Earnings Call: Q3 2024

Jun 6, 2024

Summary

NAV per share held at £0.95, while 61% of NAV was at cash-flow breakeven or funded to reach it. A seed-asset transfer and strong sector financing activity reinforced the focus on mature growth holdings.

Good morning, everyone, and welcome to the Seraphim Space Investment Trust Q3 results webinar. I will shortly hand over to the Chief Executive, Mark Boggett, Chief Investment Officer, James Bruegger, Chief Operating Officer, Sarah Shackleton, and Chair, Will Whitehorn, to run through the results presentation. Once the presentation has concluded, the team will be available for questions. If you do have a question, please type it into the Q&A box and we will try our best to answer them all. I will now pass you on to Mark to begin the presentation. Will, do you want to make your introduction? Yes. Good morning. Will Whitehorn here, the chair of Seraphim Space Investment Trust, and welcome to our presentation today. I was going to begin by reminding everybody that we are in an industrial revolution space, which really is continuing apace. New government money in the last 6 months has come into almost every budget around the world, and in fact, a number of new governments have launched their first space budgets. In addition to that, over $7 billion of new private investment capital has come in in the same period, and a number of new companies in the venture capital world have made their first space investments. The same drivers are driving this growth: communications, climate change, defense and agriculture. Even this week, we have seen 2 launches of satellites, launching of 50 satellites. We've seen Boeing launch its crew capsule, and we are about to see the next Starship test by SpaceX. That is the kind of activity that might have been over a year, only 5 or 6 years ago, and indeed, this week has also seen a flotation. We'll be hearing more of that later. Our own companies have had investment rounds, and many of them, several in fact, in the $100 million range, which reflects what's happening in the industry. Our portfolio remains very well capitalized. The company holds reserves of GBP 26 million in cash at the end of this period, and that represents 11% of NAV. The most notable developments, however, occurred just outside the reporting period. Following last quarter's announcement that 60% of our portfolio by NAV is now profitable, we're secured sufficient capital to reach profitability. The manager has taken a decisive step to refocus our portfolio on later-stage growth companies. In April, we transferred all the early-stage companies added to the SSIT portfolio since the IPO into a new private venture fund led by the manager. This strategic move will allow SSIT to concentrate our resources on the more mature assets while retaining upside potential for the ongoing interest in those nine assets that were sold. This was a unique one-off transaction where we incur no management fees or carried interest, and we have made no further commitments to this fund, which will focus exclusively on seed and Series A early-stage investments. Additionally, in the period since the close, we have been pleased to announce the IPO of Astroscale yesterday, one of our top 10 portfolio companies. It is now trading on the Tokyo Stock Exchange. At that point, I will now hand over to Mark Boggett, who will walk you through the details of these quarterly results. Thank you. Thanks, Will. Hello, everyone. Thank you for tuning in this morning to our quarterly results. Before I go into the detail of the report, I wanted just to take a step back and remind folks about the big picture for Seraphim. Seraphim is the most prolific investor in the space market globally. We have now got a portfolio of over 120 space tech companies in our public and private portfolio. Seraphim was the first VC to launch a venture fund in 2016, and this trust represents the one and only listed investment fund focused on space globally. Our partners and backers include some of the biggest space corporates globally, and we continue to see a massive global deal flow, seeing virtually all deals at all stages, and this provides an incredible information asymmetry over the sector. We triage early-stage deal flow to our affiliated accelerator program that focuses on seed-stage space tech companies alongside our recently launched seed stage space fund. We are a value-add investor. We are a hands-on investor, and we join the boards of most of the portfolio companies, and this allows us to build conviction. Information asymmetry and conviction is the bedrock of our past and future success. Now, let us turn to the third quarter results. Let us start with the headlines. NAV per share is flat on the quarter at GBP 0.95. As at the 31st of March, the share price was GBP 0.49, which was up from GBP 0.34 as at the 31st of December. The shares have continued with this rally, closing at GBP 0.68 yesterday, representing a significant narrowing of the discount. Net assets of GBP 226 million were valued at only GBP 117 million by the market at the end of the quarter. However, with the recent rally, the market capitalization is now at GBP 161 million as of last night's close. The left-hand chart that you can see here shows the relative outperformance of the SSIT shares versus a range of indices since March 31, 2023. The right-hand chart shows the share price performance of SSIT correlated with our AIC peer group. These are the private growth trusts like Chrysalis and Schiehallion, and it demonstrates the relative outperformance, particularly post the period end. During this presentation, I hope to convincingly explain why SSIT will be well positioned to further close the discount gap when sentiment starts to return towards technology and the growth stage private companies. SSIT has a number of clear and increasingly evidenced drivers that marks us out differently to the generalist tech nature of our AIC peer group. Now, let's turn to the balance sheet as at March 31. This table sets out the NAV bridge. NAV marginally increased over the period up to GBP 226 million from GBP 224 million in December 31. The portfolio fair value, which includes FX movements, increased by GBP 2.8 million over the period. Management fees of GBP 0.7 million, expenses of GBP 0.4 million resulted in the NAV being flat over the period. Importantly, I wanted to emphasize that the portfolio is well capitalized, and we hold 11% of NAV in cash, GBP 26 million as at March 31, and that we believe that this is sufficient for us to continue to support the needs of the portfolio over the year ahead and beyond. Let's go into more detail now with this attribution analysis table. I'll explain how the value of the portfolio increased from GBP 198 million to GBP 201 million during the period. Unusually, there were no new or follow-on investments during the period, but that masks a lot of activity within the broader portfolio. The increase in fair value was at GBP 1.9 million, and that was made up of some positive and some negative elements. The key drivers on the positive side was the fair value of Xona Space Systems increased by GBP 4 million. That reflected a new funding round of $19 million that closed just shortly after the period end. D-Orbit was up by GBP 1.3 million due to the full impact of their EUR 100 million round, which closed during the quarter. The New York Stock Exchange-listed Spire Global was up by GBP 1 million due to continued share price increases and performance in the market. These positive gains were offset by reductions in the fair value of two portfolio companies, but hopefully these reductions will be short-lived. Astroscale, we marked down by GBP 3.9 million ahead of their IPO, reflecting the issue price of its IPO. It's important to note that the IPO that happened two days ago, the stock is now trading very well, up 30% and recovering much of the fair value relative to the March 31 valuation. The other company that was marked down over the period was the Nasdaq-listed AST SpaceMobile, which was down by GBP 1.2 million due to share price falls during the period. But likewise, this is likely to reverse during the next quarter because of recent news flow that has led to very strong trading reversing this loss at this portfolio company. More detail on that later. We also saw an FX gain of 0.9 million during the period. In this slide, I have tried to take a snapshot of the key trends, the key numbers that are really driving the portfolio. In the quarter, we have seen a moderate increase in the value of the underlying portfolio fair value to 201 million. Private companies, unlisted companies, broadly flat on the quarter, but material post-period performance from Spire Global and AST SpaceMobile both are now announcing key commercial contracts. The key figure on this page, however, is the 61% figure. That means that seven companies representing 61% of fair value are now fully funded to cash flow breakeven on either their own or on projections of management. This is a massive step forward with the maturity of this trust. As announced last quarter, this includes ICEYE, our largest company by NAV, 20% of NAV, which has become EBITDA positive. Outside of the 61%, the balance of the portfolio has an average funded runway of 10 months. 72% of the portfolio funded for +12 months, and those that are not funded for the full period of a year have active term sheet discussions underway. This is really just the typical stages of funding these companies that typically raise money every 12 to 18 months for the year ahead. Our key messaging here is hopefully that this should give you confidence that the SSIT portfolio is showing strong evidence of maturing. Next, we turn to some key developments over the period in the portfolio companies. Starting with ICEYE, which is 20% of our NAV. We were very proud to see that they were ranked company number 30 in the Financial Times 1000 companies ranking Europe's fastest growing companies. This company can also continue the expansion of its SAR constellation through the launch of three additional satellites in March. D-Orbit, 15% of NAV, closed their EUR 100 million equity financing round. That is supporting their international expansion, increasing their manufacturing capability, and expanding its product line, extending its lead within this market. HawkEye 360, 9.5% of NAV, closed a further $40 million venture debt facility, bringing the company's total capital raise to over $400 million. This company also successfully launched two further satellite clusters, each cluster having three satellites within it, bringing its total constellation to 29 satellites and extending its leadership within its own market. Astroscale secured JPY 7 billion in a debt financing with MUFG Bank. That is $45 million. Post the period end, as mentioned by our Chairman, Will, they completed an oversubscribed IPO on the Tokyo Stock Exchange, raising $153 million. More news on the portfolio as we continue to travel down into the lower NAV companies. LeoLabs, 6% of NAV, they have just appointed a new CEO that is very well-known in the industry, previously leading one of the major business units of Maxar Technologies. SatVu, 5% of NAV, they completed a contract, which they signed for their next two new satellites. They've also announced the first close on their new funding round to help them accelerate the launch of those satellites in early 2025. Tomorrow.io, 2% of NAV, they announced the success of their first satellites launched in space. They were able to demonstrate that they're pathfinder satellites, and confirm that they have unprecedented accuracy in their weather-related technologies. The final piece of portfolio news related to Voyager. They've added Japanese heavyweight Mitsubishi to their Starlab joint venture to develop a new commercial space station. This Starlab joint venture now consists of Airbus, Northrop Grumman, and Mitsubishi. This really opens up the market opportunity for Voyager in U.S., Europe and Japan. Much of the activity in this period actually happened just outside of the period end. That includes the IPO this week of Astroscale, who successfully IPO'd on the 5th of June, raising $153 million through a mixture of primary and secondary capital. The issue price for the IPO was quite heavily discounted to ensure that this IPO was a success, and represented a 40% discount on Astroscale's previous financing round in Q4 of calendar year 2023. I'm pleased to report that early trading has been really positive, and on the first day of trade, Astroscale's share price closed at a 62% premium to the issue price. This has been brought down in today's trading, but we're still around 30% up. We look forward to seeing the market cap of this business find an equilibrium over the coming days of trade. It's also interesting to note that the Tokyo Stock Exchange has a number of listed comparables, such as iQPS, which is the Japanese equivalent of ICEYE, and a company called ispace, which both of them have been listed within the last 6-12 months, and have seen a very strong growth in their market capitalization maintained. Astroscale is commercially and financially at the top end of the range of its peer group, so we expect to see continued support for this company. Another major activity that's happened during the period relates to Xona Space Systems, 3% of NAV, where they've closed this $19 million funding round led by Future Ventures and in participation with NGP Capital, which is Nokia's VC venture fund. Future Ventures is led by an individual called Steve Jurvetson, whose claim to fame is an early investor in both Tesla and SpaceX, where he joined the board of both companies. He's been actively on the hunt to try and find the next big space company, and he's really now focused on Xona. He's excited about Xona because this is a business that's doing something very unique. They're building a private GPS network, one that can provide centimeter accuracy and high levels of security to really power the future of autonomous cars and all of the requirements that we have for asset tracking and for live digital maps. Two other in the portfolio of our listed companies, Spire Global, had some great news to announce that really positively impacted their share price. They announced a multimillion-dollar contract in relation to their new high-resolution weather forecast model, which offers six-day outlook and is powered by their own proprietary AI model for long-range forecasting. This news also followed an announcement around their collaboration with NVIDIA to support Spire's AI-driven weather prediction capability. Their shares have rallied 30% since December 31. AST SpaceMobile, this is the company that does cell towers in space, enabling connection direct to any handset. This company had a $155 million equity round that was led by Google and AT&T that closed in January to fund the expansion of their cell tower networking space. More recently, the shares really responded positively to an announcement that both AT&T and Verizon have signed up with AT&T. We signed up with AST to provide their cell tower capability direct to their subscribers. These shares have rallied by 43% since the beginning of the year. As mentioned by Will in his introduction, the management team have also led a strategic activity just outside of the quarter, where, on April 22, SSIT announced in an RNS that it made a sale of the interest in all of the early-stage portfolio companies, the seed-stage companies that have been invested into since the IPO in July 2021. That is nine assets. These seed assets were valued in aggregate at GBP 3.8 million by an independent agent that was selected by the board called Azets. The valuation was at December 31, 2023, and it was then adjusted for accrued loan note interest where it was relevant, for the three months ending March 31, 2024, and one of those companies had also gone through a recent transaction that was reflected in the price. These assets that were transferred for GBP 3.8 million were at a total cost of GBP 3.5 million. This early stage portfolio represented 1.7% of NAV, and there was no change to NAV as a result of this transaction. The total consideration of that GBP 3.8 million was settled through the issuance of an interest for SSIT in this new space venture fund. SSIT effectively became an LP member of the new fund as a one-off contribution of these assets. SSIT will not incur any management fees. They will not incur any carried interest as a limited partner in the fund. This venture fund will then invest over a 10-year period in seed and Series A stage companies in space tech markets globally. This is very complementary to SSIT, that invest in B series and later growth stage, space companies. This is a one-off transaction. It represents 100% of SSIT's commitment to this future venture fund, and there will not be any further commitments made to this new fund. Why did we do that? There is a range of reasons why we thought it was appropriate to do this. First of all, the removal of the requirement for SSIT to provide any follow-on funding to these nine hungry early-stage, seed-stage companies. This enables the trust to be able to concentrate its resource and its GBP 25 million of cash liquidity on its more mature assets. It also provides continued exposure to the upside from these nine assets sold, through their interests and through the trust interest in the venture fund. It enables the building of a larger pipeline for future growth, via its exposure to the new developing portfolio of this private fund. The fund's aiming to build a portfolio of around 30 early-stage space tech companies, and as they mature, these become pipeline opportunities for SSIT to invest into. But finally, and perhaps, equally as importantly, having this early-stage dedicated fund helps strengthen Seraphim's market position. It builds upon our global leadership, sustains our ability to continue to see the vast majority of deal flow in the space domain. Remembering that information asymmetry is the bedrock to our ability to be able to pick the future leaders of the space market at every stage. This slide presents a snapshot of the portfolio. Drawing out some insights from the donut on the left-hand side into the top right ecosystem. This demonstrates that more than half of the portfolio is invested in platform. By platform, we mean constellation of satellites. These are the businesses that are developing the digital platform in the sky, providing the capability of data and insights from large constellations of low-cost satellites. The biggest customers for these today is defense and there's a considerable amount of budget increase in this market since we've seen the war break out in Ukraine and Israel. This is the reason why there is so much growth within the portfolio. In relation to geography, it's pretty evenly balanced between the U.S., Europe, and the U.K. In relation to stage, bottom left-hand chart, 75% of the portfolio is in the growth rounds of the C and D series. Turning our attention to the NAV chart on the right, I've really given some coverage on the sort of performance and latest news on each of these companies in the top 10. Top 10 companies dominate NAV, accounting for 75% of total NAV, with cash at 11% of NAV. This is the final slide before we open to Q&A. Just a few more comments here, really more about the market. Investments in the space tech market has remained very resilient over the past 12 months, despite the economic uncertainty. As mentioned in my report today, three companies have raised more than EUR 100 million during the quarter. Whilst the general VC investment market saw a 21% drop in investment compared to Q1 calendar year 2023, the space tech market substantially outperformed. In fact, Q1 was 20% up on Q1 for last year, and that's really reflected in our own portfolio as well. In terms of the outlook for the year ahead, SSIT continues to be well-capitalized. We've got $26 million of cash at the end of the period, and 72% of the portfolio by fair value has a robust cash runway, with 12 months funded runway. 61% of NAV is fully funded, and already reached cash flow breakeven, or they've raised sufficient capital to reach cash flow breakeven. The investment market's buoyant with many EUR 100 million rounds raised, AST, D-Orbit, Astroscale. We've made this strategic decision to remove the seed stage companies from the trust, all of those that were invested in since IPO. That allows us to focus the trust on growth, and that growth is now clearly evidently coming through. We remain very optimistic about the outlook for the sector, which is very much driven by tailwinds in defense and climate and sustainability. Thank you very much for your attention today. I am now going to open up to questions, and I am going to encourage my colleagues, James Bruegger and Sarah Shackleton, to get involved answering some of these questions. Thank you, Mark. As a reminder, if you do have a question, please type it into the Q&A box, and we will make our way to it. We have the first one here. It says, "Could you provide a bit more detail about the ICEYE raise that took place outside the period? Was the raise at a higher valuation to the last funding round? It appears this was done to speed up growth rather than out of necessity. Have you been given any indication by ICEYE management as to whether they plan to undertake any further raises along this vein? James, do you want to take that? Yeah. I am happy to take that. I can confirm that this funding round was done in order to accelerate growth rather than out of necessity. We have previously reported that in calendar year 2023, ICEYE generated in excess of $100 million of revenue, and during that period in the second half of the year, achieved EBITDA profitability. Like many of our more mature businesses that are on a trajectory to potentially become public companies over the course of the next couple of years, the likes of ICEYE will opportunistically still potentially look at raising rounds to both potentially accelerate growth, and we might anticipate elsewhere, potentially around acquisition opportunities, which in the current market conditions abound. Those companies that are more mature category leaders and well-capitalized, which fortunately characterizes much of the more material holdings of our portfolio, are very well-placed to potentially start to consolidate lesser players as a way of gaining critical mass ahead of potential IPOs. Thank you. We have the next question here, which says, "What potential value inflection events do you hope for the largest portfolio of businesses over the next 6-12 months? I'll take that one as well, Mark. I'm not going to talk specifically about individual companies, but as a generalization and building on the guidance we've given previously, our most mature assets are now approaching EBITDA profitability. I think that is really the key next milestone for these businesses that their management teams are selectively projecting that they're expecting to achieve during the course of 2024. I think in most instances, these businesses will need to be post EBITDA profitability before they can start to turn their attention seriously to thinking about being ready for potential IPOs, which clearly remain subject to market conditions. I think it's a combination of continued top-line growth, which has been robust in the portfolio, driven by the sort of secular tailwinds which Mark and Will have been referring to, and then starting to see at least at P&L level in the first instance, these businesses reaching profitability. Thank you. The next one here asks, "Did SSIT participate in the most recent SatVu funding round? Short answer, yes. Another one here, "How is ALL.SPACE's production ramp-up going? I will take that one. ALL.SPACE has a healthy contracted backlog that we anticipate the business will continue to deliver against during the second half of this year. Thank you. There is a question here about the Astroscale IPO. They have said, "The IPO has been well received by the market. What happens to the SSIT holding? Mark, shall I take that one? Yeah. Well, in simple terms, like all of Astroscale's shareholders prior to the listing, we have seen our preference shares convert into ordinary shares that are now trading on the Tokyo Stock Exchange. In terms of what we ultimately determine that we do with our holding in Astroscale, as with all of our businesses, as and when there are potential liquidity options, we will assess what we believe the potential future value creation and growth in the value of our holding is, relative to potential other opportunities, were we to look to recycle capital through divesting or partial divestment back into either other portfolio companies or indeed new investment opportunities. So it will very much be on a case-by-case basis, depending on how Astroscale trades. Thank you. We have one more here on Astroscale, just group them together. Can the team disclose how many Astroscale shares they own, as the basis as from 31st of March? What valuation and restrictions are you under regarding selling the position? I believe this is a matter in the public domain from Astroscale's IPO documentation. So as at March 31, we owned just over 1.3 million shares that are not restricted. Thank you. The next one here. How do you plan on diversifying the portfolio going forward? Mark, should I take that one? Please. I think there's two different elements to this. Diversification at the early stage, as Mark and Will have alluded to, is really now through the limited partner position that SSIT has in the recently raised Seraphim Space Ventures II. That vehicle is focused on seed to Series A, forecasting to build a portfolio of around 30 holdings, which through the interest that SSIT has, provides diversified exposure to a broad range of early-stage companies. And we would anticipate through that in due course, good candidates for growth stage opportunities. In terms of SSIT's portfolio itself, I think we've given guidance in recent quarters that we believe that based on the current number of companies that we hold and current cash reserves, that the portfolio is approximately at maturity now. We are still selectively looking to add to the portfolio, as indeed we have done in recent quarters, most recently with our investment in Skylo. But majority of the focus is on the existing portfolio at this time. Thank you. We have one here. What are the strategic benefits to shareholders by the sale of nine early-stage portfolio companies? Would you like me to take that one? Yes, please, Sarah. Morning, everyone. The idea behind selling those nine assets was really so that SSIT could concentrate on its more mature growth assets. It also removes the need, as Mark Boggett spoke about earlier, for additional follow-on funding into those earlier stage assets, which tend to be very cash hungry and raising on a periodic basis. SSIT obviously still maintains its exposure to the assets through the interest in the fund and will gain further exposure to other early-stage investments. We are targeting about 30 early-stage investments in that venture fund, and that will ultimately also provide a pipeline of opportunities for SSIT in the future when those companies are more mature and more advanced in their stages. Thank you, Sarah Shackleton. We have the last one here. How was the valuation of those portfolio companies arrived at? Sarah Shackleton, why don't you take that one? In a similar way to how we have been valuing all our assets, we obviously, you know, follow the IPEV guidelines, look at, you know, the valuation. The sale value was determined by a third-party independent valuation agent. We used Azets to do the value for the sale. Thank you. That marks the last of the questions from the Q&A. I would like to hand back to Mark quickly just for some closing comments. Thank you. Well, thank you to everyone for your time today listening to our report. I really just want to bring you back to that 61% figure. We have got 61%, as measured by NAV, of our portfolio that is now at cash flow breakeven or has raised sufficient funds to reach cash flow breakeven. That is a significant milestone for this fund, and it is the direction of travel. We have announced during this quarter three companies that have raised more than GBP 100 million, D-Orbit, Astroscale, and AST. That really demonstrates ongoing interest from scale, growth stage investors in the sector. We consider that to be continuing into the future. We have got next generation, really exciting companies like Xona that are now raising significant rounds on their next stage of scaling up. These are the companies that we expect to become, you know, future leaders as they sort of mature towards reaching cash flow breakeven. With Astroscale and the IPO that was achieved this week, we believe that this is the first of a series of IPOs and that a range, as James Bruegger pointed out, of our maturing portfolio companies, particularly those that have reached cash flow and EBITDA breakeven, that they are looking as a next step to how and when they position themselves for IPO. Hopefully, that is clear evidence that the portfolio is maturing. As we have alluded to throughout the presentation today, we have got these secular tailwinds of defense and climate and sustainability that are going to continue to accelerate the growth of our portfolio company. So thank you to everyone for listening today. Will, do you want to add anything to my wrap-up? We couldn't possibly close a retail presentation without a corny space phrase. Seraphim is going to live long and prosper. Thank you very much.