Op-ed | Space and SPACs: A COVID Romance?
The growth in popularity of Special Purpose Acquisition Companies (SPACs) has impacted many industries, including the space sector. While the relationship between the two dates back to the successful merger of Iridium in 2008, the pace of SPAC activity in the space sector truly accelerated in 2020 and 2021, marked by several high-profile mergers. The majority have been successful, with redemption rates equivalent to or lower than those in other SPAC mergers. However, there are several examples of space companies with redemption rates of 50% or more – even as high as 90% in the case of small satellite manufacturer Spire Global, which went public in August 2021.
Boston Consulting Group’s analysis of current SPAC trends and the nature of traditional investment in the space sector suggests that while some elements of space are attractive to SPAC investors, the two may not be natural long-term partners. This potential lack of compatibility may stem from the typical desire for quick returns with SPACs, versus the often long-term timelines to profitability from space startups. Additionally, performance risks in the space sector may be unappealing to SPAC investors. Numerous companies in this sector have declared bankruptcy, while others have suffered high-profile setbacks such as launch failures. The space market will likely remain dynamic over the next 10 years as it consolidates. This will not deter traditional space investors, but may cause a decline in SPAC interest.
We may continue to see the COVID-era romance between SPACs and the space sector wane. However, space isn’t a “bubble“ like dot-com stocks in the 1990s. Rather, the space sector will continue to grow in economic yield as a platform for Earth observation, satellite communications, and eventually in-orbit services and manufacturing. Investors should remain bullish on space investments and adapt to the timelines associated within this dynamic sector for technology readiness levels and market-ready service availability. Space investment demands a time tolerance and level of commitment that is otherwise often antithetical to investment timelines. SPACs will continue to play a role in the market — and a large one if they can accommodate the space sector’s realities.
SPACE SECTOR SPACS – HOW DID WE GET TO WHERE WE ARE TODAY?
The growth of SPAC interest in the space sector has been relatively slow despite Iridium’s early merger, as the next move was not until Virgin Galactic merged with Social Capital Hedosophia in 2019 in a $1.5 billion de-SPAC transaction. This heralded an increase in space sector SPACs, with two more announced in 2020 and six in 2021 through the start of November. The SPAC frenzy included Rocket Lab, BlackSky, and Astra – all of which were announced within a four-week period.
Key attributes of SPACs have contributed to this growth. From a target company perspective, SPACs provide two streams of additional capital inflow. First, there are the SPAC proceeds left after deducting redeemed capital. With a low redemption rate, target companies receive a higher share of the IPO proceeds. Second, in parallel to the initial merger discussions between the SPAC and the target company, additional financing in the form of a PIPE (Private Investment in Public Equity) is negotiated. Traditionally, institutional investors take part in PIPEs, providing additional capital and certainty to the SPAC merger.
Looking at SPACs from a different angle, SPAC mergers can be compared to a VC-like financing round (new SPAC and PIPE investors come on board and existing investors stay), including a process of going public to capital markets. As a result, privately held young target companies — typically, startups — gain access to a broader audience to accelerate their growth potential. SPACs thus provide more of an opportunity for public participation.
The accelerated pace of activity prompted increased attention to the role of SPACs in the space sector, drawing particular focus to the redemption rate, in which SPAC shareholders request the return of their shares and funds until the SPAC merger closes.
The redemption rate dynamic has prompted questions regarding the compatibility of space sector firms and SPACs, as high redemption rates may reflect concerns with the growth prospects and investors’ trust of the targeted firms. However, BCG analysis shows that space sector redemption rates are not reflective of any issue with the space sector. In fact, redemption rates for space firms from 2019 to date are lower than the broader industry rate, with a median of 22% for the space sector and 41% for non-space sector SPACs. As shown in Figure 1, redemption rates for space sector mergers have been consistently lower than the average for that month, and only Spire and BlackSky have stood out with rates above 40%.
Our perspective on the rate of SPAC redemptions in 2021 is that Q1 saw a low redemption rate of 8% compared to its average of roughly 50% since 2019. This low rate reflects a combination of euphoria and trust from investors in the frenzied market created since 2020. However, rates climbed in the following two quarters to more than 50% – again showing signs of a dampened outlook. One key driver was the increased scrutiny from the U.S. Securities and Exchange Commission, which raised concerns about SPACs and investor protection issues. While Spire was well above the Q3 average, BlackSky was only slightly over, and these examples do not necessarily suggest inherent differences between space sector redemption rates and other mergers more broadly.
DIFFERENCES IN INVESTMENT APPROACH
The space industry has traditionally attracted investors with long memories, with funding sourced from venture capital over long periods of time. For example, VC firms such as Space Angels (backing NanoRacks and SkyWatch), Hemisphere Ventures (carrying value in Akash Systems, LeoLabs, and Planet), and Fidelity Investments (which has made several investment rounds in SpaceX alongside new entrants) have historically been on the relationship market with space companies.
Meagan Crawford, co-founder and managing partner of the Space Fund – a space investment and market research firm – was cited by Bloomberg in a July article stating that “there is a lot of hype around space. It’s cool, and people want to invest in things that are cool,” while noting that many of the firms currently seeking to go public may be too risky for investors and don’t represent “the best of what space has to offer.”
The best of what space has to offer is long-term value, rather than near-term returns. We can expect consolidation and further failures in the next 5-10 years in commercial space, and the unpredictability of this market can be a deterrent to investment and M&A activity. Traditional space investors are primed to not expect quick ROI; rather, they are in space for the long haul, where the average concept-to-market timeline trends toward a decade, and the sight of a collapsing launch vehicle on a launchpad doesn’t scare them away easily.
For SPAC investors, the heavy focus on a quick ROI – and overall risk aversion, with redemption as a means toward a hedge – may ultimately make SPACs and the space sector an imperfect fit. The flurry of activity in the space sector which accompanied the overall growth of SPACs during the global COVID-19 pandemic may not last over the longer term, as relative market uncertainty and the long timelines for returns on many space sector firms will diminish their appeal to SPAC investors.
IMPLICATIONS FOR COMPATIBILITY
While contemporary trends in SPACs and current state of the space sector are not necessarily well-matched, there is possibility for a continued, mutually beneficial relationship. Space investors have an opportunity to educate the broader investor market on the full scope of yield generated by space startups in the Earth observation and satellite communications sectors alone, not to mention the longer-term in-orbit services and human spaceflight verticals. Meanwhile, if SPAC investors remain narrowly focused on short-term ROI, they risk losing out on medium-term gains by driving high redemption rates on technologies manufactured by startups with a high failure tolerance. Space companies will continue to find SPACs an attractive alternative to access public markets to fund their journey, but must manage the shift from short-term investment style of SPACs to long-term minded investor mix after the SPAC merger is completed.
As is the case with most successful relationships, commitment is crucial. Broader SPAC investors will need to develop a failure tolerance that is commensurate with the technology readiness cycle itself. Space investors and broader SPAC investors should also pay very close attention to value-added services coming online (selling Earth observation data and associated analytics as a service; selling satellite communications as a service) – as those two value-added services are expected to drive much of the medium-term growth in the new space economy. The growth trajectory of the space sector will not be linear, but investors with patience will find that there are many compelling benefits to seeing the commitment through for the long term – sowing the seeds for a vibrant, next-generation space economy.
Sita Sonty is partner and associate director for aerospace and defense at Boston Consulting Group. Cameron Scott is lead knowledge analyst for defense and security. Thomas Endter is a lead knowledge analyst in BCG’s Transaction & Integration Excellence Practice.
This article originally appeared in the December 2021 issue of SpaceNews magazine.