Space, the next giant leap for markets
While mankind celebrates this year the first lunar landing’s 50th birthday, the space theme is taking off on financial markets. 2019 could well “be the year for space”, Morgan Stanley even asserted last November in a report on the global space industry. The firm’s analysts “expect industry/technological milestones and capital formation will up the ante starting in 2019.”
Milestones were several in recent months like the landing of the space theme in the ETF market. US ETF provider Procure AM on 11 April launched the Procure Space ETF (UFO), which tracks the S-Network Space Index and formed the second space ETF listing following State Street's SPDR Kensho Final Frontiers ETF in October 2018.
Another development, yet political but one to arouse investor interest, has been the signature on 10 May of a memorandum of understanding between the United States and Luxembourg to deepen their cooperation in the space area. Both countries will identify projects of common interest in various fields among which space exploration, science, R&D, earth observation, space situational awareness and communication.
An international framework for activities of exploration, use and exploitation of space resources will be discussed, Luxembourg being the only European country to have adopted such space bill so far.
$1.1trn revenue expected in 2040
Morgan Stanley highlighted that on near term, space as an investment theme is likely to impact a number of industries beyond aerospace & defense, such as IT hardware and telecom sectors, estimating at $1.1trn or more the revenue generated by the global space industry in 2040, up from $350bn currently.
“The space sector has been growing steadily at approximately 6% per year for the past decade according to the non-profit Space Foundation, with the global space economy reaching $384bn in 2017. Morgan Stanley recently forecast that this would grow to $1.1trn per year by 2040, and Bank of America forecast growth to $2.7trn in the next three decades.
“A major reason for this anticipated growth is that the space industry provides products and services that are crucial for other high-growth sectors, such as internet access, media distribution, “big data” analytics, and location-based services like ridesharing. Many of the companies included in the index, and the space sector in general, are poised to benefit from these growth trends”, S-Network Global Indexes explains.
The index it developed for Procure AM’s space ETF tracks several segments of the space area (satellite-based consumer products and services, rocket and satellite manufacturing, space technology hardware, and space-based imagery and intelligence services).
The provider wanted to build a pure-play index « truly reflective » of the space industry, as opposed to an index whose companies were only tangentially involved in space. Each company in the S-Network Space index has to meet at least one of the following criteria: operating or using satellites currently, manufacturing space vehicles components or ground equipment depending on satellite systems, having been a prime manufacturer for a satellite or an operator of a launch vehicle in the past five years.
Besides a company’s space-related revenue must constitute either a minimum of 20% of the company's total annual revenue, or more than $500m in annual revenue. Companies earning the majority of their revenue from space-related business make up 80% of the total index weight, with the remaining 20% of the index weight comprising companies that receive less than 50% of their revenue from space-related business.
A screened universe of 5,500 global companies is narrowed to a smaller field of 75 and 100 companies involved in the space economy.
“Since most new space companies are not yet publicly listed, the majority of the index universe consists of traditional space companies. However, the index still provides some degree of exposure to new space companies because of the many partnerships, supplier relationships, and joint ventures between new space companies and traditional space companies”, the firm explains.
Procure AM’s co-founder and CEO Andrew Chanin points out that new space develops fast because tech develops much faster. Prices have been pushed down rendering space more accessible and fostering investment by public markets, he says.
He also notes that the degree of collaboration between governments and private companies has reached unprecedented level. “Nowadays Nasa does not have to build the whole space craft”, Chanin underlines.
“Lots of interesting things are ongoing on the private side. The index will further diversify with new areas. I think of space tourism, including transportation and hospitality, space colonisation, space resource exploration. IPOs in the new space sector will come since this industry needs greater capital regarding R&D or regulatory approval for instance”, he adds.
Mega-rounds come earlier
Space tech investments have amounted to $4bn in the 12 months to 31 March 2019, up 42% year-on-year according to the Seraphim Space Index, developed by British venture capital firm Seraphim Capital and tracking space tech transactions in the venture market.
Says Mark Boggett, CEO and managing partner of Seraphim Capital, space tech becomes a wide-spread market and has aroused considerable interest among venture investors over the last couple of years.
"You cannot find a large venture fund that has not been invested in a space tech business today. Last year alone, venture capital funds have poured some $3.25bn in the sector. A bunch of VC funds is looking to launch their own space fund and we welcome them as space tech startups require a much higher level of capital than traditional tech startups. Also we are very collaborative in the way we look to invest and we do it already alongside a range of VC funds to make sure there is enough funding to support space tech start-ups", he explains.
The firm, counting Google Earth’s co-founder Michael Jones as well as Space Flight’s director and ex-GeoEye CEO Matt O’Connell within its management team, was the first venture capital fund to seize space opportunities. It also chose corporates from the space industry as limited partners.
Seraphim Capital CEO sees a paradigm in the space sector. In his view, traditional space is about having the same technology in satellites for a 15-year period and is financed by debt with a huge amount of redudancies built-in. At the other end of the scale, new space includes for instance small satellites that are low-cost and designed to live two or three years. Tech evolves so quickly that they become rapidly obsolete, he notes.
Boggett adds : “When you start thinking about constellations, you think of datasets that have never been available before and that you can access for low cost in real time. We believe there is a tremendous amount of value to be created across a very broad range of sectors. We could not find a sector that was not going to be influenced by this new type of data. We also assess that space is just next us regarding long-term trends in transports, smart cities, artificial intelligence.”
A sign that demonstrates investor’s rising interest in space for Boggett is the fact that mega rounds – more than $70m raised – come in earlier rounds whereas they traditionally come in series C, D and E.
“OneWeb is a good example as the A-round was over $1bn raised. Companies like Mapbox and RocketLabs have had A-rounds of $165m and $140m respectively. Something noteworthy is that US-based investors have always been the main investors in the space industry but over the last two years, we have seen significant capital coming from Asia. Over the 10 largest transactions completed in the space sector in 2018, six of which have been by American investors and four by Asians”, he argues.
Boggett stresses a group of new investors going into into space tech market and providing capital, particularly in the B-round, where investment soured by 138% year-on-year to 31 December 2018.
The majority of the capital is currently being invested in rockets launch to address the bottleneck of access to space.
“We are particularly excited about a few areas such as ‘change detection’, using large constellations of Earth Observation satellites to pass the same point on earth frequently, noting changes to infer insights or identify anomalies”, Boggett adds.
Seraphim Capital’s co-founder accents two ongoing elements, the consolidation of space market players and the acquisition of emerging companies with new business models and technologies.
“There has not been too much M&A among new space companies yet but we estimate that time is coming. We are looking forward to the first $1bn acquisition of a new space company”, he says.
Like Chanin, Boggett foresees new space IPOs “definitely taking place in the next five years.” Satellite operator Spire Global would be a good candidate he estimates.
“It is a small satellite operator with 100 satellites in orbit currently and that number will increase by 50% next year. As they need to replace satellites every three to four years, they need significant capital to maintain that constellation. Being a public company with access to fresh capital more frequently would be a sensible approach. In that sense, new space companies with high level capital requirements would go listed while others will remain private for longer”, he develops.
Though, Boggett points a bottleneck in access to space which is the current lack of operational launch providers despite the success of Elon Musk’s company SpaceX.“VC funding is flooding to alternative rocket companies such as Rocket Lab or One Space. There is only a limited amount of rocket launch capacity but within the next few years, we are going to see more launch capacity in the market as a result of this funding”, he says.