SpaceX windfall presents dilemma for California pension fund

By Preeti Singh, Bloomberg

A California pension’s tiny SpaceX investment has ballooned to about $2 billion, creating a windfall for the portfolio — and an unexpected headache.

Roughly eight years ago, Orange County Employees Retirement System backed Elon Musk’s aerospace and space technology company with $60 million. The investment has grown so large that it’s become a much more concentrated position than originally expected, and the pension must now re-vamp some risk and portfolio strategies to manage such a large and volatile asset over the long term.

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The investment was done in two funding rounds through co-investments with venture capital managers in the pension fund’s portfolio, according to Chief Investment Officer Molly Murphy.

SpaceX went public on June 12, surging to about $225 per share before falling as low as $104.83. It now trades at around $136.20.

But the volatility of the share price has led to big swings in the pension fund’s exposure to the company, with SpaceX’s portion of the portfolio ranging between 4% to 9% since the IPO, Murphy said. In contrast, the Magnificent 7 stocks and Broadcom Corp. account for a more consistent 1% each in the public equity book, she said.

“We believe that we’re buying generational holdings, but living with SpaceX month to month, quarter to quarter is going to be interesting,” Murphy said in an interview.

It’s a high-class problem, but a problem nonetheless. OCERS, as the pension is known, will need to adopt different risk parameters for the position, Murphy said.

“Let’s just say it doubles from here, which is a pretty tame expectation for the next five years,” Murphy said. “SpaceX will be a very concentrated position for a very long time for the pension. So we have to not just think about concentration risk, but also volatility in the stock.”

OCERS invested in the rocket company as part of its effort to become a bigger participant in California’s economy, Murphy said. At that time, SpaceX’s plants were located in the state. When the pension first invested, it was underwriting “the promise” of Starlink Inc., SpaceX’s satellite internet service, Murphy said.

“We were really getting the opportunity to invest in a next-gen communications company with a rocket company as collateral and the Department of Defense contracts that the main body of SpaceX’s business was providing us,” Murphy said.

OCERS has backed other ventures related to artificial intelligence and holds them in its venture capital portfolio, Murphy said, declining to name the investments. The pension’s venture capital holdings are “exploding because of these big wins” and now exceed their target size.

“We’re actually trying to do a lot of maintenance,” Murphy said. OCERS will move SpaceX to its public markets asset class in the near future to rebalance its venture book, she said.

The pension doesn’t want to sell down its position or cash in on SpaceX yet, Murphy said.

“We believe this is a holding that we’ll probably have for as long as we believe in the company, which I think is tethered to the longevity of Elon Musk in some way, shape or form,” she said.

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