Investment Trends, M&A, and Operational Challenges for the Space Industry in 2023

Are we in a recovery? Europe had a strong first quarter and the U.S. had a strong second quarter, with increased investment driven by larger growth rounds in both regions. Increased investment, increased growth stage investing, and greater activity globally. Sounds like a recovery to me.

At Seraphim, we’ve started to track M&A activity in space and it paints an interesting picture of the industry. Some of the largest space companies see only one way to survive competition with SpaceX — join forces. Space in 2023 has many companies we all thought were undervalued — it seems private equity agrees. Consolidation is also underway, but with several New Space acquirers, new leaders in the industry may start to emerge.

Even with the early signs of a recovery, companies still have to persuade investors, both public and private, that they can manage their finances. Now employees and suppliers are the ones dealing with the consequences.

Global Space Investment Trends and Dynamics

There has undoubtedly been a global downturn in space investing. Globally, early stage investing has been healthy throughout 2022 and 2023, but an absence of growth stage deals has driven down overall investment. Europe started its recovery first, driven by large growth deals in the first quarter of 2023.

After three straight quarters of decline since the second quarter of 2022, the U.S. rebounded strongly, with total investment in the second quarter of 2023 almost double ($818 million) that of the previous quarter. This uptick was driven by a return to growth investing. Median deal size doubled in the second quarter, and we saw several meaningful growth stage deals: Astranis ($200 million), Ursa Major ($100 million), and Constanellis Aerospace ($78 million). Ultimately, the return of the U.S. is great news for the space industry. As the home of both New Space and venture capital, it is unlikely we can have a dynamic space sector without a healthy New Space ecosystem in the U.S.

Over the last year we have seen increased investing globally. There are more countries than ever in the top 10 largest deals. In addition to the usual players like the U.S. and China; the first half of 2023 saw top 10 deals from German, Danish, British, French, Spanish, Canadian, Israeli, and Australian companies. This is a great sign of an overall healthier ecosystem. Some startups are undoubtedly driven by local space sovereignty concerns, such as Isar Aerospace in Germany or Exotrail in France. What I find particularly interesting is that many of the large raises in the top 10 reflect local strengths, where the startup will likely have a long-term advantage over U.S. competitors. For example, Kepler, which is focused on in-space data relay, may soon be another great Canadian space telecommunications company, like MDA and Telesat. And Fleet Space uses its own satellite constellation to remotely map lithium mines, drawing on Australian mining expertise.

Mergers and Acquisitions: Strategic Movements in 2023

There has been a notable uptick in M&A activity in the last 12 months, driven by three trends: SpaceX, private equity, and consolidation. SpaceX competition has driven some of the largest deals, as heritage space communications companies realize they must combine to survive. Viasat’s acquisition of Inmarsat ($7.3b billion), Eutelsat’s merger with Oneweb ($3.4 billion), and even SES and Intelsat’s failed merger ($10 billion), were all driven by the need to combine to face increasing competition from SpaceX.

Private equity has been involved in space for some time, often acquiring smaller hardware suppliers. They are increasingly focused on New Space startups and “take privates.” PE firms usually want to increase the value of the company with the aim of selling it onto a larger player later at a higher valuation, or occasionally take it public. To drive returns, they typically acquire when they think a company is undervalued, often by market conditions. So in this market, where valuations are down, we are likely to see increased PE activity.

Most people working in the space industry are aware of AE Industrial Partners, with $4.9 billion in assets under management (AUM), with space investments in Firefly Aerospace, Redwire, and Sierra Space. Their recent acquisition of York Space Systems valued it at $1.125 billion.

Increasingly, more generalist, larger PE firms are playing in space. Advent International, with $89 billion AUM, took Maxar private at $6.4 billion — four times 2022 revenues. Most recently, KKR, with $504 billion AUM announced they would take European OHB private at the attractive valuation of 770 million euro, which is 0.77x revenue! These are all good companies, and PE firms are betting on the fact they can make them more valuable. The obvious challenge is that PE does not usually invest in R&D, and wants to drive down costs. It will be interesting to see how that approach will work in space, particularly for companies like York, which are still early in their revenue trajectory.

We can all point to examples of great New Space companies acquired or partially acquired by -primes, like Boeing and Millennium Space Systems and Raytheon and Blue Canyon Technologies. However, more and more New Space companies are the ones doing the acquiring. Firefly, Redwire, Voyager Space, and Rocket Lab are some of the largest of these players. Could a “New Space prime” emerge from this period of consolidation?

Business Challenges in the Current Space Economy

In this challenging fundraising environment, startups have been forced to cut costs to preserve runway. Even companies with plenty of cash are under pressure to show financial restraint to investors and delay any further fundraising until the market recovers. This is why we are seeing layoffs at both companies that are struggling like Astra and those that are doing very well like Planet. This is very challenging for workers. While many companies are hiring it often involves relocation to booming space regions like Los Angeles or Colorado, particularly because space work tends to be in-person.

In addition to layoffs, companies trying to preserve their runway often delay payments to suppliers, which has big knock on effects for companies right out through the supply chain. In many cases, suppliers are much smaller businesses and are rarely VC-funded so they have little cushion to smooth out delays in payments. Aside from the serious pain felt at individual companies, this could have wider implications for the entire industry if delayed payments force suppliers out of business.

The Future of Space Industry: Projections and Recovery

There are early signs of a recovery in VC investing in space, which should help private startups if it continues. The fundraising environment for public New Space companies seems to be much tougher. With increased PE activity, we may see some undervalued de-SPACs taken private but it is likely to be those with meaningful revenues and contracts. Lower valuations seem likely to continue in private and public markets for some time, which should increase consolidation.

It has been a challenging 12 months for the space industry, not least for those workers facing layoffs. Yet with early signs of recovery starting to appear, it seems that we may be through the worst. VS

Dr. Maureen Haverty is the vice president of Investment for Seraphim Space