I thought this week, following the publication of its prospectus, I would take a look at Seraphim Space Investment Trust (SSIT), the UK’s first listed space technology fund which was unveiled last month with ex-Virgin Galactic president Will Whitehorn as chair.
The trust is looking for £150m of cash, which it hopes to augment by issuing 30m shares at £1 a share to the owners (some of whom are members of the management team) of a seed portfolio of 15 assets.
The objective is to deliver capital growth and its ambitions are not modest: 20% per annum net asset value (NAV) total returns over the long term. Such returns are achievable. The investment companies sector can boast eight funds – the usual suspects, Scottish Mortgage (SMT), Allianz Technology (ATT) and Polar Capital Technology (PCT), for example – that have achieved such returns over the past 10 years. However, for me, that figure felt more headline-grabbing than realistic.
The managers, Seraphim Capital, have some relevant experience, having established a precursor fund in 2016 which is the source of SSIT’s seed portfolio. They can also point to a 31% IRR on existing investments (although bear in mind how short a time frame we are considering here).
This is obviously a new asset class among investment trusts, but I guess it will be allocated to the Association of Investment Companies’ Growth Capital sector. Most of the investments will be unlisted. Seraphim says it will leave seed capital and series A financing to other investors, and focus mainly on series B and above funding rounds.
As the prospectus highlights, there are risks associated with investing in a largely unproven investment category. The uniqueness of the asset class brings with it some stock specific issues. I have never seen solar phenomena and orbital collisions highlighted as investment risks before.
I was pleased to see a recognition that early-stage businesses may need to undertake subsequent funding rounds and that the trust could suffer financially if it is not in a position to make follow-on investments. As I have highlighted before, this was one of the biggest mistakes that Neil Woodford made with Patient Capital – now run by Schroders as Schroder UK Public Private (SUPP). Sticking with the theme of Patient Capital failings, there is also no plan to gear the portfolio.
On the plus side, there are good reasons why the trust may work. For me, chief among these is a statistic that ‘the costs of building and launching a satellite [have] fallen by a factor of more than 100x since 2010’. This has been helped by a trend towards lighter and smaller satellites but advances such as SpaceX’s reusable rockets are game changers. This is the sort of metric that helped create the renewable energy sector (as the cost of new solar panels and wind turbines has fallen), the growing boom in electric vehicles (as battery costs have crashed), and laid the foundation for many leading software businesses (as the cost of data storage is now a fraction of previous levels).
Another interesting statistic in the prospectus is this: ‘today there are approximately 3,700 satellites in orbit – over the next decade over 100,000 satellites are planned’. That tallies with the ambitions of SpaceX. Its Starlink satellite network has permission to launch up to 12,000 satellites but the company has asked for permission to launch a further 30,000. It is just one of a number of companies looking to create satellite telecommunications networks, including Seraphim seed portfolio investment AST SpaceMobile, which is now listed in the US. Morgan Stanley estimates that there could be a 20-fold increase in the capacity of satellite-based connectivity over just five years.
It is fair to say that this explosion in the number of satellites concerns some observers – think 2013 film ‘Gravity’. Another seed portfolio investment, LeoLabs, aims to track every piece of space debris down to 2cm in size as far as 1,000km up in orbit.
The growing importance of global positioning systems, satellite communications and increasingly earth monitoring (with applications in areas such as agriculture, logistics and defence) underscores demand for all this additional capacity. In time, falling costs can create the right environment for whole new industries.
Seraphim Capital reckons that $7.7bn was invested in the sector in 2020. The manager has been looking at about 50 opportunities a month. It has a £400m pipeline of potential investments and is targeting a portfolio of 20 to 50 holdings for SSIT.
Should SSIT’s launch fail, there are not really many other ways of accessing this theme within the investment companies market. Scottish Mortgage has the odd holding in companies such as in Space X and Relativity Space, but here’s not much else out there.
My guess is that there will be sufficient interest in the initial public offering for it to succeed. Bear in mind though that returns may be lumpy. Not for the risk averse.
