When the British private equity industry met for its annual summit in London last month, the final headline act of the day wasn’t a prominent politician or a respected economist: it was an astronaut.
Tim Peake, who became the first British astronaut ever to visit the International Space Station in 2015, took to the stage to share a message with buyout shops: the space industry is booming.
“We’re moving very rapidly into an area we haven’t used space for before, in terms of the commercialisation of low earth orbit, which is going to offer so many opportunities,” Peake told investors.
It seems his audience is getting the message. A swathe of private equity and venture capital firms are starting to monetise the space ecosystem, amid increasingly cheap access and rapidly-developing technologies.
The cost of launching into low-earth orbit has fallen from $65,000 per kilogram to $1,500 per kilogram in the past four decades, according to McKinsey & Company. With major breakthroughs in recovering and reusing rockets, Elon Musk’s SpaceX has played a pivotal role.
“The world of space has massively shifted in the last 5 years, all thanks to our friend Elon,” says Shonnel Malani, who is responsible for aerospace and defence at private equity giant Advent International.
“What he has done is invest with the US government behind him and massively lowered the cost of launch.”
Easier access is opening up a new frontier for investors, with commercial projects ranging from 3D organ printing and high-tech drug testing to solar panels and private flights.
In 2023, however, as interest rates have lifted off and tech valuations have come back down to earth, the dynamics of the investor space race have started to shift.
PE houses are pivoting away from highly-speculative commercial projects to more stable military ones, as geopolitical tensions prompt governments to bulk up their defence budgets.
“The companies that are getting funded and are performing well continue to be the ones with a national security customer backbone,” says Kirk Konert, partner at AE Industrial, which is one of the most active PE investors in the sector.
In August, KKR snapped up a minority stake in German space and technology company OHB SE, which recently won a contract from the European Commission to develop multinational space-base early warning and tracking systems for ballistic missiles.
“[The] strategic importance of space has become an irrefutable political reality in the context of the Russian war of aggression against Ukraine,” wrote OHB chief executive Marco Fuchs in August this year.
THE SECOND SPACE RACE
While the first space race ended on 20 July 1969 when Neil Armstrong stepped onto the Moon for the first time, a second space race is now underway. On one side, the US and its partners (including Britain) hope to put humans back on the lunar surface from 2025 onwards with the Artemis project, while on the other side, China is looking to establish its own lunar base this decade.
But beyond moon landings, this second race includes a broader militarisation of space that is drawing in private companies, as nation states roll out multi-billion dollar development contracts to gain an edge over their rivals.
Satellites are proving to be a particularly popular target for investors: they were the top category for M&A in 2021 and 2022, with 13 VC-backed orbital satellite companies acquired in those two years alone.
AE Industrial’s Konert says that government agencies are now hoping to replicate their approach towards the launch of rockets by Musk’s SpaceX in the satellite arena.
“The Space Development Agency and the DoD [US Department of Defense] are pushing that same mindset: signing fixed price contracts, moving quickly and getting the technology deployed as fast as possible.”
Konert and his team are hoping that their acquisition last year of York Space Systems, a provider of small satellites, satellite components and turnkey mission operations, will fit into the government’s new agenda.
Since 2021, more than half of SpaceX launches have been missions for its satellite internet network Starlink, and Starlink itself may account for up to 40% of SpaceX revenues, according to data company Pitchbook.
Investment giant BlackRock dipped its toes into the satellite sector earlier this year, leading a $58m funding round into HawkEye 360, a defence technology company which had 21 satellites in orbit at the time of the deal in July.
It was Advent International’s $6.4bn acquisition of Maxar in May, however, that underlined investor appetite. US-based Maxar, that has programmes which include helping NASA’s Artemis missions with moon exploration and providing the US army with virtual training exercises based on geospatial intelligence, is “a large, established company with underlying secure contracts,” according to Malani.
He says: “There’s not enough safety in the commercial side of investing in space, especially when you think about a leveraged environment. The military side of space is far more stable and developed because there’s a very clear impetus for governments that see that satellites in space provide a defensive layer for all the kit that goes up.”
Malani explains: “Apple puts up a satellite and suddenly our data is up in space. Somebody needs to protect it, but there are no borders. A Chinese satellite can fly right by the Apple satellite and collect information, so who is going to protect that? How is that going to be looked after? There’s a big impetus on how you protect what’s up there.”
RISKY BUSINESS
Yet despite the lucrative government contracts on offer, space remains a notoriously risky sector. Rocket failures, launch delays, supply chain disruption and new breakthrough technologies all pose a threat to investors muscling into the sector.
“From 2020 into 2022, we saw a lot of money flowing into space and the diligence was just not there,” says Tim Chrisman, executive director at the Association for Space Finance. “I talked to a number of investors and I was shocked at what deals were getting funded just because they didn’t want to get left out.”
In April, Richard Branson’s Virgin Orbit filed for bankruptcy after struggling to find long-term funding in the wake of a failed rocket launch.
“This year we’ve seen a bit of a contraction in the full stack of investing, from pre-seed all the way through to growth capital,” Chrisman adds.
Private equity and venture capital deal activity in the sector slumped from 2021 to 2022 and signs of the slowdown have continued into this year: from January to October 2023, VC firms inked 255 deals, down from a peak of 355 during the 12 month period of 2021, according to Pitchbook data shared with Private Equity News.
A handful of space ventures that went public via special purpose acquisition companies (Spacs) several years ago now have a harder time raising capital.
The stock price for Rocket Lab, which listed on the Nasdaq in August 2021, has plummeted from a peak of more than $20 in late 2021 to just over the $4 mark today.
While Pitchbook expects “geopolitically neutral nations such as India” to be best positioned for the space race, as they compete without alliance-based restrictions, there are concerns that Europe’s growth firms in particular could be hit by the downturn.
Bogdan Gogulan, who runs space-focused PE company New Space Capital, says that the continent risks “being held back by a lack of investment”.
“Growth-stage funding in Europe trails behind in comparison to the US. The rise of the US and China in space tech further accentuates Europe’s pressing need to not only sustain but innovate. And the byproduct of inadequate investment in Europe (especially in growth companies) is also leading to smaller valuations – this is an opportunity for savvy investors.”
Indeed, PE firms have already begun scouting for bolt-on bargains in the market. Chrisman says: “It seems there’s a need for consolidation: I’ve talked with a number of people in the more traditional PE world of acquiring distressed companies and they’re looking at bundling companies together.”
Maxar is considering a push into sensor products such as infrared and synthetic-aperture radar (SAR), according to Malani.
“There are a lot of smaller space companies that did Spacs and it’s all gone pear-shaped. Some of them have good technology and need to find steady homes, so invariably there will be a shake up,” Malani says.
AE Industrial’s Konert is also in an acquisitive mood: “There will probably be opportunities to save really good businesses that were poorly managed or had a bad capital structure.”
Pitchbook noted in a recent report that the decline in VC activity for space tech is smaller than the decline in the broader venture capital ecosystem, but the rising cost of capital in an already capital-intensive industry means that cash management will be paramount.
The data company wrote: “Investors will be more prudent about deploying capital to space tech companies, and thus we can expect many startups to either be acquired or fail entirely. That said, the presence of government support, particularly through a reforming acquisitions process, means that opportunities still exist for startups to acquire funding for their ventures.”
All eyes are on defence, but as astronaut Tim Peake pointed out in his speech to private equity delegates last month, the extraterrestrial economy is set to take off on many fronts.
Without Earth’s gravity affecting the human body, some of the world’s largest pharmaceutical companies, including AstraZeneca and Sanofi, have been sending experiments to the International Space Station.
Pitchbook expects the space tech market size to grow at a compound annual growth rate (CAGR) of 11% to $321bn by 2025.
“You’ll see more established firms adding space to their repertoire,” predicts the Association for Space Finance’s Chrisman. “Companies used to 20-year time horizons with investments costing billions of dollars now have a new source of capital that will start being unlocked more and more.”
From healthcare to high-tech defence, the industrialisation of space is well under way.
US politicians currently debating the existence of UFOs might well discover that these mysterious sightings are, in fact, private equity-owned companies venturing into space in search of profit.
To contact the author of this story with feedback or news, email Sebastian McCarthy
https://www.penews.com/articles/interstellar-returns-inside-private-equitys-space-race-20231106
