Issue #2(24) 2020 Opinion

The four horsemen of space finance

Dylan Taylor Voyager Space Holding, Denver CO, USA

The space industry has come a long way in the past ten years. Not only have key technologies such as launch reusability and 3D printing in space been demonstrated successfully, the nature of space finance has also evolved significantly. Ten years ago, the industry struggled to attract early stage angel capital. With that problem now largely addressed, venture capital firms and other institutional investors have entered the industry in a significant way. Despite this, space finance remains perhaps the biggest challenge to truly opening up the high frontier, especially in light of recent economic traumas caused by Covid-19. This begs the question: why is space financing in particular so hard? Additionally, why is the space industry different from other industries? And what then can we as an industry do about it?

To better understand the nuances of space finance, it is best to start with the basics of any type of investment. In general, the governing principle is risk versus reward. This is as fundamental to financing as supply and demand is to economics. As the chart shows, for a higher level of risk, investors would necessarily expect a higher return. This is why equities typically have higher returns than debt. Since in the ‘capital stack’ debt holders are paid first, and equity holders get what is left over, the debt holders are in a superior (and therefore less risky) position. For this lower level of risk, a lower return is both expected and required for the same amount of capital invested.

However, at the upper right of the chart, you can see some anomalies. For example, why would private equity (primarily a US based invention) have a higher return than emerging markets, which are typically economies that have much more systemic risk? The answer is that while you can buy emerging markets in a mutual fund, you can’t necessarily do that with private equity. Therefore, private equity is less liquid (e.g. you can’t sell it at the push of a button on the open market). This lack of liquidity means that most investors will demand a higher return in order to agree to invest.

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