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Seraphim Space Investment Trust
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== Investment process: Seeking winners within vast addressable markets == Seraphim Space is seeking high-growth, early-stage space technology businesses that are addressing very large market opportunities. These opportunities are likely to persist for many decades, providing a long runway of growth and powerful long-term secular tail winds. Investee companies must embrace the vast potential of space, take long-term investment decisions, be leaders in their field and be willing to tilt towards the best multi-generational opportunities. These best in breed leaders with first-mover advantage are well placed to disrupt existing incumbents to address the wide opportunity set or to create entirely new markets via the application of evolving technology. First mover advantage can be hugely beneficial and create barriers to entry, for example Spire (which is one of the relatively mature listed holdings) is currently on its seventh generation of technology. Technical innovation is key, and it would require extensive investment for a new entrant to catch up. IP is also an important competitive moat for the category leaders, with a number of SSIT portfolio companies that have patents ranging from 100s to over 1,000. As first movers there is often a greenfield opportunity to patent cutting-edge technologies, which creates legal challenges for competitive followers. Seraphim Space CIO James Bruegger notes ‘We're backing people first and foremost over anything else. We are long-term patient investors, looking to build relationships with entrepreneurs over the long term. We want to back those entrepreneurs that are most exceptional, those that have the proven ability to execute and have the biggest vision of how they're going to change our world for the better through the use of space’. SSIT will apply the same consistent process that Seraphim Space has used to good effect since the launch of the Seraphim Space LP fund in 2016. It invests throughout the life cycle at seed, Series A through D, pre-IPO and IPO stages and will take minority stakes, although it has identified the B to D series rounds as a sweet spot. At this stage companies have ironed out technical risks and demonstrated that the product has a place in the market. At series C and beyond, companies are establishing market leadership potential. LeoLabs and Isotropic Systems are examples of Series B and C investments. At December 2021 around 9% of SSIT was in Seed or Series A stage, with only six of the 21 holdings pre revenue (albeit all are pre profitable at this stage). Seraphim Space typically utilises preference shares, convertible loan notes and ordinary shares to access holdings rather than debt instruments. It will make follow-on investments at subsequent funding rounds, subject to a disciplined review of the milestones achieved by the underlying business. As a minority investor, Seraphim Space will potentially accept some dilution of a holding if the subsequent valuation is too high or milestones are not reached. Syndication of investments and the financial capability of co-investors is of key consideration. Seraphim Space does not invest alone, preferring to invest alongside well capitalised investors. For example, they co-led alongside Insight Partners in the HawkEye 360 Series D raising in November 2021. Insight Partners (a US VC and PE growth investor) operates a mega-fund of nearly $20bn, which shares the same long-term investment philosophy. The first element of the investment process is to evaluate as many opportunities as possible; this allows a wide appraisal of the available opportunity set and developments in technology and applications. At this stage, only eight months since IPO, SSIT is around 73% invested via 23 holdings. Edison Investment Research expects the residual cash to be largely deployed within the next six months, which is in line with the guidance given at IPO and confirmed to be on track by management on 23 February. The managers do not have a specific target for the number of investments but have guided for a portfolio over time of 20–50 holdings. Seraphim Space has cultivated a very strong symbiotic network of expert contacts and co-investors. It has corporate partnerships with leading global multinational space companies, many of which are investors in its funds, including Airbus Defence & Space, SES, Telespazio and MDA. These corporate partners in turn provide Seraphim Space with access to their expertise to facilitate due diligence evaluation and portfolio company commercial collaboration. === Seraphim Space Camp and AWS Space Accelerator === Another innovative and unique source of deals and proprietary information is the associated Seraphim Space Camp/Accelerator scheme. The Seraphim Space Camp Accelerator is an affiliated programme and plays a key role in sourcing deal flow for the trust. These international accelerator programmes run several times per year for up to 10 space technology companies per cohort, for three months, which leads to them raising equity funding from other VCs. Through the subsequent careful ongoing monitoring of technical and commercial progression post-graduation from these accelerators, Seraphim Space is able to cherry-pick which graduate companies to back. The accelerator programmes also put Seraphim Space at the heart of the space technology ecosystem, building deepening relationships with the global investor community for co-investment and deal syndication. === Asset management === Portfolio management is carried out, in the majority of investments, via board representation, regular portfolio monitoring and continued utilisation of the ‘ecosystem’. Regular and close scrutiny of the investment assists in its development but can also highlight potential issues with the investment thesis or operational performance. Strategically, Seraphim Space aims to hold investments indefinitely as it takes time for these early-stage assets to mature – both in terms of technology and financials and to achieve value appreciation to reflect this. Three portfolio companies have listed on US markets, Arqit Quantum (September 2021) and AST SpaceMobile (April 2021) on Nasdaq and Spire Global (August 2021) on the New York Stock Exchange. SSIT has not retained a board representation on any of these businesses. Since 2016 only one investment has been exited through a trade sale: when UltraSoC was acquired by Siemens (June 2020), having delivered an IRR of 80%. Nonetheless, for a portfolio of largely private companies, funding and the route to exit is also a key part of the management process. As part of the ongoing monitoring process, there is a quarterly portfolio review, where an update for each portfolio company is provided to the investment team.
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