The space race: exciting, but not necessarily profitable

Want to go to space? You probably can’t (it will cost $250,000 to ride in a billionaire’s space plane), but there is a chance your money can. This week, Seraphim Space Investment Trust (LSE: SSIT), backed by Richard Branson, listed in the UK.

There are some exchange-traded funds (ETFs) in the area, but this is “the world’s first listed space tech fund”, says its chair, Will Whitehorn, ex-president of Branson’s Virgin Galactic.

The idea is to invest in growth-stage space-related companies “which rely on space-based connectivity or precision, navigation and timing signals or whose technology or services are already addressing, originally derived from, or of potential benefit to the space sector”.

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The first investments sound exciting. One, says Hargreaves Lansdown, is “Arqit, a British quantum technology encryption start-up constellation of ‘quantum key distribution’ satellites that use lasers to transmit unhackable . . . encryption keys” and which “has unicorn status with a valuation of more than $1bn, following its reverse merger via a Spac [special purpose acquisition company] with Centricus Acquisition Corp.”

A little outside the scope of my expertise, but still, exciting! Then there are various satellite companies, some firms with fabulous names such as Altitude Angel and PlanetWatchers and some more boring-sounding, but no less impressive in their aims. Commodity investors will for example be taken by the idea of ChAI, which “makes it easy to identify the optimum time to buy key metal, agricultural, energy, and plastic materials” by combining “cutting edge artificial intelligence with satellite data to deliver commodity price forecasts”.

Who wouldn’t want to invest in this kind of final frontier cutting-edge technology, particularly in a month in which Branson has actually gone to the edge of space in his rocket plane? There’s more. The trust isn’t just jumping on one popular market story – it is jumping on two. Most of the companies, being newish, in the portfolio will not yet have listed.

So this isn’t just space investment. It is private equity space investment. It involves, at Seraphim, private equity return expectations of 20% a year over the “long term” and, of course, private equity fees – think 1.25% annually and a 15% performance fee.

Similarities with another craze of the 1600s

I love this story and so does everyone else. A few launches have failed recently; this one was oversubscribed. We shouldn’t be surprised: investors love stories (the history of investment is really one of well-told stories) and this one fits neatly into the frenzied relationship between the market and new physical frontiers.

My favourite example is still the diving bell bubble of the late 1600s. This began in June 1687 when a ship arrived in England with 40 tonnes of silver and gold on board (worth £250,000 at the time – about £62m today). The loot had, says Peter Earle in his book Treasure Hunt, been raised from the Concepción, a Spanish galleon wrecked 40 years previously, by naked divers with no breathing equipment.

The King of Spain was not impressed (his ambassador was sent to attempt to claim the treasure). Everyone else was. Suddenly every sailor knew how to find a wreck, every inventor knew how to breathe underwater, and every investor wanted to finance them to go a-wrecking at the bottom of the ocean. The first great promotional stockmarket boom in British history had begun.

Imagine the kind of fun stuff you could have had with a new trust based on this. You’d have had your basics of course, shares in a couple of the expeditions . . . perhaps the Company for Recovering Treasure from Wrecks off Bermuda. Then you’d have had a few companies providing exciting technology to the expeditions. Perhaps The Company for Making Salt Water Fresh or The Company Owning the Diving Engine Invented by Joseph Williams. The latter would have come with a complicated prospectus about various types of ropes, pipes, lead shoes and copper armour. Complicated, but exciting!

You might even have chucked in a promise of offering dividends to charity, something historian William Scott notes some company promoters doing at the time. You get the idea. These days funds jumping on the ESG (environmental, social and governance) bandwagon promise to pay part of their management fee to charity and the new frontier is not the bottom of the sea, but the top of the atmosphere.

Much of the rest is familiar. Diving bell inventors showed off their inventions to the monarch on the Thames. Branson has shown off to all of us by actually reaching the edge of space.

Many will invest; few will profit

Both booms also involve too much money. In the late 1600s war had reduced trading opportunities and left “many wealthy men but a distinct lack of stimulating investment opportunities”. Today, low interest rates have done much the same.

They also both involve new technology. It’s easy to be down on bubbles, but in his Constitution and Finance of English Scottish and Irish Joint Stock Companies to 1720, Scott notes that while it is true “that as a general rule two cases of outstanding profits in the same kind of venture rarely occur at one period” and that almost all treasure-hunting expeditions were complete failures, there is, he said, more to be said in favour of the great treasure hunt than “at first sight might be anticipated”.

Think, he says, of the “great advance of invention.” Sure, the salt water thing didn’t work out, but the 17 patents applied for on early diving bells paved the way for the modern diving suit. A huge amount of value was created, it’s just that it didn’t necessarily accrue to the first round of shareholders. The same was true of course of the railway and dotcom bubbles.

The key point is this: Whitehorn tells us there is an “industrial revolution under way in space” that offers opportunities “out there above the atmosphere” and he’s right, just as there was an industrial revolution offering them below the ocean 300 years ago. But that doesn’t make it a safe investment.

When there is a lot of money chasing not quite enough opportunities, too many companies are started. Most will fail. Investors will sell out and make profits on the ones that do not go down too early but most will fail and much money will be lost (as it was when the bubble of the 1690s collapsed in 1697).

Stories really are just stories – not money. Something to keep in mind as you wonder whether to buy or not. I will be keeping an eye on the trust as a possible long-term punt. There will be a few big winners. I can’t pick them. Maybe, encouraged in part by an outrageous performance fee, Seraphim can.

• This article was first published in the Financial Times