To infinity and beyond? The growing case for space
Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: The space industry could triple in value to over $1tr by 2040, having already doubled in the last decade. Improving technologies and superior materials are serving to lower launch costs. At the same time, the number of use-cases for increased space investment are growing, from enhanced broadband deployment to space tourism via extreme data, military surveillance and resource mining. Against this background, venture capital has committed ~$2bn to the industry over the last year and a plethora of start-ups are emerging across the value chain. Since there are limited ways for public investors to access the space theme directly at present, our approach is to back leading businesses in the development of space technology and/or broadband beneficiaries.
Next year will mark the 50th anniversary of the first manned mission to the moon. This was a landmark event which, even with the passing of time, remains the apogee of human venture in space. What renders it even more remarkable was that it was achieved despite primitive computing and the use of much untested equipment. Looking forward, we believe that the world is possibly on the cusp of a new golden age for space, owing to a combination of modern software, artificial intelligence and advances in materials science, combined with a new generation of proactive entrepreneurs. Space is becoming an increasingly active area of innovation and capital deployment. Put another way, we are seeing the commercialisation of space.
At present, there are some 4,600 man-made objects in space, the majority of these being satellites. Of note, however, some 1,500 of these went up in the last decade, and a record number of 553 last year (data per the United Nations). The main reason behind this is that space is becoming easier to access. With the advent of better materials, reusable rockets and scale economies, the launch cost of a satellite has fallen from ~$200m in 2006 to ~$60m at present (per the United Launch Alliance). Looking ahead, it seems reasonable to assume that launch costs should fall further, based on precedents from other industries such as lithium-ion battery production or the sequencing on genomes using molecular diagnostics. 3D-printing is already helping to deliver cost improvements and more tailored (efficient) parts. Industry commentators are suggesting that launch costs could fall to ~$5m by the end of this decade, while some predictions put costs as low as $1m.
The global space industry, which primarily comprises ground equipment, satellite services and satellite manufacturing employs over 210,000 people and has doubled in size in the last decade. It is currently worth $350bn (a 2016 figure, courtesy of the Satellite Industry Association), but could be worth over $1tr by 2040, a tripling in size (per a Morgan Stanley projection). Satellite broadband will be responsible for most of the growth. Over time, security, mining, manufacturing and tourism will also likely become important segments of the space industry, producing many beneficiaries.
We have written in the past about the data deluge and the corresponding growth in demand for broadband. Internet traffic is forecast to expand 60 times between now and 2030 (per Cisco), a forecast which may prove conservative given the increasing deployment of artificial intelligence, the internet of things and virtual reality. Broadband satellite provides a solution to this growth in demand. In addition, note that currently only 55% of the world’s population (or some 3.2bn people, per the International Telecommunication Union) have internet access. A combination of satellite networks and potentially drones could help connect the unconnected, yielding major economic benefits. A report from the World Bank estimates that a 10 percentage-point (pp) increase in internet penetration could raise developed world GDP growth by 0.8pp and emerging world growth by 0.9pp. Businesses including SpaceX, OneWeb, Google and Facebook have already received approval from the Federal Communications Commission to launch satellites over the coming years to this end.
The corollary of (more) ubiquitous broadband is radical transparency. Full-scale broadband deployment could be thought of as placing a computational shell around the planet, which could be used for potentially tracking anything. Some have already begun to refer to this development as ‘extreme data.’ Data collected by satellites could help increase efficiency in industries including agriculture, logistics, maritime and retail, particularly in the context of climate change. DigitalGlobe (owned by Canada’s Maxar Technologies) is, for example, already using its satellites to help shale oil companies to map and monitor ground features and well locations. Meanwhile, Descartes Labs (a US start-up) is using satellite images to forecast US corn harvest yields with a greater degree of accuracy than the United Sates Department of Agriculture. Elsewhere, Spaceknow, a private venture funded by Airbus among others, is using satellite imagery and AI to monitor changes at industrial facilities in China, as an alternative to perceived often inaccurate Chinese government data.
Satellites also clearly have benefits from a military perspective, best thought of in terms of improved communication (the relaying of voice and data transmissions), positioning (synchronisation of operations, routing), weather (for planning and execution of operations) and surveillance (intercepting signals). Beyond this, there is a broader argument developing: whoever has space dominance, will ultimately have superior access to the vast natural resources within the Solar System. Growing geopolitical instability and an apparently intensifying arms race on land is helping to drive the militarisation of space, a development occurring concurrently with space’s commercialisation.
For the first time in seven years, an increase in the annual budget allocated to NASA was authorised by Donald Trump (although this is still subject to Congress approval). Moreover, in June, the President announced that Space Force would officially become the sixth, co-equal, branch of the US military. Some of these moves seem undoubtedly spurred by the desire to demonstrate US prowess, but the reality is that China, India and Russia have begun to catch up (if not pull ahead) of the US in terms of space initiatives. China recently launched the world’s first quantum satellite and plans a Moon mission by 2020 followed by a Mars mission by 2022. India has begun to pioneer low-cost satellites, launching over 100 so far this year. Meanwhile, Russia has reportedly begun development on a $23bn rocket aimed at manned exploration of deep space. It has also talked of building a permanent base on the Moon.
Part of the appeal behind potential space dominance relates to the fact that studies have shown that there are large quantities of gold, iridium, silver, osmium, palladium, rhodium and tungsten located within the Earth’s nearby asteroid belt. These could potentially be mined in space and then used either for on-site construction or taken back to Earth for deployment there, particularly on the assumption that some of the planet’s natural resources may be exhausted over the next 50-60 years. Commercial enterprises including Planetary Resources and Deep Space Industries (both private) have already begun developments and have stated intentions to launch mining missions in the near future. The logic of manufacturing in space is also compelling, particularly since its zero-gravity environment would be appealing for testing new products.
Although the broadband, military and mining/manufacturing opportunities afforded by space are likely to account for most of the growth in the industry, many of the headlines are likely to relate to space tourism. The prospect of humans going to the Moon and beyond, or even just seeing the Earth from near-orbit has an enduring appeal (certainly for the author of your piece, ever since he was a child). Elon Musk’s SpaceX has announced that it plans to take its first passengers into space by 2023, while Boeing, Blue Origin and Virgin Galactic have ambitious plans, operating along similar timelines.
Despite the forecast trebling of the industry over the next 20+ years, things will go wrong. Much of the technology is still maturing, launch costs are significant, crashes happen and even the term ‘space tourism’ could be considered misleading; it can lull people into believing that such ventures are routine and low-risk, whereas the opposite is currently true. From a commercial point of view, history is littered with cautionary tales of the bankruptcies of various satellite businesses including DBSD, Teledisc and TerreStar. Although this time may be different owing to falling launch costs, the industry is still subject to funding risk, regulatory risk, delay launch and failure as well as concerns about potential cybersecurity compromises.
Furthermore, there are a number of practicalities to consider. Most pertinently, the Outer Space Treaty, devised by the US and Russia in 1967, governs what can and cannot be done in space. It also forbids any country from claiming sovereignty over any part of space. Not all countries (including China) have signed up to the Treaty, while the issue of ‘property rights’ in space remains highly contentious. An additional consideration is that no space colonies have been built so far. At present, the building of such a colony would present a set of huge technological and economic challenges. Space settlements would need to provide for human needs in a very hostile environment where it is still unknown how mankind may thrive.
There are currently very few ways for public investors to access the space theme directly, although the private sector is awash with opportunities. As has already been highlighted in this note, many start-ups are currently operational in the field and across the value chain. Some $1.8bn was pumped by venture capital companies into space in 2015 (the last year for which data is available, per Bloomberg; the figure now is almost certainly higher), doubling the combined amount invested over the prior 15 years.
Our approach is twofold: either invest in engineering and development businesses most exposed to space, or, alternatively, in the largest likely beneficiaries from the growing commercialisation of space. Within the former category, SpaceX seems currently to have established a strong position. Space Exploration Technologies, to give it its full name, was founded in 2011, employs over 6,000 people and has won a $2.6bn contract from NASA for the launch of various rockets. Some 30 space missions are planned for 2018, following the 17 completed last year. SpaceX is currently privately owned, primarily by Elon Musk. Recent valuations suggest the business could be worth up to $40bn (per Equidate/ Morgan Stanley) and a public listing may be possible at some stage. Smaller rivals include Blue Origin (funded by Jeff Bezos) and Virgin Galactic (backed by Richard Branson). Among the major aerospace and defence manufacturers, Boeing has participated most heavily in the satellite and launch components of the space value chain. Elsewhere, Airbus, Lockheed Martin, Thales and Northop Gruman are also active in the field. While it may still be too early to call out specific beneficiaries as space becomes more commercialised in general, and broadband is more actively deployed in particular, the major consumer internet businesses (such as Google and Facebook) look currently well-placed. Watch this space.
Alexander Gunz, Fund Manager, Heptagon Capital
The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital LLP believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital LLP, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital LLP is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital LLP disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document.
The document is protected by copyright. The use of any trademarks and logos displayed in the document without Heptagon Capital LLP’s prior written consent is strictly prohibited. Information in the document must not be published or redistributed without Heptagon Capital LLP’s prior written consent.
Heptagon Capital LLP, 63 Brook Street, Mayfair, London W1K 4HS
tel +44 20 7070 1800
email [email protected]
Partnership No: OC307355 Registered in England and Wales Authorised & Regulated by the Financial Conduct Authority
Heptagon Capital Limited is licenced to conduct investment services by the Malta Financial Services Authority.
GET THE UPDATES
Sign up to our monthly email newsletter for the latest fund updates, webcasts and insights.