Seraphim Space Investment Trust Plc (SSIT) Earnings Call Transcript & Summary

Good morning, and welcome to the Seraphim Space Investment Trust Results Webinar. I'm joined by Will Whitehorn, Chair; Mark Boggett, CEO; and James Bruegger, the CIO. Seraphim are going to make a short presentation, which will highlight the main features of the results this morning before we break for Q&A. [Operator Instructions] And with that, let me hand over to Will Whitehorn, who will introduce the results.

Good morning, everybody. Welcome to the quarter 3 results for Seraphim Space Investments Trust Plc. Just as a way of sort of make our economic background, this has been a really strong period for the space industry globally. We are seeing a lot more government money coming in on the back of both the climate change initiatives undertaken after COP26, both for climate mitigation and climate monitoring and space companies are in the forefront of providing these new services to governments around the world and to private companies and to things like the insurance industry. We're also seeing a growth in the use of communication satellites in space which is moving a pace at the moment. It's also been a time for record budgets in space, defense projects following what's happened in Ukraine and the quite obvious forefront role that satellites have taken. We have seen governments from around the world increasing their budgets in space and in some cases, creating new space agencies. From our point of view, the Seraphim Space Index of Global Space Investment Activity, which is the investment of private money into the private companies, we've seen an increase in 60% over the lows of the previous quarter. And we certainly witnessed that in our own companies in particular, some of which have completed rounds during this period, and the valuations have held up. We've also seen a number of our portfolio companies and some of the largest ones win big government contracts. The team led by Mark, we'll talk to you about that today. But to give you an example, ICEYE, which is our biggest single investment, they signed a very big contract with the UAE and there is a trend amongst all of the major companies that we invest in to see contracts from government and the private sector are increasing. So without further ado, I will move on to Mark. But I'd also like to say that we've also seen an increasing use of new space launch companies. And these have been largely [ unsuccessful ]. You have witnessed a couple of high-profile space launches that didn't work. But do remember, Seraphim does not invest in space launch, we invest in space technology companies. Over to Mark.

Thank you, Will, and good morning, everyone. Can we move on to Slide #3, please. So before I go into the detail of the interims I wanted to take a step back to remind folks about the big picture for Seraphim. So we're the most prolific investor in the space market globally. We've got a portfolio of over 100 portfolio companies across both our public and private activities. We -- alongside the trust, we run an early-stage global accelerator program, which allows us to support space tech companies through their entire life cycle. So the accelerator acts like a feeder to our own funds. It's a programmatic due diligence platform where we can evaluate the companies at scale. And then through SSIT, we can double down with conviction on the best-performing companies. So this is a model that's thriving. We're at this accelerator now -- in it -- it's 11 cohorts, with dual programs operating in Europe and the U.S. 4 times a year. It's also worth reminding our shareholders that we're a value-add investor, we're a hands-on investor. We joined the Board to nearly all of our portfolio companies, and this allows us to be able to build conviction as we help support those businesses and then we invest into later rounds. So information asymmetry and conviction is the bedrock of our past and our future successes. So now let's turn to SSIT and to this quarter's results. Can we move to Page 4, please. So starting with the highlights. So a relatively pedestrian turnout, NAV is largely flat versus the last quarter, but the share price has continued to suffer falls. The market cap of GBP 90 million at the end of the quarter versus a NAV of GBP 222 million, which includes GBP 40 million of cash equivalents. So this implies a huge discount on the carrying value of our investments, which we don't believe is justified given the strong performance of the overall portfolio and in particular, the downside protections that we have in place across the portfolio with things like liquidation preferences. These protect the core value of our investments. So drawing your attention to the chart on the right-hand side, you can see there the SSIT share price performance is largely correlated with our AIC peer group. So these are our other public investment funds that invest into private companies. But you can see that we've underperformed during the quarter and then recovered just after the quarter end. So we take some comfort in the fact that the discount is across all of our peers. It's not just about Seraphim. It's not focused on space. It's really focused on investment vehicles that are investing into private companies. So during this presentation, I hope to convincingly explain why SSIT is going to be well positioned to close this discount gap when the sentiment returns around technology and private companies. SSIT has a clear number of increasingly evidenced drivers that mark us out differently from the generalist nature of our AIC peer group. So if we can just move on to Slide #5. This will then allow us to dig into some of the detail, starting with the attribution analysis table. So the portfolio is holding up well. This is reflective of our portfolio companies continuing to close out additional funding, growing their revenues, achieving important milestones. So the value of the portfolio has marginally decreased from GBP 181.2 million to GBP 180.2 million (sic) [ GBP 180.8 million ] during the period. A modest GBP 1.2 million increase in portfolio value was actually offset by GBP 2.5 million losses in FX for the period. So the portfolio value remains close to cost, 96%. Moving on to Slide #6, please. So this is the balance sheet as at the 31st of March. And this table sets out the NAV bridge. So the NAV decreased by GBP 2.3 million over the period to GBP 219.7 million versus GBP 222 million as the opening position. So besides the GBP 1.3 million decrease in unrealized fair value of the portfolio, other contributing factors were, the management fees and expenses of around GBP 1 million. NAV per share marginally decreased during the period from 93p to 92p. But it's really important to focus on the fact that we've got 18% of our NAV in cash so that we can continue to support the portfolio going forward. If we move to Slide 7, please. Now this next slide gives us an overview of the activity of the trust during the last quarter. Only 1 transaction closed but nevertheless, there was a period of reasonable amount of activity with several other portfolio companies closing rounds, a number of which were financed by other investors not Seraphim, including Astroscale and Altitude Angel. Both of these were announced at our interims. I'll provide some more detail about QuadSAT, the company that we did invest into in my next slide. So post the end of the period, we've continued to be busy, several follow-on investments and one new investment has already closed. None of these have yet been announced. So I can't name them and focus on them during my presentation today. However, I can say that we're really excited about this new investment that we just made. It's only a small position in an early-stage company, but they're focused on the exciting carbon credit market. What they do is they review carbon projects to determine the overall quality and the ability to sequester carbon. Now this provides much-needed transparency and confidence in the giant carbon credit market. So I'm excited to tell you more about that when we speak next quarter. It's also worth noting that the portfolio companies have received multiple term sheets from new investors during this quarter on rounds that were closed this quarter and potentially the next quarter. So interest to invest in our portfolio companies continues to run at high levels. So let's move to the next slide, where I'm going to focus on QuadSAT. So in March 2023, Seraphim completed a follow-on investment of EUR 1 million into QuadSAT as part of a EUR 9 million Series A round. So this round is led by IQ Capital, with participation of Seraphim alongside others. And importantly, this is one of the companies that was originated through the Seraphim space accelerator. So QuadSAT is really gaining commercial traction. So they're the only mobile antenna testing company globally. So they've recently been accredited by SOMAP, so this is the satellite operators minimum antenna performance. And this is an industry platform that has been agreed by AsiaSat, Eutelsat, Inmarsat, Intelsat and SES. And this is for testing antennas in the industry. So this was a significant milestone that QuadSAT have achieved. And it's very much amongst the first steps to bring them into the leadership position for improving antenna performance for the industry. So what they enable is that manufacturers can perform more measurements, they can increase the validity and enable more reliable products for their customers to access good data. So this is a giant addressable market that QuadSAT is focused on. The global RF testing equipment market is forecast to reach nearly GBP 5 billion by 2028 and QuadSAT is well on their way to achieving leadership in that market. So they've got a range of customers already, including some of the biggest satellite constellations, including OneWeb. They've successfully completed their first system and services sale to some of the world's leading satellite antenna companies and terminals. And they completed commercial missions with customers including the United Nations and Telespazio. And national defense agencies are now really showing a huge amount of interest in this business. So we're really positive around the trajectory of this business. It's a real demonstration of accelerator and how it enables us to be able to reduce the risks and invest into the best-performing companies. So we're going to move on to the next slide, where I'm going to take a deeper dive into the top 10 of the companies in the portfolio that represent 70% of NAV. And when you consider that we've got nearly 20% of NAV in cash. That really is the majority of the portfolio. So I'll start with some bad news, I'm afraid, in relating to 1 of our 3 listed companies, Arqit which you'll no longer see it in the top 10. As we discussed last quarter, we partially sold down our stake in this business at $8. And today, the share price is down to $1. The market is an exception to the terms of a $20 million placement that they undertook last quarter. And outside of the period Arqit reported its own results that were materially below expectations. They also announced a pivot in their strategy and the intention to sell their space assets. So their share price has been published by the market and it's now fallen out of our top 10. So that is the bad news. The rest of the news that I've got to share is actually very good news. In fact, I'd go as far as saying that we experienced a fantastic quarter. We've had record revenues and bookings in key portfolio companies. We've had significant rounds closed Astroscale, QuadSAT, Satellite Vu. We've had substantial term sheets written by other investors, top-tier investors for 3 of the companies in the top 10. And there's been a major regulatory change that's been a key driver for our portfolio companies. So that's the overview of what's been going on in the portfolio. Let me take you down to look at some of the detail, starting with our largest company, ICEYE. So ICEYE had a fantastic quarter. So they've recorded record contracts record bookings, record revenues. They've announced the closing of a milestone contract with UAE and this is a business that's really firing on all cylinders. So this is just the world's largest at-radar satellite company, it very or much services the defense and intelligence community and also the climate and insurance community and business is absolutely booming. HawkEye has had a successful quarter. They've separately, in 2 different rockets, launched 6 satellites, taking their satellite constellation up to 21 operational in orbit today, that marks them out as the largest constellation for signals intelligence. It really brings down the latency time for them to provide the important data to their customers. This business is really thriving. So next of all, we've got D-Orbit. So D-Orbit has won multiple, tens of millions of dollars contracts during the quarter. And with the European Space Agency and the Italian Space Agency, they've been announced as part of a consortium for EUR 235 million for an in-orbit services contract. This is a first of its signed -- first of its kind contract for such activity in Europe and D-Orbit is very much in the lead. So it's worth noting here that there's been a key driver for in-space activity. There's been a change in regulations. So the Federal Communications Commission, the FCC has approved an important new in-orbit debris rule. So under this rule -- the previous rule used to allow satellite operators 25 years after the end of the life of their satellite to remove that satellite from the space. And that essentially allowed enough time for the orbital drag of the earth's gravity to pull the satellites in and burn in the atmosphere. The new regulation has now changed that to 5 years, which means that satellite operators now have to find a way of returning and removing those satellites after that 5-year period. So this rule comes into effect in 2 years' time, 2 years after this order is adopted, it's focused around U.S. licensed satellites and those operating in the U.S. market, but we believe that the majority of regulators around the world are also going to adopt this. So the reason why I go into such detail here is that this is a really significant change and one that is really going to drive the outlook for 3 of our most important portfolio companies, Astroscale, LeoLabs and D-Orbit. So I've already talked about the D-Orbit and how they've had a fantastic quarter, really developing their leadership in the market. Astroscale has closed a $75 million round, and that round is at the price of the 2022 round, which indicates how investors are continuing to prepare to invest into these businesses at a robust valuations. And LeoLabs is the market leader in providing and data around all debris in space so that the regulators and operators can use their live data in order to be able to manage their debris mitigation strategies. So this is a really exciting development for the overall portfolio. So I'll talk about 2 more of the portfolio before I move on to the next slide. Our Satellite Vu, so 3 years of effort, and they're just about to launch their first satellite in June. We're really excited about this because this is the first company ever where their satellite will be able to show the heat signature of any building on earth, and there are so many different applications to that type of depth of understanding. So customers have been lining up to work with this company. And they've signed over $100 million of purchase options from customers who are desperate to get their hands on this important data set. So the final one that I'll talk about is Altitude Angel, which is really on the periphery of our space investment strategy. So PwC have estimated that drones could contribute GBP 45 billion to the U.K. economy by 2030 and the ability to be able to scale and safely integrate drones into the airspace market is paramount. So Project Skyway, which is a project that's developed by Altitude Angels and its partners, which include BT they're aiming to do exactly that, starting with the 265-kilometer drone super highway. So this is now actually in the development stage, this will be completed later in 2023 and paving the way for the first commercial drone flights between Redding and Coventry in early 2024. So the U.K. is looking from a regulatory perspective and from an operational perspective to lead the world in this regard, and this is all built around Altitude Angel and their platform for safely managing this -- the drone super highway. So that's the huge amount of activity that is going on within the portfolio and is really not clear from the pedestrian numbers that we're presenting in relation to the performance of the NAV. So this -- I move to the next slide now, please. And really turn to valuations briefly and really just to shine a light again on our processes. Now this is a terribly busy slide, and it's actually a challenging slide to try and present to you that. So the purpose of sharing it with you is that we're constantly refreshing our assessment of the enterprise values of each of our portfolio companies. We take a rigorous approach to do in this, taking account of both public and private marketing data. And alongside that, we use confidential or non-public information from the companies themselves. So we then use this to refresh the enterprise values to then create and calculate the fair values. But in order to create the fair values for the enterprise values, we have to look at the capital structure for each of the businesses. And this includes things like liquidation preferences and antidilution rights and these are taken into account when we are calculating the fair value of the underlying business. So these different structures help protect the value of our investments, where there might be a reduction in the enterprise value. So we've not repeated it this quarter. But last quarter, I evidenced how within the top 10 there've been a number of sizable reductions in the enterprise values of individual companies over the last 6 to 9 months. And that's at the same time as other companies like Astroscale and others are continuing to raise money at valuations that are consistent with their previous rounds. So I'm hoping that this sort of level of detail will give you confidence about our rigorous assessment and that our NAV valuations are reflective of the real underlying value of those portfolio companies. So I'm going to move on to the final slide now which really gives me the opportunity just to talk about what's going on in the market more broadly than Seraphim. So Seraphim since 2017 has produced a quarterly report and which we published called the Seraphim Space Index, which reviews global private investments in the space domain. So in the first quarter of 2023, we saw a bounce from the lows of Q4 '22, with private investment increasing by over 60% to $1.4 billion. So European transactions to focus on the continent were up by nearly 50% in the year to the 31st of March, a record-breaking 42 transactions in the quarter. Indeed, the first quarter of activity in Europe was equal to half a year of 2022. So the trajectory is really underway. So looking in a little bit more detail. Q1 saw a strong pickup in growth stage investment activity. So there was a record number of B rounds, C rounds, D rounds that were financed globally. So early-stage transactions were also strong, 96 transactions closing and really the level of money that has been invested is pretty consistent with the levels in previous quarters, but there's more transactions that are being undertaken. So looking forward, the portfolio is at an excellent quarter. So it's really driven by government engagement and the climate activities that the portfolio is focused on. This has led to record contract wins lots of ongoing investment activity. And really, Western governments have really recognize that space is highly strategic. It's playing a crucial role in protecting democracy and protecting the planet. And we believe that the portfolio is really well positioned to benefit from this continued government interest and we anticipate that the recent positive commercial trajectory within the portfolio will continue. And that as we continue to release this positive information that over a period of time, our discount will start to close. So thank you for listening today. I'm going to pause there now and along with my colleague, James, we'll take your Q&A.

We will, Mark and James, thank you for that. Very interesting and useful as always. Let's move on to Q&A. [Operator Instructions]. The first question we have comes from Hannah, who is interested in the bounce back in funding that you evidenced, Mark. And she observes that it feels as though the external environment might have gotten tougher when we read about Silicon Valley Bank and some of the challenges that are being faced in funding markets. So it's interesting in that context to see the recovery you are reporting. How can we explain that?

Well, I'm going to hand over to James so that he can address one of these questions. James, do you want to take that?

Yes, happy to, Mark. Thanks, Nick. Well, I think first observation, based on Mark and I having each worked in venture through multiple downturns is that irrespective of where we are in the macroeconomic cycle, the best businesses always get funded and we expect that trend to continue. Needless to say, there has been some consequences as a result of the crisis around Silicon Valley Bank albeit that situation has been stabilized with both the U.K. and U.S. operations having been taken over. And those portfolio companies that were customers of Silicon Valley Bank continue to have access to their existing facilities and indeed new ones. And anecdotally, we are seeing across the portfolio new facilities being offered by Silicon Valley Bank. So although there's been a change of ownership with that institution, it continues to play an important role in the ecosystem. So investors are definitely as a rule being more discerning about where they're willing to make new investments. Much of the investment activity within the portfolio over the last 12 months has been principally around inside of [indiscernible] rounds, or existing shareholders are supporting the business. But as Mark has alluded to, over the last quarter or so, we've increasingly seen the return of new investors being willing to issue term sheets for our portfolio companies, which we believe is a very positive sign. So in terms of the overall investment activity that's happening in space-tech, I think it's fair to say that over the last quarter or so, it has largely bucked the trends of the broader venture ecosystem. Why is that some of the reasons that Mark has been saying, whereas other sectors may really be facing very significant headwinds as a consequence of the macroeconomic environment. Some of the causes of those headwinds are actually benefiting our company. So principally, particularly the geopolitical tensions that we see both in Ukraine, but also around China and Taiwan. That has really turbocharged the incentives for governments to look to engage with the commercial space sector with companies in our portfolio have been beneficiary, to build on Mark's earlier comments we have seen companies in this quarter with 8 and indeed in one instance 9-figure bookings during the quarter. So we remain pretty optimistic whilst also so but the reality is, the fact there may be continued turbulence within the funding market through the rest of this year.

Thanks you James. And a follow-on question really from Kieran, who asks, in a more cash-constrained environment, the extent to which the requirement to -- for your portfolio companies to reduce overheads, extend their cash runways, whether this is at the expense of their development and growth rates.

Mark, [ could I ] take that one.

Yes, please.

That one again. So evidenced so far, based on the trajectory of our key portfolio companies, is that we haven't seen a slowdown. Indeed, the overall growth of the portfolio continues at a pace like many companies, both space-related venture and indeed, outside of venture clearly, everyone is being more prudent with how they're spending their money but our companies are continuing to grow. The increase in cadence of their expenditure may have been abated. But in most instances, what we're not seeing is companies with wide-scale layoffs or reducing of overheads. It's just that they have reduced the pace at which they are increasing their overheads. And again, in terms of the traction that we're seeing for the businesses, we're not seeing that having an adverse impact currently.

Thank you, James. And I've got 2 questions from Giovanni and Mark, which I'm going to combine. They're both on SPACs, one which is rather generic or more generic, which is about given the recent performance of SPACs, has it changed your opinion as their utility as a tool for investment exit? How would you evaluate the pros and cons today, I guess? And would you look to use them as an exit route in the future.

Well, clearly, the share price performance of SPACs generally has been very poor since the start of last year, and that clearly includes several of our companies. It's worth noting that the companies of ours that have SPAC, as a rule, have progressed really quite substantially since they listed. So SPAC, for example, growing close to 100% year-on-year and now with GBP 100 million of annual recurring revenues. And AST having now proven their technology and space to enable 4G connectivity direct to handsight from a satellite, which we believe ultimately is going to be a game changer. So the company is fundamentally looking in pretty good shape, notwithstanding the very disappointing as share price performance. In terms of looking forward, this being a liquidity route, it's worth noting that although the rate of SPAC mergers, within the sector and elsewhere has clearly slowed over the last 12 months. Space companies are continuing to use SPACs as a route for going public and we certainly wouldn't rule it out, notwithstanding current market challenges. Those companies that are more mature in our portfolio right now, their strategy is more to look to build towards a traditional IPO in favor of a SPAC merger. But they remain open to all avenues for ultimately becoming public. And we do see companies becoming public as one of the key avenues for our best performing companies in terms of ultimately delivering some form of liquidity for our investment.

Yes. But it's worth noting, we don't really consider them to be an exit because we wouldn't be exiting the business at that point. It's an efficient form of financing to continue the growth of the businesses rather than an exit.

Thank you, Mark and James. Very, very helpful. And just a more specific follow-on question from a different Mark who notes the plans that were in place for D-Orbit to SPAC. The question, I guess, is around future listing plans and progress with this business.