investors (some of) their money back every three months. In normal times, this sounds like good prudent liquidity management: Investors can only occasionally ask for their money back, so the fund can rely on keeping most of it for a reasonable amount of time. Letting the investors get their money back more often would be riskier.

Of course in recent quarters a lot of people in private credit funds have been asking for a lot of their money back, creating financial and public-relations problems for those funds. One solution might be to offer more frequent liquidity. Bloomberg’s Hannah Webster reports:

JPMorgan Chase & Co. won approval to offer monthly redemptions on a new interval fund investing in private and public credit, as the direct-lending industry grapples with another round of elevated requests to pull out cash.

The US Securities and Exchange Commission said Tuesday that the JPMorgan Public and Private Credit Fund would be exempt from a rule requiring withdrawals on a quarterly basis. The vehicle’s prospectus from March said it would look to buy back at least 2% of shares each month. …

In its March request to the SEC, JPMorgan said monthly repurchases would benefit shareholders by providing more liquidity than a fund with only quarterly repurchase offers.

“Investors also will be better able to manage their investments and plan transactions because they will know that, if they decide to forego a repurchase offer, they only need to wait one (rather than three) months for the next offer,” JPMorgan wrote.

Possibly letting investors take money out more frequently will lead to them taking money out less frequently.

I wrote yesterday about the ominous rumbling that SpaceX might merge with Tesla. One thing I said is that, while SpaceX investors (1) won’t and (2) can’t object to any such merger on any terms that Elon Musk wants, Tesla investors might. Not only does Tesla have some shareholder rights; it also has big outside shareholders (index funds, etc.) who are not devoted Musk fans, and who might stick up for themselves if the deal is unfair to them. Don’t count on it or anything, but maybe.

Along those lines, law professor Ann Lipton makes another important point:

Assuming Texas law tracks Delaware on this, if SpaceX acquires Tesla, that’s a conflict transaction of the sort shareholders on both sides might sue over (when Shari Redstone caused CBS to combine with Viacom, both sets of shareholders sued, for example). But on the SpaceX side, that’s a derivative lawsuit; shareholders must have 3% to file, and that’s, you know, in excess of $52 billion depending on where SpaceX closes today. But on the Tesla side, it’s not derivative – that’s direct, and that means, there is no 3% barrier to suing. Plus, Tesla has not (yet) attempted to bar class actions the way SpaceX has. So there’s much more litigation risk on the Tesla side, even if the standard of proof would require plaintiff-shareholders to show fraud or intentional misconduct.

That is: If you’re a shareholder of a public company, and your company makes an acquisition at too high a price, that harms the company, and you can sue the company’s directors for breaching their fiduciary duty to the company. But the bar for that lawsuit is high: Directors have a lot of leeway to run the company however they think best, and in the case of Tesla and SpaceX you need to own 3% of the company to sue.

But if you’re a shareholder of a public company, and your company gets acquired at too low a price, that harms you: You are forced to sell your stock too cheap. You can sue the company for that, and the bar is lower. If you own one share, and your share gets bought out too cheap, you’ve got a lawsuit.

This assumes that the buyer in any merger would be SpaceX, and the target would be Tesla. That seems like a reasonable assumption. For one thing, SpaceX’s market capitalization is bigger, and usually the bigger company is the buyer. For another thing, SpaceX has dual-class stock that gives Elon Musk total control, while Tesla doesn’t, and Musk would probably want to preserve his total control of the combined company. 

“Passive income” is, as far as I can tell from Instagram, largely a scam. People will sell you online courses teaching you how to sell online courses to teach people how to sell online courses, in an infinite recursion of uselessness. Or they will sell you online courses teaching you how to buy rental properties with 99% leverage, which I guess is not exactly a scam — that is a thing you can do — but which has some obvious risks.

This stuff, on Instagram, always offends me as a believer in capitalism. The point of capitalism is that you do something useful for society, and society gives you money. The point of “passive income” on social media is mostly “here are ways to get money without doing anything for society.” Bad.

Here is a Wall Street Journal story — “Forget Work. Passive Income Is the New American Dream” — that mostly confirms my crotchety view of passive income. But not entirely. It does start with this uplifting anecdote:

Greg Keogh couldn’t stand commuting, office attire and feeling depleted at the end of a workday. To find a way out of his corporate 9-to-5, he decided to break into the world of so-called passive income. ...

His escape hatch came from a chance conversation with a dog owner who was excited to have found a bigger-than-normal lint roller. A mechanical engineer by training, he designed one nearly as wide as a paper-towel roll and put it on Amazon, where sales took off. 

Keough could have tried to build a lint-roller empire. Instead, he decided to coast. Seven years later, he works on it two hours or less in a typical month and personally nets about $50,000 to $115,000 a year. 

See that’s great, that’s how the world is supposed to work. He did something modestly useful for society — invented a big lint roller — and now makes a perpetual modest living from it. If all of the passive income schemes on social media were like “invent a useful thing and sell it on Amazon” that would be great. We’d have better lint rollers, probably.

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