Closing Bell - Manifest Space: The Space SPAC Stumble with ProcureAM CEO Andrew Chanin 5/11/23

Episode Date: May 11, 2023

While publicly traded space startups have seen prices plummet back to earth since spinning off as SPAC companies, some investors are finding opportunities in the sector. Morgan discusses the investing landscape with ProcureAM CEO Andrew Chanin, whose firm issues the first pure-play space ETF. For more Manifest Space, listen and follow here: https://link.chtbl.com/manifestspace

Publicly traded space startups, many of them the result of a special purpose acquisition company or SPAC deals, have seen their stocks crash back to earth. Collateral damage of a frothy equity market awash in stimulus that then faced the fastest pace of interest rate hikes in a generation. Shares of some space stocks are trading down drastically from their all-time highs. Take Virgin Galactic, the first pure-play spaceflight name to go public via SPAC in 2019. At one point, it traded near $60 a share. Today, after quarterly results and news of its next human flight test

spurred big gains this week, SPCE still trades at just about $4. Galactic is largely pre-revenue, hoping to launch its suborbital commercial service before the end of June, so the argument does exist that it perhaps never should have been trading that high to begin with. But it does raise a broader question. Was the SPAC boom good for space investment or bad? There are companies that benefited from going public during the SPAC boom, and a company like Rocket Lab and some others,

it might actually be better positioned to win government contracts as a publicly traded company than they might have as a private company. Andrew Channon is the CEO and co-founder of ProcureAM, a firm issuing exchange-traded products, including the first PurePlay Space ETF, Procure Space ETF, ticker UFO. The fund is down 4% this year versus the S&P 500's 7% gain. It might not be rocket science, but in this episode, Shannon digs into the complicated business of investing in space. I'm Morgan Brennan, and this is Manifest Space.

Well, this is a fund that we launched over three years ago now. It's been four years now. Wow. Since 2019, we had the world's first pure play space ETF. And UFO was a fund that we were excited to make our company's first product, our flagship product. It currently has just under 40 publicly traded companies from around the world specializing in space, with over 80% of the fund's weight focused on companies actually deriving a

majority of their revenue from space, but also realizing that some of the major players, ones that you speak with regularly on this podcast, are some of the more diversified aerospace and defense names that are major players in the space economy. There's up to 20 percent of the fund can actually be allocated to those more diversified players that are still really helping drive the space economy forward. We've seen the space economy change pretty dramatically in the last couple of years. So what gave you the idea to even create a pure play space fund four or five years ago? So this is almost like the 12th fund that I've launched. They're sponsored, financed, going back to the early 2012.

And one of the things that I always try to do is bring a product to market that's a first to market concept. And for that, the index is really important and we were ecstatic that we could find a team that was working with the former director of research from the space foundation in Michael Walter range someone that actually helped develop the model that they still use today and have been using for you know 15 plus years in their annual space report to calculate the size and the growth and the makeup of the actual space economy. And for us, that was a huge win to be able to not just work with an index team that truly understands space, but with all the major changes happening for the industry, the ramping up of rocket reusability, the lowering of costs of sending things to space is something that obviously

couldn't have been done without reusable rockets until recently. And just the many new companies that were coming to market and seeing how important space had become for governments and militaries around the world. You had this cross section of all these major megatrends happening, and so many of them are utilizing space and people don't realize it. And so for us, being able to give people that diversified access to this incredibly important part of our global economy was something that we really wanted to be able to offer. So we were thrilled to be able to bring UFO out and thrilled to have many shareholders still today. And of course, I want to get into some of those broader space trends and how it's reflected back in some of your top holdings in UFO as well. But I mean, since then and even before then, we've had other aerospace and defense ETFs like XAR and ITA. And then more recently after UFO, you've got, you know, Cathie Wood's ARCX space and exploration ETF too.

And we've seen some others start to come to market as well. So I guess just in terms of some of the details that differentiate your offering versus some of the other funds on the market. Yes. So at the core is the index. So this is a passive fund and it tracks what is essentially the broader publicly traded space market? So actually looking into these companies and determining revenues from space alone is a major differentiator. So you're looking at UFO, you're investing in a fund that has over roughly 80 percent or more of its weight in these pure play space companies. And it's also a global fund. So not every fund has a global focus. And space is truly something that is collaborative around borders. And you see it on the ISS, and you see it with companies helping foreign governments and militaries even

launch sensitive spacecraft. So having a fund that gave exposure not just to American companies, but global companies that are helping drive the space race forward was something that was truly important. So I think the global focus, as well as companies truly deriving revenues from space. And that might seem like a simple, obvious feature to have for a space fund. But we were the first, and to my knowledge in the us no one else is actually focused on space revenues so some have more uh you know interpretive uh ideas of what space are and you know their funds allow for that but our funds methodology guide actually requires this fund to have this focus on you know companies that generate revenues from space and we think that someone that's looking to actually invest in this growing space economy,

it's the companies making revenues from space that are the ones that make this up. So I think not getting cute with trying to define space was something that truly set us apart. And I think that as time goes on, this is an idea that many people will be very interested in. And for us, it's our goal to get the concept and the strategy out as broadly as we can. And we've even, through one of our other subsidiaries, partnered with a company, Han ETF, out in Europe that offers a similar strategy to European markets. And I think that kind of shows our focus and beliefs in this concept. And where are you in terms of investors being interested in inflows versus outflows? And I asked that question because we did see a number of companies, space companies go public in recent

years, perhaps at valuations that were not warranted, but there was a lot of money out there. There's a lot of capital and liquidity out there. And since then, we've seen a lot of those stock prices drop pretty dramatically. Yeah. Specifically speaking to the SPAC market, and there was a time where you'd say you can't spell space without S-P-A-C. And that time has certainly moved forward. That said, there have been some strong companies that have emerged from that broader SPAC wave. That said, looking for what is the best company that I can move public, but a lot of them had a vision of what might be the sexiest type of company that I could bring forward. And to many, space caught their attention. Certainly we saw EVTOLs and other more earthly types of companies also going forward, lots of heavily tech-focused companies,

and even some media companies being brought forward. The success has been limited, and there still have been many successes out there. That said, a lot of these companies, when markets sour on technology and other forward-looking ideas and ones that might be more capital intensive and in many cases not yet generating revenues, these companies as a group tend to get hit fairly hard.

And so our fund being one that looks at space companies, certainly there were many de-SPAC companies that were in the fund, not all de-SPAC space companies ever made it into the fund um but there also are some rules uh you know from the fund's perspective where if it doesn't meet certain intraday uh daily value traded if it doesn't have certain market caps these are you know things that can actually remove these names from the fund so um you know you talk about prices going down then you have a company like virgin orbit that youbit that goes bankrupt and disappears.

What will happen with that company as we move forward will be something that we're all waiting to see because horizontal launch does have a place in the industry. It has for years and it fits a certain need, an area of demand that horizontal launch solutions will absolutely be required in the future um but you know there are companies that benefited from going public during the spac boom and you know a company like a rocket lab and some others it might actually be better positioned to win government contracts as a publicly traded company than they might have as a private company but you know every quarter you have to show shareholders you know how much you've been doing and that you're moving things in the right direction.

And for some companies, it's been easier than others, but it certainly hasn't been easy. There's a lot I want to unpack there. But first, the idea that so the fact that Rocket Lab is public, is this the thesis you're putting out there? The fact that Rocket Lab is public has made it more attractive in terms of its ability to vie for and win government contracts and other types of contracts? I think that that's the case for actually for several of and many of these now publicly traded de-specced companies, as well as publicly traded entities in general. Certainly seeing with the conflict with Ukraine and Russia, how important space is from a military perspective. Other things that we know about space that everyone's repeated is that

it's hard and that companies being able to be financially stable, not just when they receive a contract, but when they actually have to deliver on that contract is something that's really important. If you're a large space agency that has a 10 year plan for something, and you're contracting companies out that far in advance, and, you know, all of a sudden, that company is no longer there to provide those services, because something's happened, you know, you're, it's going to potentially hamper your results as a as an entity that's reliant upon those companies. And, you know, it's our belief that um you know especially at the governmental and military level when when looking at companies

that they want to work with publicly traded companies have more access to taft capital markets and you know because of that it may help sway things in their favor not that private companies won't get funding you know SpaceX and Blue Origin are major private companies that have been able to win contracts in the past. SpaceX seems to continuously be winning all sorts of contracts, government, military, commercial, and even offering consumer services. So not all things are equal, but you look at those two companies that I just named

and they have something that's very different, which is a ton of money coming in from either founders or interested investors. So this is all something that might help tip the scales in a publicly traded company's favor if looking at a company that maybe has the same capitalization that's a private company. Yeah, it's almost like SpaceX and Blue Origin are the exceptions to the rule, because they're two names that are probably never going to go public, or if they do, it's going to be a ways out, or maybe it's a spinoff like Starlink, which has been discussed by Gwen Shotwell and Elon Musk at that company at SpaceX as well. So I guess it raises the question, I realize this is a broad question, but was the SPAC boom good for space or was it bad for space then? So one of this fall on effects of these companies being grouped together as being a de-SPAC space company, it could potentially bring buyers to the market you know a lot of these companies have been hit pretty hard some of them offering you know

really important services or solutions um some that have been you know fully developed some that are still in the research and development phase and you know when the prices of certain types of assets drop you know in many cases uh you know opportunistic companies say what can i do with that technology if we were to have it in-house? Or maybe it's a way to take out a rival and reduce competition. Certainly, there are different rules and whatnot about that. But say there's a company that has a government contract that maybe doesn't have the financial stability that they're going to need to execute on that. Having a government contract could be a win for another company that might want to you know acquire and bring them

bring them on so you know there's you know that which you know i don't think was the intention of of uh the spac craze having uh you know depressed asset class of uh you know space stocks but that is you know certainly we've seen interest in people finding value when space stocks have come down. Just look at Maxar, which as household of a name as you can have for a satellite company, private equity firms saw tremendous value and lifted its stock price 139% from the previous night's close when they announced that they wanted to take them private because they saw value that typical individual investors or other institutions

maybe didn't see Maxar having the ability to tap. And so I think broadly, there's been less excitement for investing in space. Some of those first ideas out there, and I'm sure we're going to get into it, Virgin Galactic, caught a tremendous amount of media attention. How large is the commercial space tourism industry? No one knows yet. And that's one of the risks of getting into a new market. Will there be customers if you're even able to bring the technology forward? And I think we're kind of in the middle of that right now, but I think that there's some tremendous opportunity to be found

when people start grouping broad industries together as much as they seem to do for smaller space companies. So it raises the question, what's a good investment when it comes to the space economy right now? Where can an investor actually, what are the companies that are making money? And what does that mean in terms of investors being able to make money? So, you know, it's great that we're not in the very early innings of the space industry. I mean, as far as what I think we have the ability to accomplish as a species and space travel and exploration and infrastructure and the many exciting projects ahead, we're still in the building out the infrastructure stage for what the next several generations of technologies for space are probably going to rely on or build off of themselves. And so, you know, I think we're

what what we need to do is be able to find ways of providing capital to the companies that are best able to utilize it. And, you know, diversification is something that, you know, I think is a beautiful feature for ETFs because not every company will make it. We've seen companies like Virgin Orbit attempt to and fail. And there might be companies whose technologies work and they still fail. But diversification, I think, is extremely important, not just because some companies will win and others will fail, but because there are so many different areas of space that you can touch. There's the launch business, there's satellite manufacturing and operation. And then even as we come up with challenges, in some cases, ones that we create ourselves, like sending up so many things into

low Earth orbit at one time, we have this new land grab, this new space race to acquire orbit in low earth orbit. We're creating new industries like debris mitigation and debris removal. And so, you know, things that we're doing are creating new industries that are building off themselves. And we don't have necessarily any viable solutions yet for, major coming problem of debris removal. But because of that, it's creating this increased need to send things to space as quickly as possible before potential regulations start to heighten where fewer companies can use low Earth orbit or you're limited in ways that you're allowed to use it. So there's a lot of gamesmanship that is occurring right now um you know and who is going to win is you know very far from being decided that said you know there are many companies and

some are pre-revenue like we've mentioned some have been making revenues in space for for decades and you look at the larger more diversified aerospace defense names and they've been getting uh you know an incredible amount of contracts for you know space military uh purposes you know whether ukraine related or whether you know all levels of the military are saying you know space is the new strategic high ground if we're not spending we're falling behind the way the u.s competes historically with spaces by spent outspending its rivals and you know it you know its next several rivals combined and you know space is one of those areas that we've already said we need to be a leader, if not the leader. And from a military, strategic and national

security standpoint, that all types of companies may be able to receive contracts because there are so many diverse needs at the moment and likely into the future too. So space continues to be difficult. Companies, though, have different time horizons for different types of products and services. So I think it's important for those that are looking at space to look at the many different areas. And I think, again, that's one of the beauties that a diversified ETF could potentially offer. Yeah. And certainly it's the pitch for an ETF like UFO. If I look at the top 10 holdings, I mean, you've got Rocket Lab in there, but it's not launch companies. It's not human spaceflight companies. It's really mostly satellite companies and different types of satellite companies offering different types

of services. And you could even argue Rocket Lab has been diversifying in terms of space hardware manufacturing as well. How does that speak to, yes, all of these possibilities and land grabs and promises, but how does that speak to what's already generating cash right now and as an established business in space? Yeah, so, you know so communications companies are extremely important. When you look at the makeup of the overall space economy, communications makes up roughly a third or more of the overall space economy today. So to not have satellites, to not have communications companies largely represented would be providing something that isn't a full representation of what the space economy today is. Now, I don't have to go out and make projections because fortunately other research houses do that.

And we're able to look at those numbers and say whether we agree or not. But regardless, two very large firms, Morgan Stanley and Bank of America, for years have been putting out their estimates for the growth and size of the space economy. Morgan Stanley seems to be a little bit more conservative with the space economy being over a trillion dollars by 2040. Then you have Bank of America, which says that the space economy could be $2.7 trillion by 2045. Then you have China that says that the cislunar economy alone could be worth 10 trillion dollars uh you know a year by by 2050 so yeah there are tremendous amounts of varying um you know degrees of valuation projections but one of the common threads of all these projections

that communications could potentially drive over 50 of the growth of the space industry. So now currently under half a trillion dollars per year, with communications being what many people believe will be the driving force of the growth over the next few decades, that kind of makes a lot of sense to someone, I think, looking to invest in space that there'd be a heavy representation of those companies that are providing this type of access. Just as importantly, what do you steer clear of right now? So we're a passive fund. We're not trying to outsmart the market. We're providing what we've promised. We're not getting cute and creative and saying, oh, well, this type of company might use space. And even though it's a third of a percent of its revenues, we can make an argument for how it's a space company.

We follow the methodology guide and the index tells us what goes in the fund. And right now, it's companies that derive a significant part of their revenues from space. And so that said, there are rules that we think do protect the index where, you know, companies that fall underneath a certain market cap, if trading liquidity completely dries up, these are names that could be removed. So, you know, at one point, Virgin Orbit was in the index, but it was removed shortly thereafter, you know, and didn't have to go through the entire bankruptcy mess. And that's, you know, one of't have to go through the entire bankruptcy mess. And that's, you know, one of, again, one of the beauties of having what we think is a pretty intelligently designed index methodology guide. And, you know, I think if, you know, 10 years ago, if someone asked you, what's going to be the next driver for, you know, the public trade space

market, I don't think anyone would have said SPACs. But I think, you know, we're coming to this, this era of reality where people are saying, okay, show me earnings, show me how much money you have, show me how much money you're spending and let me think if it makes sense if I think you're going to be a viable company going forward

and if we have a long-term horizon for this investment in mind. So it's going to be a really interesting next couple of years for the space industry and I hope forever because that means people are challenging norms and they're driving the industry forward. And I'm a true believer in the American space economy as well as the global space economy. And I think there'll be a lot of companies keeping each other honest, trying to buy for who can do things best

and cheapest. Any other, and we've touched on some of it already, but any other key trends or thoughts about where this economy goes over the coming years, recession or not? Yeah, you know, I think it's beautiful to see how much money has been coming into the space industry, whether it's governments, whether it's militaries. And you look at South Korea and they announced, you know, increasing their budget to space. You know, Israel has has ambitions. Japan has ambitions. It's not just the major names that we hear thrown around like the US and Russia and China and the countries supporting the ESA. Ireland has ambitions for spaceports throughout the UK. I mean, this is something that countries are realizing that either you have your own capabilities or you have to rely on third parties.

And can you rely on these third parties forever is now a question that wasn't really as thought through as it has since the Russian invasion. And these are real questions that companies need to have. We saw what happened to oneWeb satellites being held hostage. Governments, you're talking about national security. I mean, that should be one of the most important things that any government considers when making decisions. And knowing how critical space is, I just hope that people start to realize

that the many technologies that they like to invest in, that they use, whether that's 5G, cloud computing, Internet of Things, AI, big data, connected devices, even cryptocurrency and blockchain. The common thread there is a tremendous amount of data being generated and passed from point A to point B in many cases. And who's there to provide that service? In many cases, it's satellites and communications companies. So I see space as the digital data toll operator of the digital data superhighway. And so many of these megatrend technologies rely

on it. I hope people realize how important space is. And so that people don't say, why are we spending on space? The truth is NASA has a great return on investment for technologies that benefit us here today that people don't give it credit for. And space is something that's truly important, whether it's a climate change issue, whether it's a recession issue or not. Space is here to stay. And I'm glad that there are many people at the top that support it and continue to push these efforts forward. That does it for this episode of Manifest Space.

Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.