As Karl Schmidt of KippsDeSanto & Company said, “The Space M&A markets couldn’t be any hotter. We’ll see more buying and more exits in 2021.” There was total agreement by the panel and everyone seemed to be onboard with his comment
The general consensus was certainly that 2020 was an interesting year, and for James Murray of PJT Partners, it was actually three separate years in one.
First, the private placement market was healthy and robust with around $4 billion in private capital aid for business being doled out, enabling those firms to continue to build out their constellations — the industry and the markets continued to hum along quite admirably.
Then COVID arrived and the second segment of 2020 arrived when the market tipped sideways.
The third portion of 2020 found firms emerging from the shock of the coronavirus invasion and a different market materialized and the industry regained some of its footing. He noted that what used to be a nice market has now drawn a lot more attention. The success of Starlink, he noted, sent shock waves through the industry — many firms were struggling with the new smallsat paradigm. And a point that many agreed upon throughout the session was that there has never been a better time to raise capital. This is also a tale of two cities, where the opportunities for the smallsat segment are excitingly available, but for larger operations, the time has become far more challenging.
Many noted that a key investment player is the government and is becoming more and more interested in the smallsat environs. The pandemic helped the government realize the value of the space sector and their ability to access commercial space data and found such to be highly useful. Commercial space is very relevant to government players in the U.S.
The high profiles of OneWeb and Intelsat bankruptcies actually caused a refresh of the industry, according to Noel Rimalovski of GH Partners. Balance sheets became healthier and the deck was cleaned up going forward. With $10 billion in capital coming into the industry, new investment models will further helps some of the smaller companies in the industry move from a small to a large size.
John Stack of Canaccord Genuity readily agreed that 2020 was clearly a dynamic year; however, there were many questions about where were all of the company exits into the markets. A lot was happening on the M&A side as company’s pondered their exits and examined a myriad of opportunities to grow. He notes a continued sense of urgency for those who have a fear of missing out. There are a lot of strategic discussions regarding what the best path forward be for them. If they don’t engage a SPAC, what does it mean about raising money downstream. Where do they fit into the ecosystem with competitive sets? Private rounds? Private equity rollups? Public equity routes? Many of the new investors are trying to get educated to get a feel for what’s going on while companies weigh their strategic options. There’s a lot of money, a lot of deals, and a lot of rollups.
In looking at SPAC (special purpose acquisition companies) Mr. Murray noted these have been around for decades. What is new in the market environment all now find themselves in. Market timing is crucial. There will be about 250 SPACs out there by the end of next month (March 2020). He believes there are different groups of players with the SPAC confines: Hedge fund investors who find the opportunity to put money into a SPAC and then have a look at early stage movement and can pull out when they wish. Then there are the SPAC sponsors who are coming to the table and they are chasing growth.
When looking across New Space, many companies are promising a lot of appreciation. The third group are companies’ management teams who themselves are seeking to raise funds at reasonable rates and they are looking at SPAC to see if this is suitable for their business plans. He thinks that in 2021, in genera, there will probably be five or six portfolio companies looking at SPACs, which is clearly a big topic of conversation. Whether they go forward will have to be seen. SPAC is simply a way of getting business capital into the door. There is some risk for companies that are not ready for primetime going out — a little bit of a rush to exit — and a SPAC would not be as great for those firms.
The panel agreed that SPACs are not for everyone… there are a number of concerns to consider when going public… there are investor relations concerns, legal issues and the necessity of building up senior management to handle the new requirements SPACs place on the firm and other challenges.
Without question, the continuing belief by the panelists was that the smallsat industry has certainly evolved into an exciting market segment and is attracting huge amounts of capital. There will be horizontal integration between firms that have complimentary data sets, for one thing.
One area being seen by Mr. Rimalovski, is that small companies have overlapping strategic interests and the anticipation is, especially in the EO sector, is horizontal integration, particular with those firms that have complimentary data sets. Additionally, a many investors not seen before in this sector are coming in taking a look. In terms of the GEO role, there will more than likely be a big recapitalization of these companies thru bankruptcy — LEO models will be eating GEOs traditional lunch, especially within the data sector. No doubt that the industry will continue to be disrupted by smallsats.
Mr. Schmidt added that many equity groups — particularly in the mid- to smaller size equity groups — that haven’t previously been able to get into the space sector are now looking at their next platform, such as the services and software side.
Mr. Murray believes that deal announcements are an indicator of positive activity. Many of these deals are under confidentiality agreements; however, he expects to see many new verticals opening up, especially around comms via smallsats. He thinks LEO operators may well consider funding along the s perhaps considering public financing route.
When discussing government involvement within the smallsat industry, Tom Gillespie of In-Q-Tel thinks it’s difficult right now to make a pronouncement on how the Biden administration is going to treat space. There are some questions regarding the National Space Council and how it will move forward and if the Office of Space Commerce will actually survive. He did note that, clearly, government is paying attention and is watching what’s happening in space. A lot of government money is going into the market segment. In example, the USAF is investing in smaller companies. There will be pressure on defense and intel budgets going forward, so space is a good place to be. Government is still grappling with how much should they own outright, or, do they pay someone to handle the project and at least get a piece of those operations.
Moderator Randy Segal of Hogan Lovells said that space is the next sexy thing. The rest of the world over the last two to three years has come to realize that space is the really cool thing and that is where they want to be. People want to invest and be part of it. She then asked for Words of Wisdom from the panel.
Mr. Rimalovski answered that small companies that are stretching for capital investment must be quite careful if they plan on doing business in western world — foreign ownership can be an impediment and if that path is taken, they must take into account that there will be a lot of legal fees. Mr. Stack succinctly stated, “Team, Tech and Traction, with a focus on the last ‘T’.” He will be excited to finally see company CEOs and management teams get their place in the sun, as they have imbued their companies with their own blood, sweat and tears into their firms. Finally to be seen will be the acknowledgement of their hard work. Mr. Schmidt emphasized that the space M&A markets couldn’t be any hotter and that there will be more buying and more exits in 2021. For Mr. Gillespie, this is going to be a truly exciting year, with the government really heading into commercial space. He also believes there will be a number of company exits via SPAC, which is really healthy for the industry.
Gathering all of the comments together in a single channel, there was no doubt by the panelists that this was an extremely exciting time to be involved in the smallsat industry.