Is now the time to explore the final frontier of investing?

It’s been impossible to ignore the major strides that have taken place in space exploration in 2020, including the launch of the UAE’s Hope probe and the first launch of astronauts from US soil to space in more than a decade. The number of satellites deployed in space is increasing quickly, as rockets become cheaper and more reliable, while space tourism operators are set to begin regular operations in the near future.

So, it’s no surprise that investors are taking notice. Many of the biggest names in tech – including Elon Musk and Jeff Bezos – are active in the field with their own companies. And in the UAE, Mubadala Investment Company is a prominent investor, including ownership of Yahsat, a UAE satellite operator, stakes in Virgin Galactic and major investments in venture capital funds that have a focus on space.

But we could be on the cusp of even greater opportunity, with Morgan Stanley estimating that by 2040, the global space economy could generate revenues worth $1 trillion (Dh3.67tn) by 2040, up from $350bn currently.

Experts in space investment point to a number of technical catalysts that are helping to turbocharge the sector. The invention of the CubeSat – small satellites weighing as little as 1.33 kilograms that are placed in low Earth orbit – and the increasing power of off-the-shelf electronics have lowered the barriers, says Tess Hatch, vice president at Bessemer Venture Partners, which has made major investments in space companies, including Rocket Lab.

As governments ramp up their spending on space exploration and defence, including the establishment of the United States Space Command, it is creating an additional flow of money to private contractors, says Andrew Chanin, chief executive of ProcureAM, which offers a space-focused exchange-traded fund (ETF).

Overall, the scale and ambition of some private companies are breathtaking, from space tourism and supersonic point-to-point travel to plans to colonise planets, mine asteroids for precious metals, produce lunar rovers or print 3D rockets.

Still, a large segment of space technology is focused on providing services to Earth dwellers – including GPS, satellite television, high-speed internet and other communications services, or gathering data on weather, agriculture and other applications using sensors on satellites.

“People haven’t fully grasped the importance of how space technologies are already affecting our everyday lives today and how it may affect them in the future,” says Mr Chanin. “We believe that as people become more aware of how much space plays a role in our everyday lives, they might start considering the importance of having space exposure in their own investment portfolios.”

GPS is the best example of a transformational space technology that has been put to good use by tech companies. Developed by the US military and made available for civilian applications, GPS is today used to provide location-based services on our smartphones and wearable devices – powering everything from Google Maps to ride-sharing services such as Uber to Pokémon Go.

The goal for investors is to identify the next set of space technologies that can deliver value creation on the same scale as GPS, says Chad Anderson, managing partner at Space Capital.

The greater number of satellites in space and more available sensors are creating new opportunities in Earth observation, with demand coming from fields including agriculture or insurance, he says.

Meanwhile, demand for geospatial intelligence, which uses satellite and other sensors to gather data about the world, such as counting the number of ships in a major port to predicting trade volumes, is growing rapidly.

This is especially true as Covid-19 creates a more uncertain outlook, according to Mr Anderson. “We think that the opportunity in geospatial intelligence is going to be as big – if not bigger – than GPS or location-based services,” he says.

Supplying high-speed internet via satellites is also expected to be a major growth market, especially in countries where internet services are slow or non-competitive.

Mr Musk's SpaceX has launched about 600 low Earth orbit satellites, but has approval to launch as many as 12,000, each weighing approximately 260kg. It is aiming for "near-global coverage of the populated world by 2021", according to the StarLink website.

Technologies developed for space exploration can also have applications on Earth. The UAE has already announced plans for a Mars colony by 2117.

While that goal may seem distant, many of the challenges around science and technology that will need to be overcome to establish a habitable human settlement on the Red Planet, such as securing food and water, are linked to challenges that the UAE faces today.

This is a point made by Elodie Robin-Guillerm, a partner at Gothams, an aerospace and defence accelerator that has a partnership with Hub 71 in Abu Dhabi to invest in early stage space companies and bring them to the UAE.

“That’s why there is a lot of cross-sector development, and why you need partnerships between the government and the private sector to make this happen,” she says.

The UAE is also rapidly developing as a hub for the space industry. This year, it passed a Space Law intended to bolster investment in the sector. The law not only provides a stable regulatory environment for investors, but also signals the seriousness of the country’s intent to develop the space sector, says Anna Hazlett, founder at AzurX, a space and technology consultancy in Dubai.

“The Space Law is giving the UAE international recognition within the space sector. Space companies can start to operate here, and investors see this as a sensible, secure environment in which they can invest and they know that the regulatory framework is there,” says Ms Hazlett.

Where to invest

So, if you’re convinced space is the next big thing, how can you get exposure in your investment portfolio? The simplest way would be to include a specialised ETF tracking the aerospace industry, such as SPDR S&P Aerospace & Defense ETF. Its major holdings include Virgin Galactic, Northrop Grumman Corporation and Howmet Aerospace.

A more specialised choice is the ProcureAM Space ETF (its ticker is UFO). Eighty per cent of its index weight is allocated to companies that derive a majority of their revenue from space-related industries, including those utilising satellite technology, with names such as Trimble, Iridium Communications and Dish Network.

The fund tracks an index developed by space expert Micah Walter-Range, and includes two tranches of companies – pure play space companies, such as Virgin Galactic, and diversified companies that receive some revenue from space.

Mr Chanin says the ETF can appeal to investors who want long-term exposure to the space sector, or those who are looking for short-term catalysts such as major government contracts.

But given the rapid pace of development, many of the investment opportunities are only available in private markets, whether to angel investors or investors in venture capital funds – though successful companies are expected to eventually list on public exchanges.

When it comes to evaluating a potential investment in an early stage space start-up, Ms Guillerm says key considerations include the strength of its team and the commercial viability of its project, including time to market.

One thing that newcomers to the space investment sector can lack is a network to draw on, both for technical advice and assessing whether a company will be disruptive in the market they are targeting, she says. “Space is a very large field, from upstream to downstream, and no one can be an expert in all of the sub-fields and sub-segments,” she says.

That view is echoed by Ms Hatch, herself an aerospace engineer who has worked for Boeing and SpaceX, where she worked on integrating payloads with the Falcon9 rocket. “Even with all our expertise at Bessemer, we hire independent consultants who have PhDs and deep expertise in the field, who dig in and understand every part [of a company’s technology] before we invest,” she says.

Investors may also need to be prepared to invest early, so look for founders who have a strong vision for their company as well as the technical expertise and intelligence to execute it, she adds.

Other investment decisions include whether to target companies in the upstream – space exploration activities – or downstream, which are space technology companies providing services to Earth. Downstream companies that can generate recurring revenue quicker may be a safer bet, and especially those whose potential customers are in multibillion or multitrillion-dollar industries such as agriculture or the Internet of Things (IoT).

Companies that are focused on analytics or other services will likely also have a quicker route to market than a company that is trying to build its own hardware, and may require less capital to get their idea off the ground. “Hardware at the end of the day is black and white – it either works or it doesn't,” says Ms Guillerm.

Companies involved in space exploration will likely be more risky, but the flip side is that if a company is successful in trying to do something that hasn’t been done before, it can produce unique gains, says Ms Hazlett. “If a company is involved in space exploration, there’s definitely more risk attached to it. But that’s where the opportunity is: if someone wants to take a risk as an investor, and it goes well, it’s going to be a great story.”

One feature – or risk – of the industry is that despite the large amounts of venture capital invested to date, there have been relatively few exits – whether initial public offerings or acquisitions. Space Capital’s Mr Anderson puts this down to the relative newness of many companies in the sector, and the rule of thumb that it typically takes six to eight years for a company to be ready for an IPO.

“We’re right in the sweet spot now, where we [should] start to see one or two IPOs soon,” he says.

Mr Anderson believes investments in space technology companies are no more risky than investing in general tech companies at a similar stage of development. “I would say space might be even less risky than a more crowded area of tech given that there’s so much wide open market opportunity here,” he says.