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A Kratos Constellations Conversation With Chris Quilty
Partner, Quilty Analytics

 

SPACs, Space Bubbles and Who’s Investing

Chris Quilty is the founder and a partner of Quilty Analytics, which is an independent boutique offering subscription research, strategic advisory, and investment banking services across all aspects of the Satellite & Space industry. Prior to establishing Quilty Analytics in 2016, Chris served as a sell side research analyst with Raymond James for 20 years, publishing hundreds of company-specific, macro, sector, and thematic research reports on the industrial, defense, space, wireless, and communications industries. 

Chris is widely-acknowledged as the leading Wall Street analyst on the Satellite & Space sector, and has participated in 30+ capital markets transactions over the past five years valued at over $2.5 billion. Chris received a BS degree in Systems Engineering from the United States Naval Academy in 1989 and an MBA from the University of Chicago in 1994. 

The interview was conducted by Kratos’ Constellations podcast host, John Gilroy. 

John Gilroy
SPACs, or Special Purpose Acquisition Companies, have taken the space industry by storm as an investment vehicle. Why are they hot, and how do they differ from IPOs and other funding options? Constellations talks with Chris Quilty, partner of Quilty Analytics about the advantages and benefits of, SPACs and whether this is just a passing trend or will continue to influence the space industry. 

Let’s jump in — a SPAC is defined as a shell corporation listed on a stock exchange with the purpose of acquiring a private company, which takes the company public without having to go through the traditional IPO process. Since Virgin Galactic announced that it was going public through a merger with SPAC in 2019, seven companies in the space industry revealed plans to take their companies public through SPACs in 2021, with more on the way. Joining me to explain SPACs is Chris Quilty, partner of Quilty Analytics, a research and consulting firm for the satellite and space industry. Chris, you have some history with SPACs, don’t you? 

Chris Quilty 
Thanks John. Yes, I’ll note we had the honor of doing the very first space SPAC in 2009, which was Iridium. SPACs were very different then than they are today in terms of how they’re structured and the types of companies that are going public. Back then, Iridium was an ongoing concern generating revenues and cash flow. Those are still SPAC candidates, but you’re seeing a lot more early-stage companies. 

John Gilroy
So, SPACs aren’t entirely new? 

Chris Quilty:
There were a handful of SPACs that transacted in the ‘90’s, but they were sort of in the dark pools of the industry. They weren’t high profile. It never hit a peak anything near what we’re seeing nowadays. It was quiet until the last year and a half or so where we’ve seen SPACs come back with a vengeance. 

John Gilroy
Why are we seeing this surge in the space industry? Why are these companies looking at a SPAC rather than the traditional IPO? 

Chris Quilty:
The relative advantages of a SPAC versus a traditional IPO, include the time to market, perhaps the valuation, and looser regulations regarding forward estimates. But if you to boil it down to two reasons, I think it comes to, number one, the speed to market. Since a SPAC is technically already a public company, they’ve done all the heavy lifting of the IPO process. The de-SPACing transaction, where the SPAC merges with a private company, is technically just an M&A transaction. So, it has a very different set of rules and provides a very fast path to going public relative to a traditional IPO. The second element, that I think is most attractive, is the size or the amount of capital that can be raised. If you looked at the median amount of capital raised by a SPAC versus a traditional IPO, it’s probably on the order of two to three times or more capital raised in those transactions, and for the space industry, as we all know, it’s a capital-intensive industry. So it’s an attractive path for space- related companies. 

John Gilroy
We know there’s heavy due diligence with IPO’s. Is this a step that’s being skipped with a SPAC? 

Chris Quilty
No, there is due diligence, and a lot of it is happening behind the scenes. There is a second phase of the SPAC which is called a PIPE transaction, which is a private investment in public equity. What you have are institutional investors that are called in once the SPAC transaction is announced and they will do their own diligence on the transaction. They may argue somewhat about price and valuation. Those are really the anchor investors in the transaction that were brought in to get it across the line. Now, all this time, the SPAC is public and it’s trading. Any retail investor can buy and trade the stock. They don’t, unfortunately, have the same visibility that PIPE investors do to the level of due diligence. 

John Gilroy
In the traditional IPO, the market sets the price. How is the price set when a company takes this SPAC route instead? 

Chris Quilty
Good point. For those of you who have never been involved in an IPO transaction, it’s really an auction. The price that Amazon closes every day on the market is the last transaction that traded between a buyer and seller. In an IPO, the company and their underwriters will position the company as best they can. They will set terms for an IPO range the company should go public, like 14 to 16. However, at the end of the day after the 4 o’clock bell closes and it’s time to price the IPO, investors will put in their orders. The orders will have prices attached and the underwriter will sort through the orders and pricing and determine how best they can fill the book and still leave excess demand on the table, because you want to see aftermarket buying. They may announce a certain range that they’re targeting, but as you see in the headlines, the stock trades afterwards, however it’s going to trade. The SPAC transaction is different because that price is set by the PIPE investors and the company in terms of what the value of the company is going to be. It’s the value that then apportions what the ownership structure is between the management, the SPAC, and the PIPE investors. But the price is the price — it’s $10, which is the nominal price that the SPACs are all set at, and it’s only after the stock trades that investors get to determine whether that was a fair valuation or not. 

John Gilroy
It seems the reputation of the management team also impacts the value. Does that talent or management also influence the market for that SPAC and whether to go with a SPAC? 

Chris Quilty
It depends. Certainly, there are SPACs that have been structured with a management team that is focused on a certain industry. They may have experience in Aerospace and Defense and they’re trying to pitch their credentials, their access to the market and customers as an advantage in a SPAC transaction. Currently, there’s a bit of a supply-demand imbalance. There’s so much SPAC activity with tens of billions of capital that’s trying to find a home, and they’ve got typically two years or less to invest that capital and if they don’t, they turn into Cinderella’s pumpkin and have to give the money back. In some ways, the companies have the advantage. They’ve got multiple SPACs coming to them, arguing that they should be the bride. One of the things that the SPACs will use as their wedge is the fact that they can bring management expertise to the transaction and credibility. 

Now the reality is, I think, more than 70 percent of SPACs are — no surprise — led by finance types, the folk that come out of the venture capital (VC), private equity or institutional capital markets, not specifically packaged management teams. Also, be aware, just because you’ve got an Aerospace and Defense team doesn’t mean they have to buy an Aerospace Defense company. All you need to do is look at Momentus and Stable Road Acquisition Corp. It was a SPAC supposedly formed to target a cannabis company and ended up merging with Momentus. 

John Gilroy 
Just in 2021, companies that announced SPACs, included Momentus, AST SpaceMobile, Astra, BlackSky, Spire Global, and Rocket Lab. Do you think these companies made the correct decision to go public through a SPAC? 

Chris Quilty
There’s also Redwire and Virgin Orbit. The decision to SPAC or not is really a company-specific decision. I’m in no position to second guess the decisions of the management teams and the investors in these companies. What I would note is the common thread for all of the companies that you mentioned is that they were venture-backed and, in essence, they opted to go a SPAC route instead of raising another VC round. What motivated that decision could be the fact that they could get a higher valuation by going SPAC than doing their C round or D round. Or it could be the fact that SPACs raise much larger pools of capital, which gives you the ability to compress what would have been multiple VC funding rounds into a single SPAC transaction. 

The funding window for SPACs is open and investors have demonstrated a big appetite for this type of investment vehicle. Sometimes you jump on an opportunity when it presents itself, not on your pre-conceived timeline, and with the window open, I think we’re seeing companies taking advantage of it. 

John Gilroy
Conversely, there are companies in the space industry that may not want to explore the SPAC route, right? 

Chris Quilty
Absolutely. There are some notable companies in the space industry that have not gone the SPAC route. Relativity just raised another venture round rather than a SPAC that presumably would be open to them. Firefly has also talked about raising another venture round, and probably one of the earliest and most established companies in the “new space industry,” As of this interview, Planet, has yet to jump on that ship. It’s not to say that these companies may not go that route, but what we have seen is a very diverse group of companies, from pre-revenue, such as AST and Momentus, to at the other end of the spectrum, Redwire, a private equity roll-up of older, larger established companies with a revenue and profit EBITDA profile. The market has the ability to ingest and price all of these different types of companies. 

John Gilroy
Several months ago you provided some insights in a webinar called SPACs in Space. Has much changed since?
 

Chris Quilty
Yes, absolutely. In the April-May timeframe, we saw a pause in the overall SPAC market. Not just space, but the whole SPAC market in general and it reflected two issues. One was the fact that the SEC issued new regulations on how companies must account for their warrants, which are like options. People in the industry viewed the SEC’s move as an attempt to tap the brakes on what had become a red-hot SPAC market. 

The second item is the PIPE investors that we talked about went on strike. Again, it’s a little bit behind the scenes, but talking to folks running these transactions, what we heard was that whether it was the SEC’s action or the market in general, the PIPE investors started to take a second look at some of their investments. Also, we’ve seen a bit of a shift in the risk tolerance of the PIPE investors away from more of the early-stage companies towards more established companies that can show revenue, profitability, and a proven business model. 

John Gilroy
What has been the space industry’s reaction to the surge of SPACs, and are SPACs good for the industry? 

Chris Quilty My view is that access to capital has always been one of the primary challenges faced by the space industry. To the degree that SPACs are able to put cash on the balance sheet of young, fast-growing emerging companies, that’s a good thing. In the long term, however, these companies have to prove that they’re good investments. 

If a company raises huge sums of capital and fails to deliver on often lofty promises, the stock’s going to correct. These sort of bad high-profile face plants of companies that raise SPAC money would be bad for the industry in general. The space industry is appropriately considered a frontier investment, which is correct in more ways than one, and we don’t want to go back to the bad old days of companies in this industry going in and out in search for investment capital. 

John Gilroy
Do you think that the SPAC surge is fueling the space bubble right now? 

Chris Quilty
I don’t think so. I think it’s fair to say that SPACs have facilitated a compressed wave of financing activity, but the underlying thesis behind space 3.0 or ‘new space’ or whatever you want to call it, stands on its own. The fundamentals we’ve seen change in the industry over the last 10 years are driven by real accomplishments like lower costs, high-throughput satellites, the use of commercial electronics, and high-volume manufacturing. Those things are sustainable, whether SPACs as a long-term vehicle remain the primary way to do it, that’s yet to be seen. In regard to the investment cycle, it’s important to note that most of the funding in the industry the past 10 years or so has been led by venture capital and that’s new. Before that, most of the startups in the industry were funded by defense primes or government agencies like DARPA, and to a lesser degree, your billionaire investor. Most VC funds have a 10-year investment mandate and most of the capital is deployed within the first couple of years and then they harvest it beginning in years five to seven. The fact that we’re seeing this surge in exit activity is on time. Honestly, it’s welcome, because one of the concerns I’ve expressed was that the space industry was at risk of becoming a roach motel. Investors put their money in and you just didn’t see any good exits. The fact that it’s SPACs now, but it could have been a traditional IPO or M&A activity — you want to see those venture investors get their returns and come back to play in the market again. 

John Gilroy
Are SPACs just a trend, or this is a continued financial strategy for the space industry? 

Chris Quilty
Themarketsareall-knowing,infinitelyrational,highlyefficientandregularlysubject to manipulation, manias, and panics. It’s fair to say that it sure feels like we’re in a SPAC bubble. I mean, the numbers are pretty astronomical, but that’s probably how brick and mortar companies felt about Amazon back in the early 2000s. Who am I to say that maybe this is the new normal and SPACs continue to overtake traditional IPOs as a way for companies to go public. The market does tend to go in cycles. As I said, this is sort of SPAC 2.0 and we should expect things to cool off here in the near term, but don’t be surprised if SPACs come back strong in the back half of the year. One of the issues with the overall markets and valuation is there’s just so much cash in the financial system and it’s got to find a home — SPACs turned out to be an interesting vehicle to get there and we will see how eventually these investments play out for companies. That’s really the long-term tale of the tape. If we have companies that go public and they’re successful, it’s all good for the industry, it’s all good for the investors. 
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Constellations has celebrated 100 episodes of dynamic, thought-provoking insights on space and satellites: See the full list of Constellations interviews and subscribe at: 
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Quilty Analytics Evaluates Prospects for OneWeb in Latest Satcom Quarterly Briefing 

Recently, Quilty Analytics issued to subscribers the latest edition of their Satcom Quarterly Briefing, evaluating OneWeb’s LEO satellite constellation and the advantages the company possesses, now that it is fully funded. 

As of this writing, OneWeb’s next launch is scheduled for September 14th, which is after this issue of SatMagazine is published. Assuming success, OneWeb will have deployed about half of its 648-satellite constellation and be on track to reach two- thirds deployment by the end of 2021. Since the company’s Chapter 11 filing in March of 2020, the company has raised $2.7 billion in equity financing from strong investors in Asia, Europe and the U.S. who believe that OneWeb has excellent business prospects and that it can also be an enabler to help each of them accomplish their own strategic priorities. 

Targeting enterprise, government and mobility markets, OneWeb’s Gen-1 services will rely less on cutting edge technologies and more on efficiently delivering core LEO broadband benefits. These include full global coverage, high speed, low latency, low costs and high security that comes from operating on an independent, space- based network. 

Chris Quilty, Partner of Quilty Analytics, said, “After evaluating SpaceX’s Starlink and Telesat’s Lightspeed constellations in our last two Satcom Quarterly Briefings, we now turn our attention to OneWeb. Through these studies, we have advised clients on the market opportunities for LEO broadband systems, along with the challenges each LEO operator faces in achieving sufficient revenue to realize an attractive ROI. We believe OneWeb is well positioned based on several important advantages, including: 

A far lower cost system, reduced by ~$3.4 billion through OneWeb’s Chapter 11 process, which means the company’s revenue goals are more attainable, though certainly still significant with needed run-rate revenue of $1 billion or more. 

OneWeb will be first to market with global coverage in 2022, potentially two-to-three years ahead of other LEO broadband systems targeting Enterprise verticals. 

Strong backing from major shareholders – the U.K. Government, Bharti Airtel, Eutelsat, SoftBank, Hanwha and Hughes. Each sees important synergies from aligning with OneWeb and all are eager to apply their respective capabilities in supporting OneWeb’s success. 

OneWeb still has to execute and overcome other challenges that we discuss in our briefing, but we conclude that if OneWeb does not reach its targeted revenue goal of $1 billion by ~2026, it is hard to see how LEO competitors that have far higher capex and come later will be able to do much better.” 

The key findings of Quilty Analytics in its latest briefing have been supported by discussions with colleagues across the space industry and communications with senior executives at OneWeb. We would like to thank the many experts who contributed with their timely input. We hope this briefing stimulates discussion, and we look forward to receiving comments from friends and colleagues across the satellite and space industry. 

To learn more about Quilty Analytics’ subscription-based research and its investment banking and strategy advisory offerings, please contact the company at: 
Info@quiltyanalytics.com