LAS VEGAS — While mergers involving special purpose acquisition corporations (SPACs) dominated the space industry for much of the year, one expert sees warning signs of waning interest in this way of taking companies public.
Speaking at the ASCEND conference by the American Institute of Aeronautics and Astronautics here Nov. 16, Phil Ingle, a managing director at Morgan Stanley, said weakening interest in SPACs in the broader market may make it more difficult for space firms to raise large amounts of capital by merging with such “blank check” companies.
“There are certain warning signs in terms of what’s happening in the SPAC market,” he said. “There are real signs of fatigue in the SPAC market right now.”
One of those warning signs is the diminishing size of concurrent funding rounds in SPAC mergers, known as private investment in public equity or PIPEs. Those deals, done at the same time as a SPAC merger, allow companies to raise capital beyond the proceeds of the SPAC.
PIPEs also help bolster the case for the SPAC deal. “It validates the valuation, it validates the story for the public market,” he said.
Ingle noted that SPAC deals across the market in February 2021 included $15 billion of PIPEs. By October, PIPE deals had fallen to $800 million and, through the first half of November, only $200 million of PIPEs had been announced. “The PIPE market has completely dried up,” he said.
That trend is evident in the space industry. Companies that went public through SPACs early in the year had large PIPE rounds, including a $470 million PIPE by Rocket Lab. By contrast, Terran Orbital, which announced plans to go public through a SPAC merger Oct. 28, included an initial PIPE of just $50 million.
Terran Orbital CEO Marc Bell said Terran Orbital’s SPAC includes a PIPE with three tranches totaling $200 million. If Terran Orbital’s SPAC experiences few redemptions, the company will not take all the PIPE funding to prevent dilution of ownership.
A second factor is rising rates of redemptions, where shareholders of the SPAC seek their money back rather than hold stock in the merged company. Redemption rates across the market were about 10% earlier this year, Ingle noted, but had grown to 70% by November. That reduces the amount of capital the merged company retains.
“That means that, if you’re a space company and you’re looking for capital in the SPAC market, number one, you’ve got a dry PIPE market and, number two, you’re facing the prospect of big redemptions,” he concluded. “Capital becomes very uncertain.”
SPAC merger prospects probably won’t improve, he argued, until companies that have gone public through SPACs, both in the space industry and across the board, demonstrate good technical and financial performance.
“The next year is going to be a really critical year in terms of, most importantly, how those companies that are public perform against their technical milestones,” he said. Financial results are also important, he added, but not as vital as meeting technical milestones.
Another factor will be companies that perform secondary offerings to raise additional capital. “It’s going to set the tone for capital formation in space,” he said.
Carissa Christensen, chief executive of BryceTech, spoke at the same conference session and cautioned against evaluating all space companies that went public via SPACs as a single group. “They’re very diverse,” she said, with differing levels of maturity and serving different markets. “And yet, they’ll be evaluated as a group whether they succeed or fail, and that evaluation is going to speak to the availability of capital.”
Space ventures are part of a group of capital-intensive companies that could be hit by any decrease in overall capital, including by broader economic issues like inflation and interest rates. “Their growth is being funded very much by infusions of external capital, and their capital needs are getting more and more substantial to hit very ambitious goals,” she said. “If they’re not able to meet those infusions, that could be really problematic, even for a company that’s extremely successful.”
Ingle agreed, noting that the SPAC boom took advantage of low interest rates that could be threatened if rates rise. “That is an absolute, no-question macro risk, not just for space but also for some of these other capital-intensive industries generally.”
The wave of SPAC deals, though, has had benefits for the space industry generally, and not just the companies that have gone public using them. “Twenty-four months, there was no pure-play public space company,” he said, which deterred investors. “Now there are pure-play space opportunities, and you are seeing Wall Street focus on this sector.”