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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Financial bubbles start when investors see a certain asset rocketing in value and start chasing anything that resembles it. Earlier generations had tulips, railroads and beachfront properties. Now a new must-have has emerged: smarts.
Shareholders will acquiesce to anything in their pursuit — as shown by the initial public offering of SpaceX. Norms like shareholder democracy have disappeared into a black hole. Elon Musk will retain control of the rocket-making company through super-voting shares and is thus unfireable; disputes must be arbitrated privately, not in court. An astronomical bonus is in store if he hits highly aspirational targets. And SpaceX’s $1.75tn whispered valuation, more than quadruple what it was six months ago according to PitchBook, suggests investors are nonetheless willing to accept a high price to reap the fruits of his unique brain.
While Musk may think he is one of a kind, the SpaceX genius premium is part of a wider phenomenon. Since the 2010s, tech companies have been enshrining founders through separate classes of shares, combined chair-chief executive roles and toothless boards. Being weird, hyper-elitist or generally offensive is a badge of honour. After all, being unconventional is, by definition, a requirement for generating market-beating financial “alpha”.
The race to back individual hotshots is supported by data. Research by Bain & Company shows founder-led companies have served up roughly double the shareholder returns of non-founder businesses, and outperform even after stripping out tech. In a separate analysis of 290 tech companies, sustaining 20 per cent growth for 10 years was strongly indexed to having a “founder mentality” and fewer organisational layers.
Still, the belief that an investment theme has broken the rules of finance is a tale as old as time — and usually proves temporary. Private credit may also be on the cusp of this. It swelled to a $3tn asset class as investors drooled over historically generous returns. Now cracks are appearing. Some financial luminaries are warning that the credit cycle will return, as it always has, leaving the complacent and indiscriminate with losses.
But the biggest one-man brands today benefit from the impression that no cycle can bring them down. Space exploration and AI are treated as one-way bets. Moreover, the market behaves as if those that have reached scale — OpenAI, Nvidia and Tesla, say — cannot be knocked off their perch.
This assumption will be tested. When a company’s worth is disproportionately weighted towards a “terminal value” composed of cash flows still many years away, even leading positions can be won and lost in a flash. Anthropic, the AI company now valued at $900bn, is only five years old. It’s not unthinkable that a big company could fall as fast as it rose.
Bubbles generally look obvious in hindsight. The genius bubble will be no different. One problem, perhaps, is that memories are short. In private credit, sceptics fret that the vast majority of fund managers joined the workforce after the 2008 crisis. Tech’s last big crash in 2000 is even more remote. Brains are an asset, for sure, but one just as liable to be overvalued as a Florida mansion, an unprofitable pet food retailer or a tulip bulb.
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