Tesla investors should focus on Elon Musk’s related-party history
Buyout of SolarCity for $2.6bn in 2016 is now the subject of litigation
Mind-altering substances are a growing distraction for investors in Elon Musk’s electric car company Tesla.
The New York Times last week reported that Tesla’s board was worried about their chief executive’s use of Ambien, a sedative Mr Musk himself has previously joked about.
While it is understandable that investors in a public company might be concerned by tales of a chief executive using medication, Tesla shareholders should really focus on Mr Musk’s history of raising debt at related parties.
Back in 2014, Mr Musk’s SolarCity announced an exciting new opportunity for America’s mom and pop investors: solar bonds. The solar-panel maker was looking to borrow up to $200m ostensibly from the American people themselves, opening up the bond offering to any adult US citizen willing to lend as little as £1,000.
“Solar Bonds are a new way to invest,” the marketing materials said. “Now you can get paid while driving the solar revolution.”
Retail investors, however, did not rush to support the solar revolution with their pocket books. Instead, it later emerged that the main buyer of SolarCity’s bonds was in fact SpaceX, another Musk company that bought $165m of the offering.
This should have rung alarm bells for investors in any corner of the celebrity entrepreneur’s empire. There is nothing inherently wrong with transactions between so-called related parties, but they do deserve a lot more scrutiny.
This is especially true in the complex world of debt market funding. The history of accounting scandals is littered with unusual related party arrangements, from Enron to Espírito Santo and Parmalat to Steinhoff.
SolarCity and SpaceX’s debt relationship was relatively straightforward and publicly disclosed. But the natural question with these deals is whether the borrower is reliant on a lender willing to offer off-market or much cheaper rates of funding.
And the bond deal prefigured a much bigger related party arrangement: Tesla’s buyout of SolarCity for $2.6bn in 2016, a deal that is now the subject of litigation.
For investors trying to work out how Mr Musk might square the circle of his now infamous “funding secured” Twitter post, this history of turning to related parties for support should be one of their biggest causes for concern.