Forget risky rocket launches, investing in space is all about debris data and satellite tow-trucks, but Seraphim Space (SSIT ) manager Mark Boggett is still struggling to get investors to understand the importance of the companies in the heavily discounted portfolio.

The £87m space technology fund has not had an easy ride since it launched as a world first almost exactly two years ago, having been buffeted by rising interest rates that knocked high-growth tech stocks, a downturn in sentiment towards investment in unlisted companies, and the high-profile collapse of Sir Richard Branson’s Virgin Orbit earlier this year.

Although SSIT was not directly invested in Virgin Orbit, which filed for bankruptcy, one of its portfolio companies Arqit was the largest creditor of the defunct firm.

‘We have zero launch stuff,’ said Boggett. ‘We made the decision not to invest in launches in 2017. Launch is a crowded market, and companies are competing against businesses like SpaceX. It is not a market we can make a tremendous amount of return from.’

He wants to see the market succeed because that would lower the cost for other operators in the space market, but admits the collapse of Virgin Orbit ‘didn’t do us many favours’.

Shares in the trust have dropped 66% since launch and 51% in the past year alone, leaving them languishing on a 67.5% discount. The trust’s net asset value (NAV) has declined by 11.8% over the past year. Its latest results (covering the three months to end-March) show a 1% decline in the NAV and a reduction in the overall portfolio valuation of £500,000 to £180.8m driven by an ‘unrealised fair value reduction of £1.3m’.

‘Quite crazy’

The biggest problem Boggett has is convincing investors that the portfolio is worth more than the level at which the stock market currently values it, which is a tough job considering the little-known nature of venture capital investments.

Currently, the net value of the assets in the fund is £220m but the market is valuing it at just under £90m. Boggett says that this includes £40m of cash, meaning the market is valuing the fund’s assets at just £50m.

‘Our biggest portfolio company’s value is £42.5m so the entire value of the portfolio, according to the stock market is based around one company, and you get the other 29 for free,’ he said. ‘That is quite crazy.’

He puts the share price falls down to ‘investor disbelief’ in the value of companies on the balance sheet and a lack of knowledge about how deals are structured.

He gives the example of a £50m investment in a company with an enterprise value of £200m. The £50m investment takes the enterprise value to £250m of cash and assets, but assuming the enterprise value halves to £125m, SSIT would still receive its full £50m investment back because it owns preference shares that put it at the top of the pay-out structure.

‘So even though the enterprise value has halved, our fair value [on the balance sheet] is held,’ he said.

If the company fell below an enterprise value of £50m, only then would SSIT not get back 100% of its original investment. It would ‘get back whatever is available’.

Boggett said investors ‘do not get’ the structure of the deals because they differ from those done on the public markets.

‘It’s the norm in our market – it’s how all venture transactions are structured. It really protects on the downside,’ he said.

‘The structure limits falls in the fair value of holdings but it’s not being taken into account by the market. The market is anticipating a huge drop in valuations and frankly it’s not going to happen.’

Boggett added that when the market realises it is wrong there will be a ‘swift upturn in sentiment’.

Taxis and tow-trucks

Until that happens, he is going to focus on the portfolio. ICEYE, a Finnish group that uses microsatellites to provide disaster response, is by far the largest holding at just under 20% of the portfolio – double the size of the second-largest position.

It has signed contracts that should generate $100m in revenue, including one with the UAE. Boggett said it is benefitting from an increase in ‘global defence budgets’ and has ‘invested more in the business because we are so confident of the outcome’.

Like other portfolio companies, ICEYE has dual use. ‘There is a military application but the same technology… is being used by the insurance market,’ he explained. ‘It is hoping to protect itself against climate-induced events, which will help [the sector] reduce costs, be more efficient and stem losses.’

One area of space investment that Boggett becomes especially animated about is ‘space debris’. There have been 17,000 satellite launches historically – 80% of them in the past two years – and there are currently 7,000 satellites operating in space. The remainder are orbiting Earth and crashing into each other, creating space debris.

‘Over the next decade it is expected that hundreds of thousands more satellites will be launched, adding to that debris,’ he said.

This has led the US Federal Communications Commission (FCC) to change satellite regulation to force companies to bring defunct, de-orbiting satellites down sooner, from 25 years to just five years.

The change in rules will be a boon for D-Orbit, the fifth biggest position in the fund, which operates as a ‘space taxi’ taking as many as 12 satellites into space aboard its own rocket, which hitches a lift on a SpaceX rocket.

Once its cargo is launched, Boggett said D-Orbit makes use of the empty space on the rocket to become a ‘space tow-truck’, dragging debris into the Earth’s atmosphere where it burns up.

‘There are two parts to the strategy… and D-Orbit is a world leader,’ he said, adding that it has completed 11 missions so far and has signed millions of dollars worth of contracts.

Boggett said if D-Orbit is considered the ‘RAC of space’ then ‘Astroscale is the Kwik Fit’ of the sector. It ‘attaches to satellites’ to fix them and prolong their life.

The portfolio also holds Satellite Vu, which hit headlines this week after securing £13m in a funding boost to continue development of what has been dubbed ‘the world’s thermometer’ – a satellite designed to map the heat signatures of buildings.

Boggett said the technology allows the company to see how many people are in a building and ‘understand economic activity’. It can determine, for example, whether an oil rig is in use or not.

‘The biggest opportunity is that it can look at a building and detect its thermal environmental footprint, and how much energy is being used – 40% of carbon release is from buildings,’ he said. ‘This is a fledgling UK company… with $130m of operational contracts.’

All.Space, a multi-network satellite communications platform, is another UK business that Boggett believes has the potential ‘to be a real UK international champion’ solving a worldwide problem – the need to ‘provide connectivity’ to anything that moves as the world shifts towards autonomous vehicles.

‘Our exposure to the UK market is high,’ he added. ‘This market is growing very quickly and space is a very good UK story.’