Seraphim Space Investment Trust — Long-term structural growth drivers remain intact

SSIT’s NAV per share (NAVPS) declined by 7.2% to £0.93 during the six months to end-2022, bringing its last 12-month NAV total return (TR) to -11.4%. The H123 NAVPS decrease came from £17.3m in fair value losses (of which £2.0m is realised), partly offset by £2.3m in unrealised foreign exchange (FX) gains (see Exhibit 1). Since its initial public offering in July 2021 (when NAVPS was £0.98 after floating costs), SSIT’s NAV is down 5.1%.

SSIT’s portfolio at end-2022 consisted of 29 space tech investments valued at £181.2m, with private companies accounting for 94% (see Exhibit 3). While quite concentrated (top 10 holdings accounted for 84% of the investment portfolio’s fair value), the portfolio is diversified in terms of ecosystem and investment stage (measured by last funding round) (see front page exhibit and Exhibit 2 below). More than half of the end-2022 portfolio constitutes companies with their own satellite constellations in space.

Amid the volatility in equity valuations in 2022 (including significant de-ratings of several space tech companies that had completed SPAC mergers), SSIT’s board initiated a valuation recalibration process for material portfolio companies which 1) completed the last funding round more than 12 months ago, 2) recently reached significant operating milestones or 3) exhibited considerable under- or overperformance versus their annual plans. This process will be repeated every quarter until the above private companies complete a new funding round. As a result, the EV of four investments from the top nine private holdings (ie all top 10 positions except for the listed Arqit, see Exhibit 3) was reduced by 25% or more, while EVs remained unchanged for three holdings and were slightly raised for two holdings. Consequently, the aggregate EV of SSIT’s top nine private holdings went down by c 15% in H123.

However, the reduction in the corresponding fair value was only 3% thanks to the downside protections structured within SSIT’s investments. These include, in particular, the structuring of investments as preference shares (rather than common equity), which provides a liquidation preference, as well as clauses that provide anti-dilution protection in case of subsequent down rounds (see our previous note for details). Investments in all the top nine private companies in the current portfolio are structured via preference shares with weighted average anti-dilution protection and/or liquidation preference.

Total portfolio valued at 0.97x cost, with top nine private holdings at 1.14x at end-2022

The EV recalibration resulted in reduced fair values of PlanetWatchers (3.3% of end-2022 investment portfolio fair value) and LeoLabs (5.1%), which were therefore valued at 1.08x and 0.80x cost, respectively, at end-2022. This compares to 2.70x and 1.17x at end-June 2022, respectively, though we note that the decline in the PlanetWatchers multiple also resulted from a follow-on investment (see below). Furthermore, the fair value of ALL.SPACE (12.3% of end-2022 investment portfolio fair value) was reduced by £2.7m to £22.3m based on a funding round that is in progress (the company is now valued at 1.15x cost vs 1.28x at end-June 2022).

Arqit’s share price fell between end-June 2022 and end-December 2022 by 43% in US dollar terms. Apart from factors affecting the broader market for venture capital (VC)/growth capital investments (ie reduced investors’ risk appetite in response to macroeconomic uncertainty), there were some stock-specific factors that could have weighed on the share price, such as Arqit’s US$20m capital raise at US$2.00 per share or the bankruptcy filing of Virgin Orbit (which was one of Arqit’s main clients highlighted in SSIT’s trading update from 27 July 2022). Overall, listed holdings (floated through SPAC mergers) saw a 30% decline in their share prices in H123. At end-2022, all of SSIT’s listed holdings made up 5% of NAV (of which 3% was attributable to Arqit) and were held at 0.29x initial cost. The recent fair value reductions brought SSIT’s total portfolio valuation to 0.97x cost (its portfolio was acquired over 2021–22), though the multiple stood at 1.14x for SSIT’s nine private holdings included in the top 10 investments by fair value.

Current share price implies a c 74% discount to end-2022 fair value of SSIT’s private portfolio

The fall in SSIT’s share price was more pronounced than that of its NAV per share resulting in a widening discount to NAV, which has also been a trend lately across the UK-listed VC and growth capital investment companies we consider peers for SSIT (see Exhibit 4). The discount to end-2022 NAV now stands at c 60%, offering a meaningful degree of downside protection. This is wider than the average 32% discount for venture portfolios sold by limited partners in the global secondary market in 2022 (according to Jefferies Global Secondary Market Review), though we acknowledge that the discounts may have been wider towards the end of 2022 compared to the annual average.

In this context, we note SSIT’s analysis indicates that a 50% reduction in the fair value of its nine private investments included in the top 10 holdings would reduce its NAV per share by c 19% (still more than double the current share price). This is not a degree of downward revaluation SSIT’s investment manager would expect for its portfolio though. Interestingly, post reporting date (in February 2023), Astroscale (4.2% of end-2022 investment portfolio fair value) raised US$76m in a series G round at a valuation in line with its last funding round in 2022, which (at end-2022 FX rates) implies a £2.6m (or c 34%) uplift to the end-2022 fair value of SSIT’s stake.

We calculate that SSIT’s current market cap (assuming SSIT’s liquid reserves at face value and Arqit’s value at the current share price), implies a c 74% discount to its end-2022 private portfolio fair value (and a c 69% discount to the end-2022 value of its top nine private holdings). This seems wide given major portfolio holdings are well funded at present and are dynamically growing revenues.

We acknowledge that the above calculations of implied discount to private portfolio may not account for the potential need to consume part of SSIT’s holding-level cash balance to support its portfolio holdings. Amid the more challenging environment across the global VC sector (especially in terms of exits), SSIT has curbed its capital deployment to focus on extending the cash runway of its portfolio companies and preserve cash at the holding level to improve its ability to support key existing portfolio holdings. It made four new investments (amounting to £4.4m) and six follow-ons (£9.0m) in H123 compared to £87.1m in investments in FY22. New investments in H123 included:

SSIT also invested £7.1m within its main portfolio (mostly in D-Orbit and PlanetWatchers) and £1.9m into three early-stage companies. Meanwhile, the company collected £3.3m disposal proceeds following the partial sale of its stake in NASDAQ-listed Arqit during the November 2022 price rally at an average price of US$8.48 per share. SSIT still held a stake in Arqit valued at £6.7m at end-2022, currently worth c £2.0m (significantly down from the £47.9m exposure at end-2021).

As a result, SSIT’s holding-level liquid resources reached £40.9m at end-2022 (18.4% of NAV), which according to SSIT’s management represents sufficient support for at least the next 12 months. Overall, 11 of SSIT’s portfolio companies raised more than US$130m between end-June 2022 and end-December 2022. The manager considers all of SSIT’s material holdings (top 10) as well capitalised, with sufficient runway through to at least end-2023, except for one holding for which negotiations on follow-on funding are at an advanced stage (with a term sheet agreed). We note that some of SSIT’s top 10 holdings (eg Astroscale and Arqit) have already raised capital in 2023.

Top private holdings growing top line by 56% sequentially

The operational developments across the global space tech sector are assisted by structural growth drivers, including the increased emphasis on global security and climate/sustainability. In terms of security, the war in Ukraine had a particularly significant impact on the industry, encouraging governments to boost investments in the sector. Most of the revenues generated by SSIT’s portfolio companies come from defence/security, humanitarian efforts, food security and the climate area. Regulation also plays an important role, eg the recent reduction in the time satellite operators have to remove their end-of-life satellites from the orbit was reduced from 25 years to five years. This should benefit in-space service providers such as LeoLabs, D-Orbit or Astrascale. The investment manager also notes that revenues generated from government contracts or grants are a significant driver for many of SSIT’s portfolio companies. These provide a source of stable funding, cushioning the impact from reduced demand from the commercial sector during a more challenging macroeconomic environment. Consequently, SSIT’s private companies from the top 10 list grew revenues by 56% h-o-h in H123 (fair value weighted).

Below we list selected major developments across SSIT’s top four holdings (making up c 47% of its end-2022 NAV):

Global private space tech investments recover in Q123 from 2022 lows

We note the continued meaningful VC/growth capital investments in space tech companies, as illustrated by the Seraphim Space Index (see Exhibit 6), with the Q123 investments of US$1.4bn representing a 75% increase from US$0.8bn in Q422. While the recent activity was below the peak levels in 2021 and early 2022, Seraphim Space highlighted that these record-high levels were driven by megarounds from companies such as SpaceX, OneWeb, Sierra Space and Virgin Galactic. Q123 also saw a record number of growth stage deals (32 closed during the quarter). The quarter also marked the first time European investors committed more capital than US investors.

We do acknowledge the overall tougher funding conditions for VC/growth capital companies at present (compared to 2021), especially for businesses with high upfront capital requirements and long lead times to revenues. That said, the above-mentioned strong secular trends within should encourage investors to participate in new funding rounds of high-quality space tech companies.