Traditionally the way an initial public offering works is that there is a private company, and it wants to sell its stock to public investors, so it goes out and markets itself to those investors. Along with its bankers and lawyers, the company writes a prospectus explaining its business. The prospectus will contain some standard sections: often a manifesto from the company's founder setting out its vision and guiding philosophy, an overview of its business and the competitive landscape, a discussion of its financial results. There will be audited historical financial statements going back several years, and risk factors explaining what might go wrong.

There will also normally be a roadshow, in which the company and its advisers present the company to investors in meetings or over Zoom. The roadshow presentation will hit some of the same notes as the prospectus, though it will probably be more forward-looking, more about how much money the company will make next year than how much it made last year, more about plans than about risks. Research analysts at the company's banks will explain their -- preferably optimistic -- views on the company to potential investors. Salespeople at the banks will call their customers to sell them stock.

SpaceX, Elon Musk's satellite internet, rocket launch, space data center, Mars colonization, frontier AI model and social media company, plans to do an IPO sometime soon, possibly in June. On the one hand, this seems like a complicated job: As I hinted in the previous sentence, it is not easy to describe what SpaceX does, what its guiding philosophy is, how it makes money, what risks it faces, or what businesses it competes in. What are the EBITDA margins on the space data centers? What sorts of contingent liabilities does the Mars colony face? The prospectus -- essentially conservative and backward-looking -- will not capture the true meaning of SpaceX; presumably it will barely mention the Mars colonies or space data centers, which are at this point entirely hypothetical. The roadshow will mention those, but in a fairly abstract way. It's not like there are meaningful projections of 2029 space data center revenue.

On the other hand, this is stupid, I'm kidding, and none of this stuff matters for SpaceX. The SpaceX IPO is not really about a private company introducing and explaining itself to the general public. The SpaceX IPO is about Elon Musk Elon Musking the Elon Muskiest of Elon Musk. "SpaceX's IPO Pitch Centers on Elon Musk's Ability to 'Sell the Dream'" was a Bloomberg headline a few weeks ago:

"What you've got to be convinced of -- and this is what they'll be working on until this is filed publicly -- is continuing to sell the dream and basically there's nobody that's been better at selling the dream than Elon Musk," said David Erickson, an adjunct associate professor at Columbia Business School and a former co-head of global equity capital markets at Barclays Plc. ...

"The reality is it's not about the fundamentals, nobody is going to get there on the fundamentals from a math standpoint because the math doesn't work," said Erickson.

It is a vibes-based IPO. And, you know, fine. There is a long history of investors giving Elon Musk a lot of money on faith, assuming that he'll do good stuff and it will all work out for them, and it usually does. When Musk bought Twitter Inc. in 2022, various rich people rather cavalierly chucked in some of their own money to invest in the deal. This worked out incredibly well, for them, and Twitter is now part of SpaceX.

Part of what you are getting, when you invest in Elon Musk's Whole Thing, is exposure to his restlessness. SpaceX was a company founded on the principle that it would be cool to shoot rockets into space. Musk still believes that, but in the years since SpaceX's founding he has added many more visions -- brain implants, tunnels, artificial superintelligence, data centers, exposing millions of people to his online comedy stylings and political opinions -- to his portfolio. (Also he runs a car company.) SpaceX combines many (not all!) of those visions, but today's portfolio of SpaceX businesses is to some extent accidental. Today I can describe SpaceX as a "satellite internet, rocket launch, space data center, Mars colonization, frontier AI model and social media company," but it will be somewhat shocking if I can use the same list in April 2027. In 2027 most of those things will still be on the list, but something else, something that would never have occurred to me, will be occupying much of Musk's and SpaceX's time and attention. "Humanity's survival depends on ______," Musk will say, about this surprising new thing, "and SpaceX is pivoting all of the computing power in its space data centers to solve it." Space data centers!

Musk's restlessness fits right in to a vibes-based, dream-selling IPO: He can show up at the roadshow in June and be like "by this time next year the space data centers will be made out of a previously undiscovered element that we will acquire from aliens," and investors will be like "oh man is he ever selling the dream." If you're investing in Musk you want novelty; if the roadshow was just like "satellite internet is a good steady business" you would be disappointed and would not pay 100 times revenue for the stock.

But it fits terribly into the traditional IPO process, the kind with a prospectus and risk factors and historical financial statements. You can't pivot your business every two months while also running an IPO process; there is a long lead time to get audited financial statements, lock down the prospectus, have it reviewed by the US Securities and Exchange Commission, educate the bankers and salespeople, and sell the stock. In some sense the prospectus for SpaceX should just be a headshot of Elon Musk with "trust me!" scrawled on it with a glitter pen, but the SEC wouldn't approve that.

Anyway. One important and quite recent part of the SpaceX dream is xAI, Musk's frontier AI lab. The nice thing about Musk's restlessness is that he was able to build a highly competitive AI lab starting from scratch, quickly competing with established AI pioneers like Google and OpenAI. The bad thing about his restlessness is that then he tore it up: Most of his xAI co-founders have left and he is restarting from scratch. "xAI was not built right first time around, so is being rebuilt from the foundations up," Musk tweeted, IN MARCH, like THREE MONTHS before SpaceX is supposed to go public.

One way to speed that process up is, apparently, to buy Cursor, an AI coding company. "SpaceX Has Deal for Right to Acquire Cursor for $60 Billion," reports Bloomberg News, and we'll come back to that phrasing in a minute. "The combination of Cursor's leading product and distribution to expert software engineers with SpaceX's million H100 equivalent Colossus training supercomputer will allow us to build the world's most useful models," SpaceX tweeted today. At Stratechery, Ben Thompson explains the rationale:

SpaceXAI has a ton of compute, and no one to use it, either for R&D or inference.

Cursor, meanwhile, reached a peak of its own a year ago, when it was the only AI application other than ChatGPT earning meaningful revenue. It's a real product with real customers, in a real trap: Cursor has to pay the frontier labs for API access to their models, which themselves offer heavily subsidized and increasingly agentic coding products on a subscription basis. The end result is a startup with real traction that is both bleeding money and leading edge customers. ...

There is really obvious synergy between SpaceXAI and Cursor: the former has compute, and the latter has a product, data, and a decent amount of distribution for the use case that is most important for AI. At a high level this tie-up makes a lot of sense.

Fine, okay, right, last week SpaceX was betting its future on xAI's AI capabilities, and this week it's betting its future on Cursor's AI capabilities. That's how life works in Elon Musk's Whole Thing, and his investors wouldn't have it any other way.

But the IPO! There's an IPO! In like two months! It's bad enough that the SpaceX IPO became Also The xAI And Twitter IPO in February, but making it also the Cursor IPO now is too much. There is no time to acquire Cursor before the IPO.

So it will have to wait. "Cursor has also given SpaceX the right to acquire Cursor later this year for $60 billion or pay $10 billion for our work together," SpaceX's tweet says. Bloomberg reports:

SpaceX isn't acquiring Cursor immediately because of the rocket company's imminent initial public offering, according to a person familiar with the matter, who asked not to be identified discussing nonpublic information. A major transaction would require SpaceX to update its filings and financial details, potentially delaying the IPO, which is targeting a $2 trillion valuation. The $10 billion is a breakup fee if the deal doesn't go through, according to people with knowledge of the deal.

I would put it a bit differently: The $10 billion is option premium, giving SpaceX the right, but not the obligation, to acquire Cursor "later this year," after the IPO stuff has calmed down.1 Because SpaceX doesn't own Cursor, or even have a binding agreement to acquire it, the IPO prospectus probably does not have to get into too much detail on Cursor's business or finances or how they would combine with SpaceX's.

The SpaceX IPO prospectus will be a historical document, capturing Elon Musk's Whole Thing at a specific moment in time, but everyone understands that, moments later, things will change. Cursor is part of that "moments later" bucket: Everyone has fair warning that, after the IPO, SpaceX will also be Cursor. But nobody has much detail about what that will entail, in the same way that nobody has much detail now about the advanced technology that Musk will license from aliens when he finds them, or about whatever he gets up to next.2

Sure SpaceX could wait to buy Cursor, but:

AI is a competitive and fast-moving market and it can't wait three months to start the integration.3 Formally, the acquisition will happen after the IPO, but "SpaceXAI and @cursor_ai are now working closely together to create the world's best coding and knowledge work AI."
If you're leaving your startup to go work for Musk, a famously demanding and mercurial boss, you will want to get cashed out of your startup. Selling for $60 billion is a good deal; going to work for him on spec for a few months is not.
Given Musk's mergers-and-acquisitions track record, a pinky swear that he will eventually buy the company is not sufficient. You will want, say, $10 billion of committed option premium to make it worth your while. Cursor's management learned from what Twitter went through. "Among the largest termination fees in history," the Financial Times called it, which is what you should expect in a post-Twitter Musk acquisition.
Also, I mean, you can't incorporate Cursor's business in the IPO prospectus, but you can mention it. "We will own Cursor and build a good coding product" is fair game for the roadshow; it's part of selling the dream. Adding specific financial disclosure to the IPO, at this point, would be bad; adding cool new things to talk about is good.

So this approach makes sense. The deal is certain enough to satisfy Cursor and Musk and SpaceX's potential investors, but uncertain enough to satisfy SpaceX's accountants and lawyers and the SEC.

Of course Musk does change his mind a lot. It would be very funny if he sours on Cursor by July and walks away from the deal, and they make $10 billion for three months' work. I guess that's another reason not to spend much time on Cursor in the prospectus.

People are worried about private market liquidity

One point that I have made, during the recent private credit troubles, is that defined-benefit pension funds are the ideal investors in private markets. People mostly invest for retirement, retirement is a long way away for many of them, and so they should, statistically, be willing to earn a premium by investing in long-term illiquid assets. Pension funds, historically, did that: Everyone pooled their money for retirement, and the fund invested it in long-term stuff. The fund's obligations -- pay $X of benefits in Y years -- were predictable and long-term enough that it could lock up its money. The modern American approach of mostly defined-contribution 401(k) retirement savings blows this up, and the main reason private credit funds are having problems is that they are sold directly to retirement savers rather than to pension funds.

That is my perspective as an American: I have a 401(k), and defined-benefit pensions are pretty uncommon around here. But I should not idealize them too much. We talked back in 2022 about a quirk of the UK pension experience, in which, for an assortment of accounting and economic reasons that I explained at the time and won't repeat here, UK defined-benefit pension plans have become enormous users of short-term leverage to buy gilts (UK government bonds). This is called "liability-driven investing," or LDI. Basically, if interest rates go up, the pension plans get margin calls and have to sell assets to post more collateral to support their leveraged gilt positions. That seems ... bad? I wrote:

The thing that was so good about pension funds -- their structural long-termism, the fact that you can't have a run on a pension fund: You've ruined that! Now, if interest rates go up (gilts go down), your bank will call you up and say "you used our money to buy assets, and the assets went down, so you need to give us some money back." And then you have to sell a bunch of your assets -- the gilts and stocks that you own -- to pay off those margin calls. Through the magic of derivatives you have transformed your safe boring long-term pension fund into a risky leveraged vehicle that could get blown up by market moves.

I know this is bad but I find something aesthetically beautiful about it. If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says "let's make pension funds vulnerable to bank runs!" Finance, as an abstract entity, just sort of does that on its own.

One way to think of it is that pensions were invented, and they were a good stable long-term way to save for retirement, and over time finance inexorably made them run-prone, but in different ways. In the UK, pensions became run-prone by using LDI; in the US, they became run-prone by becoming 401(k)s.

Anyway, in the US, people are worried about private market liquidity because private-market funds have increasingly been stuffed into retail investors' portfolios, and retail investors get nervous and try to sell. In the UK, people are worried about private market liquidity because private-market funds tend to be owned by pension funds, and the pensions might get nervous. The Financial Times reports:

UK pension funds have been warned they face "huge" costs if they try to offload their private market assets, following a warning by the industry regulator about some schemes' high exposure to hard-to-sell investments.

In response to a letter sent late last year by The Pensions Regulator requesting that schemes review their liquidity positions, some trustees have been advised by their consultants not to sell illiquid assets because of the "huge penalties" involved, according to people familiar with the schemes. ...

TPR wrote to the trustees of 58 funds in November, warning that more than 50 per cent of each of their portfolios were invested in assets that would take longer than a week to sell.

"If you have not done so already, we would encourage you to review [your] scheme's liquidity position . . . to assess the robustness of [your] investment strategy," it wrote.

Having easy-to-sell assets available "is important in maintaining the investment strategy if interest rates rise materially and there are collateral calls . . . [and] in making benefits payments".

Regulators have sharpened their oversight of defined benefit pension schemes since their forced selling of UK government bonds by so-called liability-driven investment strategies triggered chaos in the gilt market after Liz Truss's "mini" Budget of September 2022.

The crisis, and the TPR's subsequent requirement for pension schemes to hold more in easy-to-sell assets, left many overexposed to illiquid assets, with some still struggling to rebalance.

In a perfect world, defined-benefit pension funds would have predictable long-term liabilities, which they could match by investing in illiquid long-term private assets. But we don't live in that world.

Bespoke parametric insurance

If you live in a flood zone, you might want to buy insurance against the risk that there will be a big rainstorm and your house will be washed away. Here are two ways to think about that insurance:

Someone sells you a policy that is like "if a flood damages your house, we'll pay your cost to repair it."
Someone sells you a policy that is like "if your town gets more than X inches of rain in a 24-hour period, we'll pay you $Y."

The first policy -- one that pays you based on your actual loss -- is simpler for you. It exactly covers your risk. The thing you care about is your house being damaged, and you get paid if your house is damaged. The second policy pays you for an input, for a factor in your house being damaged. But sometimes the town will get fewer than X inches of rain and your house will be damaged, in which case the insurance won't pay out but you'll wish it would. Other times, the town will get more than X inches of rain and your house will be fine, in which case the insurance payout is just a windfall. You have basis risk; the insurance payout doesn't perfectly correspond to the risk.

The second policy, though -- the one that pays you based on rainfall -- is simpler for the insurance company. It's easier to underwrite: The insurance company can have some general rainfall model for your town, and sell everyone in town insurance at the same rates. It doesn't have to individually evaluate each house's location and construction. It is also easy to administer claims: If it rains more than X inches, everyone gets paid; if not, no one does. The company doesn't need to go to each house and check for damage, or argue over whether you were at fault for not closing your windows. Just a simple statistical payout. This also has some advantages for you. For one thing, it might be cheaper. But also, if there is a storm, the insurance company doesn't have to send someone out to assess your damages and haggle over your claim; if the rainfall trigger is hit, they just write you a check.

And so in fact most normal insurance is loss-based -- you get paid based on your actual losses -- but there are some important cases of "parametric insurance," where you get paid for some amount of rainfall. Catastrophe bonds, for instance, are sort of a distributed market-based form of insurance, often issued by countries where it is hard to assess claims, so they will often have parametric triggers that pay based on air pressure or rainfall rather than damages.

Neither approach is perfect, though. What you might want is to combine the simplicity and objectivity of parametric insurance with the specificity of loss-based insurance. "If there's more than X inches of rain directly on my roof, pay me $Y." With more sensors everywhere, and with more sensitive weather models, that seems doable. Bloomberg's Joe Wertz and Mary Hui reported on Monday that Bad Bunny did it:

Bad Bunny had a problem. Days before the Puerto Rican mega-star was set to perform in Colombia earlier this year, the possibility of heavy rains threatened to turn three sold-out shows in Medellin into multimillion-dollar losses.

Solutions were few. Traditional event cancellation insurance is rarely available so close to a performance date. Even if a policy could be secured, geography posed another challenge. The nearest official weather sensor sat a mile from the open-air venue -- too far, in a tropical city with steep terrain and complex microclimates, to serve as a reliable trigger for a payout.

So a transatlantic team of brokers, underwriters and meteorologists devised a workaround to save Bad Bunny from losses: They installed a temporary weather station inside the stadium, linked to a bespoke policy that would pay out if rainfall exceeded a set threshold.

And:

For [Vaisala Oyj, the weather monitoring company] and Descartes [Underwriting SAS, the insurance company], the temporary weather station was a novel fix for what insurers call "basis risk" -- the chance that rain falls at the venue but isn't recorded at an official weather station used to settle the contract. Putting the station inside the stadium solved that problem. ...

In that context, the Colombia concert was a successful test run for both companies, which see more untapped demand for bespoke parametric insurance paired with on-site weather monitoring.

Sure, right, eventually we will all have our own weather stations and our own bespoke parametric insurance.

Nothing is securities fraud

I mentioned yesterday that SpaceX, when it becomes a public company in the next few months, apparently plans to prohibit shareholder lawsuits: If you buy SpaceX stock, and you have any complaints, you have to take it up with "mandatory arbitration," not a lawsuit (and, thus, not a class-action lawsuit). US public companies have not historically been allowed to force shareholders into arbitration, and so shareholders sue often, enthusiastically and in class actions. "Everything is securities fraud," I like to say. But last year the SEC changed its views on this, so now companies can require arbitration. "Nothing Is Securities Fraud?," I said.

But yesterday I wrote: "As far as I can tell, no one has done it yet. Now SpaceX might." That was wrong. The first company to do it seems to have been Zion Oil & Gas, in December. Good for them, and sorry for missing them. That said, I also wrote yesterday that "if SpaceX does it and it works, then 100 companies that are not run by Elon Musk are going to try." And that's probably right. As, uh, the state of Texas could tell you, Elon Musk's corporate structure decisions tend to be closely watched and widely followed.

Speaking of which: I also mentioned yesterday that SpaceX plans to go public with two classes of shares, with Musk getting super-voting shares so he can control the company forever while owning only a minority of its economic value. I made three points:

Yes, right, that's obviously how a Musk company should work,
Tesla Inc. should have done that when it went public, and
Tesla can't do it now, because stock exchange rules don't allow already-public companies to start issuing super-voting shares. So to increase Musk's voting control, Tesla has to -- and will! -- give him a much bigger economic slice of the company.

Several readers emailed to suggest the obvious solution here. If SpaceX (with its dual-class stock) acquires Tesla, then Musk can probably get voting control of both companies forever and also, you know, have a fun time doing a merger. So look out for that in like six months. Right after the Cursor deal closes.

Things happen

More Banks Are Earning $100 Million Fees for Advising Big M&A Targets. Job Cuts Driven by A.I. Are Rising on Wall Street. OpenAI in talks to commit up to $1.5bn to private-equity joint venture. OpenAI Is Working With Consultants to Sell Codex. As Blue Owl's Strains Worsened, Its Bankers Pitched a Long Shot. Private Credit BDCs' 2028 Maturity Wall Poses Risk, Moody's Says. Trump Administration Nears $500 Million Spirit Rescue Package. Anthropic's Mythos Model Is Being Accessed by Unauthorized Users. Insurers move to cap cyber payouts related to AI and 'LLMjacking.' Unraveling Hedge Fund Trade Derails Boom in Taiwan Convertibles. DOJ Charges Southern Poverty Law Center With Bank Fraud. AI Startup Has Helped Reverse Thousands of Denied Health Insurance Claims. Elite law firm Sullivan & Cromwell admits to AI 'hallucinations.' Nine West is back. Lenox Millionaires. War disruption forces world's biggest condom maker to raise prices by up to 30%.

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There's No Time for SpaceX to Buy Cursor