The torrid pace of investment and acquisitions involving space companies this year is unlikely to continue next year, but investors and bankers are still optimistic about the long-term growth prospects for the industry.
Space startups this year have benefited from a broader wave of deals involving special-purpose acquisition corporations, or SPACs, so-called blank check ventures that merge with privately held companies, allowing those companies to go public outside of the traditional initial public offering process. About a dozen space companies have announced SPAC mergers in the last year, raising several hundred million dollars each.
Skepticism about SPACs in general, though, may slow the rate of such deals in the future. “Since the beginning of the year, there’s now a lot more friction to go down the SPAC path than to raise privately,” said Shireen Sharma, vice president of the technology, media and telecom group at Goldman Sachs, during a panel at the Satellite Innovation conference here Oct. 5.
That includes, she said, the work needed to raise a concurrent funding round known as private investment in public equity (PIPE) associated with many SPAC mergers to increase the size of the deal beyond the money held by the SPAC itself. Another factor is the dynamics of the public markets, including the high rate of redemptions seen in some recent SPAC deals where shareholders asked for their money back rather that hold shares in the merged company.
“When we’re looking at early-stage companies, a lot of them are opting not to go down a SPAC path but stay on the private path because there’s a lot more in their control,” Sharma said. SPACs did, she noted, help bring “a lot of investor interest into the space segment.”
“When we’re talking about SPACs, it’s almost like they’re butting into the [venture capital] space when it comes to accepting risk that the public markets probably shouldn’t have all the time,” said Steven Jorgenson, founder and general partner of Starbridge Venture Capital. SPAC deals often involve early-stage companies that usually would not consider going public. “It does seem like some of these SPACs are jumping the gun, and those companies should be private, funded by VCs a little bit longer.”
That perception could reduce interest in SPAC deals in the next year, he said, affecting overall investment in the industry. “I doubt next year will be as robust for people trying to access the capital markets as it was this year or 2020, but we’ll see. It’s a little bit chaotic out there.”
There’s also been a surge in mergers and acquisitions, or M&A. “You’re so busy you’re turning away opportunities that you’d rather not turn away because you can’t handle them,” said Karl Schmidt, managing director of KippsDeSanto & Co., a mergers and acquisition group under CapitalOne that has brokered eight space-related deals in the last 24 months, such as Parsons’ acquisition of Braxton last year.
There’s been strong interest among defense contractors to acquire space firms to avoid missing out on what they see is a growing sector. “They realize that if they’re not in space right now, they’ve got to get in,” he said.
“On the space side, we feel like there’s going to be more M&A,” he said, although not necessarily at the same high valuations as in the last couple years. “It’s been at an all-time high, so you can argue that there’s only one way to go, but we thought the same thing last year.”
Regardless of the changes in capital and valuations, it’s still up to companies to execute on their plans. “The market gives and the market taketh away,” said Mike Collett, founder and managing partner of Promus Ventures. “If you don’t execute, you’re going to get crushed. You’re already seeing that today with some of the space companies that have already gone out.”
All four panelists said that, despite a potential slowdown in deals, they still expected an up year generally for the industry in 2022. “I think we’re in a multi-decade secular growth trend for the industry that really started around 2015,” said Jorgenson. “It’s got a long ways to go.”