Should wealthy investors entrust their money to the space economy?

On the face of it, space doesn’t appear to be a particularly alluring investment. A great deal of money is burned up in the process of launching a rocket. However, far-sighted space enthusiasts point to the enormous potential of space-related business – from broadband access and mobile phone connections to high-speed cargo delivery.

The combined value of the world’s space industry was calculated to be around $350 billion in 2020. Morgan Stanley estimates that the potential aggregate revenue from the sector could exceed $1 trillion by 2040. Could it be the next frontier for private investors as well?

Historically, space exploration has depended on spending from ambitious, competitive and deep-pocketed governments. The Soviet Union’s launch of its Sputnik satellite in 1957 triggered a fierce rivalry with the United States for dominance in space. At its peak in 1966, the US was spending 4.5% of the federal budget on its space agency, the National Aeronautics and Space Administration. However, the impulse ebbed after the US fulfilled its goal of putting men on the Moon in 1969. The government’s spending on space activities had dropped to 1% of GDP by 1975 and is now around 0.5% – just $20bn.

With the Soviet Union and its successor Russia also losing interest in the space race, relatively little progress was made for decades after Neil Armstrong’s historic first step onto the lunar surface. Dreams that people would holiday on the Moon and even establish permanent settlements there have proved far-fetched – but in the 2020s they have been revived by a new breed of space entrepreneur.

Enter the private space sector

Today space tourism, if not lunar holidays, has become a reality, at least for the extremely wealthy. Richard Branson’s Virgin Galactic has developed commercial spacecraft designed for providing suborbital spaceflights to customers. The group’s maiden spaceflight occurred in 2018 and in February 2022, it opened ticket sales to the public, at a price of $450,000. It carried its first paying passenger to a height of 88 kilometres on a 15-minute flight in August 2023.

Amazon founder Jeff Bezos launched Blue Origin in 2000, with the lofty goal of enabling people to “tap into the limitless resources of space and enable the movement of damaging industries into space to preserve Earth, humanity’s blue origin”. It has since conducted 22 missions and now has 11,000 employees.

SpaceX, established by Tesla founder and CEO Elon Musk, is probably the world’s most significant private-sector space business. Although still privately owned, it has attracted funding from mainstream investment managers such as Baillie Gifford, Fidelity and T Rowe Price.

The company’s development of recyclable rockets has transformed the economics of the launch industry. SpaceX’s Falcon 9 launders have been retrieved following use and returned to the launch pad more than 200 times. SpaceX has also started offering broadband internet services via its Starlink satellites, the largest-ever satellite constellation.

There are many other commercial companies involved in space services and other activities. Currently around 100 launch providers are actively placing spacecraft in orbit and there are many more in the wider space ecosystem that manufacture components and tools.

Most of the companies active in the sector are in private hands so their shares cannot be bought and sold on stock markets.

Investing in space businesses

There are a number of drawbacks that make investing in space difficult for individual investors. Most of the companies active in the sector are in private hands so their shares cannot be bought and sold on stock markets. There are logical reasons for this – without the pressure of day-to-day price fluctuation and quarterly reporting obligations, it is easier for entrepreneurs to build, sometimes fail, and build better the next time. Many of the finest engineering minds have been focused on space travel for decades, but it is only in recent years that significant progress has become evident. Shareholders in public companies usually aren’t willing to wait that long.

The absence of publicly-traded shares makes it difficult for private investors to obtain exposure. Some innovation-focused investment funds have a stake in emerging space companies, but they tend to be a relatively small part of the portfolio, except for a handful of space-focused investment vehicles. And in the past couple of years the resurgence of inflation and rising interest rates have caused considerable pain to speculative companies that for the most part do not earn a profit and depend on investor funding.

However, more mainstream parts of the economy benefit from space innovation, such as aerospace and defence companies, which are among the biggest providers of launch services and spacecraft manufacturing. And this is a problematic point to consider. Companies active in the space economy segment are also often active in the controversial defence and armaments sector.

There is no common international regulatory framework for space business activities, which makes it more vulnerable to fraudsters and other wrongdoers than some others.

Exchange-traded fund exposure

ETFs can also offer more concentrated exposure to companies active in the space industry. Exciting though the sector’s prospects might be, investors should also consider the complex problems with which private companies may be faced. There is no common international regulatory framework for space business activities, which makes it more vulnerable to fraudsters and other wrongdoers than some others.

Space is not considered to belong to any country, but instead is subject to legislation comparable to that covering Antarctica – designated for peaceful purposes and where exploitation of natural resources is forbidden. However, the Outer Space Treaty that forms the basis of international space law dates back to 1967, and is widely regarded as being in urgent need of an update.

Some countries, including the United States and Luxembourg, have created their own legal framework for exploitation of space resources that may be extracted from asteroids, the Moon or Mars. Economic activities that in the last century appeared to belong in the papers of science fiction are today becoming reality. Some companies may make investors extremely rich; others are likely to disappear without trace. Which is which will not become clear for a while.

The combined value of the world’s space industry was calculated to be around $350 billion in 2020, and Morgan Stanley estimates that the sector’s aggregate revenue could exceed $1 trillion by 2040.