Early Tesla supporters launch a fund focusing on Musk's xAI and SpaceX

Early Tesla supporter Ron Baron is increasing his support for Tesla CEO Elon Musk by establishing partnerships that allow clients to invest in the billionaire's two private companies.

Baron Capital Management has set up a pair of funds in recent months specifically to invest in Musk's xAI, an artificial intelligence startup that raised about $6 billion earlier this year through private stock offerings. Baron's firm has also established private partnerships to purchase more shares of Musk's rocket and satellite company SpaceX.

The soaring demand for limited supplies of SpaceX and xAI stocks has spawned an informal industry where Wall Street firms create single-purpose investment vehicles that charge high fees for investing in these companies.

On the other hand, Baron's funds have foregone high returns and opted for a different kind of reward: they are betting that providing access to SpaceX and xAI will enhance the company's visibility among family office and private banking clients, who may later invest in their mutual funds.

"We're doing this because we want people to know about our mutual funds," said the 81-year-old Baron in a phone interview. "I hope my business will last for 100 years."

Musk did not respond to requests for comment.

In April, the BaronX Cayman fund, dedicated to investing in SpaceX, applied to raise funds from overseas investors, a category that typically includes U.S. tax-exempt institutions such as pension plans and charitable foundations.

Additionally, according to a source familiar with the matter, the newly established BaronxAI will invest $130 million in Musk's artificial intelligence company through a stock sale in May. The source requested anonymity to discuss the confidential details of the transaction. A sister fund named BaronxAI Cayman has also applied to raise funds overseas.

The source indicated that these funds charge an annual management fee of about 1% and lock up investor capital for approximately eight years; if SpaceX or xAI goes public, the related fees will be halved. Competing single-purpose funds typically charge 1% to % in annual management fees, as well as a performance fee equivalent to 20% of profits.

A Tough Battle

Morningstar senior analyst Adam Sabban stated that the funds raised by private partnerships may help offset the outflows experienced by Baron Capital mutual funds since the beginning of 2022. Sabban noted that many other stock-picking funds are facing similar challenges.

"Almost every active stock company is currently fighting a tough battle due to the takeover by index funds," he said.

According to Chicago-based Morningstar, Baron Capital's mutual funds have experienced net outflows of nearly $7.2 billion from the beginning of 2022 to May of this year, with most of these funds coming from the company's emerging markets and global advantage funds, both of which did not adhere to its core strategy Baron Capital's total assets exceed $40 billion, most of which are held in mutual funds.

Baron founded his own company in 1982 with $10 million managed by him as a millionaire, inheriting from the era of fund management when stars like Peter Lynch, Jeff Vinik, and Bill Miller dominated Wall Street with their stock-picking skills.

Baron was once a caddy at a famous Hollywood golf club in New Jersey, holding some stocks for decades. One example is his stake in Charles Schwab Corporation, dating back to 1992, the same year his flagship Baron Partners Fund was established.

Another hallmark of his strategy is making outsized bets on CEOs he believes are outstanding, such as casino tycoon Steve Wynn. This approach led Baron Partners to start buying Tesla stock in 2014, with the investment growing 20-fold in profit, eventually reaching about half of the fund's net assets by the end of 2021 before having to reduce the investment.

Baron also publicly supports Musk and his companies, often appearing on CNBC to endorse investments in Tesla and SpaceX. Earlier this year, as Tesla sought shareholder support to reapprove Musk's $56 billion compensation plan - initially rejected by a Delaware court - Baron joined the debate, issuing an open letter urging his fellow investors to sign off on the compensation plan.

Baron first met Musk in 2010, began investing in Tesla four years later, and then started researching SpaceX. This laid the foundation for his company to invest in the company in 2017, when Tesla had not yet launched its Starlink satellite internet service.

He has a background in the industry. Baron attended law school at night and worked at the U.S. Patent and Trademark Office during the day, where he was a patent examiner for rocket coatings that prevent rockets from burning up when re-entering Earth's atmosphere.

Space Odyssey

Baron's company continues to invest in SpaceX by arranging semi-annual issuances for employees willing to sell some shares. To date, the company has invested slightly over $1 billion in funds in this space company - including holding 1.2% of the shares - currently valued at nearly $2.8 billion.

SpaceX's reusable rockets and Starlink satellite system have been used in the Russia-Ukraine conflict, making it highly attractive to investors despite being a minority shareholder Earlier this year, the company achieved a valuation of $210 billion through employee stock sales.

Meanwhile, according to data, the fate of Baron Partners remains closely tied to Tesla, as the fund continues to invest about 29% of its assets in the car company. The stock has been soaring recently, rising 80% since the end of April.

Although this concentration has led to unstable returns for Baron Partners - more than doubling in 2020 but plummeting 42% two years later - the fund has seen an average annual return of nearly 16% since transitioning from an early-stage private partnership to a private partnership in 2003. Morningstar has stated that this performance has made Baron Partners one of the top U.S. stock funds since 2003