Unwrapping the Space Sector Deal Outlook for 2024
The past year has been a roller-coaster ride in the financial markets and an unusual one for transaction activity. Pitchbook recently stated, “More than a year and a half into the VC industry downturn, there are signs that valuations have hit bottom… [but] VCs are still not eager to bargain hunt, and dealmaking continues to be subdued.” And M&A volumes aren’t faring much better: the global M&A deal count fell by ~22% in 2023.
Yet the count of space ecosystem M&A and minority equity deals fell by less than you might expect, down just 5% year-over-year. This is a much better showing than the market at large. And many publicly traded satellite & space names followed the recent equity market rally, driving our core public satellite & space index up 7% for the full year. Is space bucking the macro trend?
Yes, but not for the reasons you might imagine: the space sector’s relative strength is evidence of its immaturity along the industry growth curve rather than some kind of Superman resilience. And under the surface, the picture gets a lot muddier.
Equity financing from sources as diverse as traditional venture capital, alternative investors and CVCs, and the public markets (including SPACs) was the fuel that propelled the development of the space sector in recent years. A geyser of funding was unleashed in 2021 but a shift in risk appetite and higher rates sent space deal volumes plunging 41% in 2022. Last year (2023), investment deal volumes held relatively steady, posting a 3% decline versus 2022.
The voracious capital needs of the space industry were not satisfied. For startups, life is all about cash runway, and in 2023, the funding spigot was significantly tighter, just as the capital needs for constellation deployment and launch vehicle development were poised to grow sector-wide. With funding more scarce and more expensive, and with investors behaving much more cautiously, the average time between early-stage financing rounds (e.g., Seed → Series A, Series A → Series B) was over two years across all industries, elongating ~20-30% over the prior year, according to Carta. The proof: belt-tightening, layoffs, downscaled plans, and a slow but steady increase in distressed startups. While not a perfect proxy, our frontier index of earlier-stage public space companies nonetheless illustrates this phenomenon, with that index falling by more than 40% in 2023.
Interest rates appear to be on the cusp of receding, but the shift in equity investor sentiment will be more enduring: the space funding environment will not return to the 2021 go-go days. As some companies’ 2021-2022 cash runway is burned down, we expect the number of distressed space companies to increase over the next twelve months, triggering distressed M&A deals, flameouts, and a new breed of “zombie” space companies. The survivors, including many new and disruptive companies, will have a compelling shot at long-term success. Startups must plan on longer fundraising cycles, and they should prioritize de-risking and proving product-market fit over chest-thumping and over-exercising go-big ambitions.
At the same time, new investment opportunities are emerging in venture space for companies that can help to manage an increasingly complex and threat-laden space environment or that can exploit the growing deluge of space-based data. We anticipate strong investor appetite for well-positioned, capital-efficient early-stage companies in these arenas.
Parallel themes are present in space ecosystem M&A. Over the last three years, M&A transactions as varied as Maxar’s buyout by Advent (EO), Viasat’s merger with Inmarsat (Satcom), and Eutelsat’s merger with OneWeb (Satcom) now promises to reshape the satellite operator landscape. And in the space hardware arena, M&A has likewise been fervent, albeit arguably with fewer headline-grabbing deals (BAE/Ball Aerospace, L3Harris/Aerojet).
We expect a downshift in “paradigm-changing” M&A deals in 2024. We attribute this to a shorter supply of needle-moving M&A targets (with a few exceptions, e.g., ULA), a more costly debt financing environment, and an increasingly hostile regulator antitrust stance. We have entered a year of large-deal digestion, with fewer targets on the block and with fewer buyers actively and aggressively shopping. L3Harris is an extreme example of this shift, with the company stating in December that it would pause M&A indefinitely to focus on bolstering its bottom line following the Aerojet acquisition.
Despite fewer mega-deals, we expect overall deal counts to remain reasonably stable as large, game-changing deals are supplanted by (1) small tuck-in technology acquisitions, (2) consolidation of smaller players in emerging market segments, and (3) opportunistic M&A. Tuck-in acquisition activity will be driven by capability-building to support key sector growth opportunities (e.g., in defense). Some fragmented, high-potential market segments, such as space situational awareness (SSA) and software, will see their first major wave of consolidation. And given today’s difficult fundraising climate, we expect to see an uptick in opportunistic M&A involving cash-starved targets.
The new year promises to be a complex one, with shifting currents in the investment climate and uncertain political/ geopolitical dynamics. In the face of these complexities, space is fortunate to be exposed to the dual tailwinds of ongoing growth and high relevancy. Conservative financing approaches and disciplined investment strategies will be key to unlocking these opportunities in the new year.
SOURCE: www.quiltyspace.com