The new space race: Investing in critical infrastructure

Sean Petersen (0:04)

The simple concept of if data centers do happen in space, and there's been demonstrations already of this by more than one company. Just like everyone's hyped on fiber and optical solutions on the ground, those players will be in space, right? So laser comms has become a very hot area of investment. Similarly, you have folks working on power. The simple idea that whether you're a comm satellite or your data center, you're sucking in as much energy as you can. You want to run all the time. It's kind of sci-fi.

Now there's a demand for that sector potentially.

Thomas Mucha (0:45)

Welcome to WellSaid, conversations with Wellington Management Investment professionals to explore key insights on the intersection of financial markets and geopolitics. I'm your host, Thomas Mucha.

For decades, investors treated space as a niche technology. That's no longer accurate. Today, there's a long list of critical applications that are now dependent on space. Global communications, GPS, financial transactions, shipping, weather forecasting, a bunch of others, all increasingly depend on assets and orbit.

As a result, space is becoming critical infrastructure in similar ways that energy grids, semiconductors, and cloud computing became critical infrastructure. Now, on top of that, listeners of this podcast will know that I've been emphasizing this topic for a long time. That's because from a geopolitical perspective, space sits at the intersection of great power competition, with the US, China, and Russia racing for advantage. There's also AI infrastructure, critical infrastructure resilience, public-private partnerships, choke point competition. I could go on and on here. Now, meanwhile, public and private companies are rapidly becoming strategic actors in this area, as governments increasingly depend on commercial launch, communications, imagery, data analytics, and spacecraft infrastructure in ways that go far beyond the traditional role NASA played in previous eras. All of this is what makes space such a powerful investment theme. It also makes it an industry that McKinsey estimates reached $626 billion last year and one that could exceed a trillion by 2034

So joining me today to discuss the many investment angles of today's great space race are Sean Petersen, a sector lead and a voice of authority on Wellington's private investing team, and Rupinder Vig, Wellington's global industry analyst, who's a real expert on the global defense sector. Sean, Rupi, welcome to WellSaid.

Sean Petersen (2:53)

Thank you.

Rupinder Vig (2:53)

Thanks for watching.

Thomas Mucha (2:54)

Sean, we've got a lot to cover today. I'm excited to dig into all of this, as you can tell. So let's start with you.

I'd like to kick off with some fundamentals. Now that trillion-dollar estimate of the market size for space I just mentioned, let's set the stage here and go over what that encompasses. So first, from your perspective, Sean, what's driving the spending?

Sean Petersen (3:17)

You know, for me, it's really interesting, having been an investor in space since the 2010s. The real shift for me has been the government focus. I know we're talking about private investing, but it's this commitment from the government sector to really leverage private sector solutions. What I think a big part of that, I'll call it sovereign push, is some of the activities that happened during the Ukrainian war in particular, kind of gave openings to, I'd say, non-actors in that space to understand that if they wanted to have actionable data coming from space, they needed to have their own programs. The reality is that a government run program probably isn't going to be at the innovation speed and scale. And I think looking at some of the blueprint of what had been done probably in the mid 2010s has been a good litmus test for those governments. And for me, once you've had that kind of first wave of success off of what was a perceived lower cost of launch was going to build all these new companies kind of the mid 2010s, you come into today and now you can look back at the past five, six years of private companies moving to IPO and now public successful companies with EBITDA and with growth.

I think that set a very strong wave for this kind of second wave that is coming right now.

Thomas Mucha (4:31)

So geopolitical factors, technology factors, market factors, they're all conspiring to push demand in this area.

Sean Petersen (4:37)

Yes.

Thomas Mucha (4:38)

Rupinder, what do you think about that?

Rupinder Vig (4:39)

Yeah, I mean, it's a great question. I've been looking at the space since 2006 And I'd say we are right now firmly more positive on this space than I think I've been in that entire 20 year period. And I think Sean touched upon some of the points well. But if we think about the breakdown of this space economy, more than 75% is commercial. But the real growth driver in the last 18, 24 months has been the government side, which is obviously the balance. And if you think what's happened with recent conflicts, things like military communication, intelligence, surveillance, missile warning and tracking, all of these areas have really come into sharp focus for governments, not just in the US, but across the globe. And I would say that where the private side fits into that is that they have been a little bit more nimble, I would say, and a little bit more adaptable in getting technology out there that is needed urgently. The commercial side is obviously growing strongly as well, given broadband, particularly Leo, satellites, network equipment, etc., commercial imaging, and then we've got the whole weather, environmental side. But I think the government side is the bit that's really dramatically come through now in the last 18, 24 months. And the public companies have been a little bit slower, I would say, to react to this, partly because on a long term period, space has not been the biggest area of growth within wider defence and aerospace. It's been areas like naval, it's been air, it's been land. But I think now that we're seeing a much stronger growth path, I think the public companies are starting to follow suit and realize they need to catch up as well.