Early Tesla backer debuts funds focused on xAI, SpaceX

Soaring demand for the limited supply of SpaceX and xAI shares has spawned a cottage industry in which Wall Street firms create single-purpose vehicles that charge stiff fees for the chance to invest in the company.

The Baron vehicles, on the other hand, are forgoing high compensation for a different sort of payoff: a wager that providing access to SpaceX and xAI will raise the firm's profile among family offices and private bank clients who might later invest in its mutual funds.

"We are doing this because we want people to know about our mutual funds," Baron, 81, said in a telephone interview. "I want my business to last for 100 years."

Musk didn't respond to messages seeking comment.

In April, a fund devoted to SpaceX called BaronX Cayman filed to raise money from offshore investors, a category that typically includes US tax-exempt institutions, such as pension plans and endowments.

In addition, newly formed BaronxAI is investing $130 million in Musk's AI venture through its May stock sale, according to a person familiar with the situation, who requested anonymity to discuss confidential details of the deal. A sister fund called BaronxAI Cayman has filed to raise money offshore.

These funds each charge an annual management fee of around 1 per cent and lock up investor capital for about eight years, the person said; the fee falls by half should SpaceX or xAI become publicly traded. Rival single-purpose funds typically charge annual management fees of 1 per cent to 2 per cent, along with performance fees equaling as much as 20 per cent of profits.

Uphill battle

The money raised by the private partnerships could help offset outflows that Baron Capital's mutual funds have experienced since the start of 2022, said Adam Sabban, a senior analyst at Morningstar. Many other stock-picking funds are caught in the same bind, Sabban said.

"Because of index funds taking over, pretty much every active equity shop is fighting an uphill battle at the moment," he said.

Baron Capital's mutual funds suffered net outflows totaling almost $7.2 billion from the beginning of 2022 through this May, according to Chicago-based Morningstar, though the bulk of these withdrawals were from the firm's Emerging Markets and Global Advantage funds, neither of which follow its core strategy. Baron Capital's assets total more than $40 billion, most of which is held in mutual funds.

Baron, who started his firm in 1982 with $10 million in capital he managed for billionaire George Soros, is a holdout from a bygone money-management era, when mutual-fund stars such as Peter Lynch, Jeff Vinik and Bill Miller held sway on Wall Street because of their stock-picking skills.

A former caddy at the famed Hollywood Golf Club in Deal, New Jersey, Baron holds some stocks for decades. One example is a stake in Charles Schwab Corp. dating back to 1992, the same year that his flagship Baron Partners Fund started up.

Another of his signature strategies is making outsize bets on chief executives he considers exceptional, such as casino magnate Steve Wynn. This approach led Baron Partners to begin buying Tesla shares in 2014, an investment that multiplied 20-fold in profit and ultimately had to be pared after it grew to equal roughly half of the fund's net assets at the end of 2021.

Baron has also backed Musk and his companies in public, often by appearing on CNBC to vouch for Tesla and SpaceX as good investments. When Tesla was rallying support earlier this year for shareholders to re-approve a $56 billion pay package for Musk "" it was initially nixed by a Delaware court "- Baron leapt into the fracas by publishing an open letter urging his fellow investors to sign off on the compensation plan.

Having first met Musk in 2010, Baron began investing in Tesla four years later and then began doing research on SpaceX. This set the stage for his firm to begin investing in the company in 2017, before SpaceX had started up its Starlink satellite internet service.

He already had some familiarity with the industry. While attending law school at night, Baron worked during the day for the US Patent and Trademark Office, where he was the examiner for patents on the coatings applied to rockets to prevent them from burning up when they re-enter the earth's atmosphere.

Space Odyssey

Baron's firm continued to invest in SpaceX through semi-annual offerings that the company arranges for employees who would like to sell some of their shares. To date, it has invested a little more than $1 billion in the space venture — including an onshore fund that holds SpaceX shares — building a 1.2 per cent stake that's now valued at almost $2.8 billion.

SpaceX's reusable rockets and Starlink satellite system, used by Ukraine in its effort to fend off the Russian invasion, have made it a huge draw for investors, even though it is closely held. The company received a valuation of $210 billion through an employee sale earlier this year.

Meanwhile, Baron Partners' fortunes remain closely tied to Tesla, as the fund continues to have about 29 per cent of its assets invested in the car company, based on data compiled by Bloomberg. The stock has been on a tear lately, jumping 80 per cent since late April.

While the concentration has led to volatile returns for Baron Partners — it more than doubled in 2020 only to plummet 42 per cent two years later — the fund has generated an average annual return of almost 16 per cent since 2003, when it converted from its earlier status as a private partnership. This performance ranks Baron Partners as a top US equity fund since 2003, according to Morningstar.

"If you have invested through this wild ride, you still came out ahead," Sabban at Morningstar said.