Article
Commercial Launch, Proliferation Creates Investment Opportunities in Ancillary Space Markets
Dialogue Between Private Equity and National Security Can Jumpstart Future Space Economy
Two barriers to entry have historically defined the relationship between capital markets and the space sector: the need for significant upfront capital and long return on investment (ROI) timelines. These barriers have created a hot-and-cold dynamic between capital markets and the space sector, as demonstrated by Space Capital’s Space Investment Quarterly: Q4 2023 report that found the space economy witnessed a private equity investment of $17.9 billion in 2023, a year-over-year decline of 25 percent compared to 2022.
But projections for the space economy not only remain high, they are quickly accelerating. A recent report by the World Economic Forum and the McKinsey & Company found that the space economy will reach $1.8 trillion by 2035, half a decade sooner than the $1 trillion projection set out by Morgan Stanley last year. As a result, new business opportunities are quickly emerging as a commercial launch market enables cheaper access to space and the Department of Defense (DOD) shifts toward a proliferation of assets across the next warfighting domain.
“The space industry has gone through cycles,” said Kirk Konert, managing partner at AE Industrial Partners. “With budget declines at NASA and other government-driven programs, space hasn’t been the best place to invest private capital. But the ability to get assets on-orbit cheaper and quicker is creating opportunities for different business models within space and has allowed investors to make more returns on investments, which is increasing overall interest in the market.”
A New Frontier Requires Infrastructure
With respect to the current state of the space economy, General Stephen Whiting, Commander of U.S. Space Command, likens it to the days of the Lewis and Clark expeditions across the American West. Like those frontier expeditions, NASA’s historic Apollo missions to the moon generated excitement for what’s possible in a new domain. But without an infrastructure in place to go back, commercial opportunities remain limited. So what the space economy needs today is an equivalent to the combination of infrastructure and incentives that kick-started the settling of the American West: railroads and the gold rush.
“The railroad analogy is interesting because the accelerant to drive traffic faster was the gold rush, and so these little towns popped up along the railroads to get out West,” said Eddie Papczun, founding partner at Elara Nova: The Space Consultancy. “Similarly, we need infrastructure in space, but building infrastructure in space is a lot harder than building a train track across the country. But that infrastructure will be a force multiplier and an accelerant to the space economy, because as soon as you can get to the moon, cis-lunar and beyond, everything changes.”
As the visceral entryway into space, launch tends to dominate the public’s perception of the space industry. But the start-up days of the launch market have largely settled, as a handful of reliable mainstays are now providing cheaper and more frequent access to the space domain. However, this access to space can enable these other, necessary infrastructure elements to take shape.
“If you’re looking to start another launch company, you’ve already missed that opportunity,” Konert said. “Entrepreneurs looking for seed capital to start a space company should project where the market will be in ten years, versus where it is today. Instead, you should focus on the lunar economy, on-orbit-servicing and decommissioning of satellites because the trends are there with proliferation.”
Opportunities in the Proliferation of Space
The word ‘proliferation’ is quickly becoming the defining mantra of the developing space economy. Due to the historically unreliable and expensive nature of launch, the DOD traditionally prioritized getting a few, large assets on-orbit to facilitate space-based capabilities. But as space started to evolve into a contested domain, those few assets became what Gen (Ret) John E. Hyten, former Vice Chairman of the Joint Chiefs of Staff and senior principal advisor at Elara Nova, referred to as “big, fat, juicy targets,” for adversaries to attack and disable.
“This shift toward proliferation was primarily driven during General Hyten’s time at the Air Force’s Space Command,” Papczun said. “He hired Mike Dickey, one of the founding partners at Elara Nova, to architect the future of space from a national security perspective with the idea of proliferating the orbits. That demand signal essentially initiated the berthing of the Space Force.”
Proliferated architectures create resiliency in that if a space-based asset is attacked or disabled, the DOD can adapt its architecture to maintain its national security capabilities. In turn, this shift toward highly-populated and proliferated space architectures can also generate future business opportunities. Through programs like the Space Development Agency’s (SDA) Proliferated Warfighter Space Architecture (PWSA), the ancillary markets supporting the Space Force’s proliferation efforts have already caught the attention of the investment community.
“There was always a niche in the space market, like producing composites for a space project,” said Konert. “But suddenly, companies started getting orders for not just one component, but dozens of components for this whole proliferated constellation of space activity. As a result, private equity firms started seeing an opportunity to invest in the space sector.”
A SPAC Bubble in the Space Market
Excitement generated by the proliferation of space however, has not always led to successful returns on investment. This particularly rang true after what proved to be a SPAC-bubble in 2021, from which the investment community is still recovering today. Special Purpose Acquisition Companies, or SPACs, are a common means of raising capital through an initial public offering (IPO) to acquire or merge with an existing company. For a capital-intensive industry like space, SPACs became prevalent as a series of space companies went public in 2021.
“The SPACs caught us by surprise in that every space company that had momentum or a good story to tell was going public,” Konert said. “The market cap and interest in space from retail and institutional investors exploded. But the business models weren’t worthy enough to justify the valuations they were receiving and that led to bankruptcy or near-bankruptcy for many of them.”
According to Papczun, the SPAC-craze of 2021 compromised what is an otherwise effective means of raising capital for emerging market opportunities in sectors like space.
“SPACs are a great tool because it’s an acceleratant that raises money quickly for a company that has sound business fundamentals in place. In 2021, we had bad actors who saw an opportunity to take this tool and leverage it for personal gain, and the companies were the ones that suffered because they weren’t ready to go public.”
Incidentally, the 2021 SPAC-bubble and its subsequent fall-out reinforced the risk-averse and cyclical approach the investment community has traditionally held toward the space sector. But Konert says the interest from the investment community still exists.
“Institutional investors are curious and interested in the space sector, but space is not yet considered one of those vertical sectors like industrials, business services and technology. Frankly, there needs to be more wins and over the coming years, you’ll see increased interest from institutional investors because there will be some tremendous success stories to come.”
A Future Space Economy from the Ground Up
One potential success story may come from an often overlooked, but critical component to the space economy: ground networks. According to a recent White Paper released by Elara Nova, the current Satellite Control Network in place today is outdated and overburdened to appropriately support the proliferated future of national security space. The White Paper generated a broader call-to-action, co-written by General Hyten and Elara Nova founding partner Major General (Ret) Roger Teague, to develop solutions for a new ground-based network to support the future space economy.
“Space-based assets are useless unless they can communicate through ground-based, terrestrial networks,” Papczun said. “We need hardened antennas that are cyber-protected and enable resiliency on the ground, so we can communicate with these satellites. Ground systems cannot just sit out of sight and out of mind until the moment that you need them, just to find their capability compromised.”
Upgrades to the Satellite Control Network, like other ancillary market opportunities defining the future space economy like orbital debris and on-orbit servicing, can generate the success stories sought for by the investment community. These success stories, however, may not always be directly related to national security space. That’s why, through its recently-released U.S. Space Force Commercial Space Strategy, the DOD is using its influence to cultivate a commercial space market that will also indirectly develop the national security space solutions of the future.
“The DOD’s commercial space report envisions how the DOD should leverage the national defense industrial supply chain and private capital to be a force multiplier,” Konert said. “The investment community should be listening to the national security customer about their problems and how portfolio investments can address them. If commercial companies can attract government funding to solve the DOD’s problems as a program of record, that creates more successes and portfolio wins that will attract even more capital.”
Now, after its first full year in operations, Elara Nova: The Space Consultancy is also evolving to not only facilitate conversations between the government and industry, but to bring the investment community into the fold as well.
“Sometimes it’s difficult for the government to move quickly because it’s very hindered by regulatory oversight,” Papczun said. “The idea for Elara Nova to be an entity on the other side of that ‘frozen middle’ to help pull solutions through to support national security space. Now, we’re talking to the investment community, because we are an interlocutor between so many different parts of the traditional economy and how it sees space.”
Elara Nova is a global consultancy and professional services firm focused on helping businesses and government agencies maximize the strategic advantages of the space domain. Learn more at https://elaranova.com/.