Interview with Phil Ingle, Investment Banker for Space Companies
This week for SpaceDotBiz, I'm excited to share an interview with Phil Ingle, Managing Director in Morgan Stanley’s Investment Banking division. Phil specializes in the coverage of Aerospace & Defense, Security, and General Industrial companies. He has worked on a variety of M&A and capital markets transactions for clients across these industries, including most recently the SPAC merger of Rocket Lab with Vector Acquisition Corp and the IPO of MDA.
Phil has a unique perspective on how the world of NewSpace companies is intersecting with public equity and debt markets. In this interview, we'll get insight into how Phil advises CEO's of late-stage NewSpace companies on fundraising, including what to consider when taking a company public. We'll also discuss how he sees the NewSpace world evolving, by leveraging his experience in other frontier industrial sectors such as electric vehicles.
I met Phil in 2018 when I was a fellow in the Matthew Isakowitz Fellowship Program. Phil volunteers for the program and was my executive mentor. I'll take this opportunity to plug that incredible program for undergraduate and graduate engineering students interested in the commercial space industry. Read more about it here.
This interview uses some minor corporate finance language, particularly with respect to SPAC's, so feel free to refer to an article I wrote in 2021 describing SPAC'ing process.
Now let's kick off the interview!
You have around 20 years of experience at Morgan Stanley working with companies in the Aerospace & Defense industry. What originally drew you towards a career as an investment banker supporting this sector?
I grew up in Australia and I did a double undergraduate degree in economics/commerce and law. Very early on in that program I realized that I didn't want to be a lawyer and was more drawn to finance. While I was at university, I got a letter in the mail from Morgan Stanley asking "do you want to interview for a summer analyst internship?". Morgan Stanley didn't have a big physical presence in Australia, so I didn't know much about the company.
I ended up participating in the first summer analyst program that Morgan Stanley offered in Australia and I loved it. I joined full time and I spent two years in the Australian office as an analyst before transferring to the US office for a one-year rotation and I guess I'm currently on the 18th year of that one-year rotation.
With respect to Aerospace & Defense, I first came into the industrials group and I've always had an inclination towards industrial-type companies rather than, for example, consumer retail, healthcare, or tech. I was also an infantry officer in the Australian military reserve for 5 years so I had a familiarity and a positive disposition toward things defense-oriented. Aerospace & Defense is a big area of the industrials group and as an analyst I got put on a few early accounts that were defense-related, which I enjoyed. I kept working with those companies and over time built up those relationships. Eventually, I got to a point where I had done a number of interesting transactions with more traditional defense/space companies.
For space in particular, from when I was small I had a passion for space. I loved space LEGOs and the first birthday party that I can remember was space-themed. As a result, I thought that maybe there was a chance for me to spend some more of my work dedicated to the space sector. Earlier in my career, there wasn't too much space business, but I figured maybe that could change in the coming years so I picked a few companies that looked interesting and spent time with them. One of those companies in fact was Rocket Lab earlier in their lifetime. A few years down the line, space has become a very active area, especially in the last 24 months.
What are the core financial service solutions your investment banking team at Morgan Stanely provides to Aerospace & Defense clients? Are there any notable recent deals you’ve been a part of that you’d want to highlight in this industry?
As investment bankers, the most important services that we provide are really in two categories, providing capital and offering advisory services.
In terms of providing capital, we act as intermediaries in helping customers get access to that capital. We have a large trading and market presence, so we can offer connectivity to the major providers of funding, anywhere from institutions like Fidelity and T. Rowe Price, down to family offices and private equity funds. In providing that access, our role is in underwriting debt, equity, or convertible debt offerings, as well as private debt and private equity placements.
The second major service we provide is advisory work. Mostly that takes the form of Mergers and Acquisitions (M&A). That means a company is either buying a business or selling a business and we're providing advisory services in relation to that process.
There are other smaller bits and pieces that we support, however, the core bread and butter of our services is the capital raising and the advisory services.
With regards to your second question, there are a couple of recent deals I would highlight. The first is that we advised Rocket Lab on their very successful de-SPAC and merger with Vector Acquisition Corporation. They essentially raised a $500M PIPE and in total raised close to $800M. The other space transaction we worked on last year was underwriting and advising on the IPO of MDA.
Going further back, a couple M&A deals that I was involved with were Harris's acquisition of Exelis, in which a signification number of space assets were involved, and then the merger of Harris and L3 to become L3 Harris Corporation.
In the last few years, "NewSpace" companies have started listing on public exchanges. How have the capital markets dynamics evolved accordingly?
Some of the trends that have happened on the capital markets front as related to space are consistent with other markets. A classic example of that would be automotive. For a long period of time that industry was dominated by the traditional "Big Three" in Detroit and then Tesla came along. Even more recently there have been a bunch of electric vehicle startups like Rivian and Nikola. So space is not alone in these same dynamics around new disruptive capital and disruptive companies.
Generally, the timing of what went on last year was tied to some background market forces. We were in a super low-interest rate environment and we were in a "risk-on" environment. In addition, we were seemingly on our way out of the pandemic and the outlook for inflation was low. As a result, people were looking for growth. Nearly all space companies are considered growth companies and so you had a marriage of a bunch of companies that were looking for capital and a bunch of investors that were looking to invest in those sorts of companies. Low and behold, there was a window of about twelve months and a bunch of space companies, fortunate for them, took advantage of that.
The environment is different today. My view is that all of the NewSpace companies that came to market got more capital than they would have outside of that goldilocks window period, which is great in aggregate. Some of those companies are going to succeed, but others won't and that might take the form of businesses closing, being acquired, or being merged. That's a natural part of the evolution of an industry within a capitalist environment.
Someone once told me that at the turn of the 19th century there were a hundred automakers. Twenty or thirty years later there were only a handful. This is a natural evolution of how markets develop. A lot of it is going to be dependent on the macro forces of the space economy itself, but there will always be individual winners and losers and that's a natural dynamic of any market environment.
Is this next generation of space companies attracting new types of investors? Or are you seeing legacy A&D investors engaging or reallocating funds from legacy names towards the newer businesses?
What you refer to as "legacy space" are typically the traditional prime defense contractors. I would say that the investors in legacy Aerospace & Defense companies are currently only making smaller investments in NewSpace. Part of that is a function of the way those investors look at risk and return. They want to see a little more history of performance from those newer companies to see where they sit on the risk/reward spectrum.
Another reason though why traditional large institutional investors in Aerospace & Defense haven't moved significantly into NewSpace is that big institutional investors can't deploy enough capital into NewSpace companies to make the investment worth the effort. When a NewSpace company is worth $300M, you can only invest a few million dollars into that company. So even if the company does well, the dollar return is not necessarily meaningful. However, it takes the same amount of effort to consider an investment in a larger company, like Raytheon for example, as it does for an investment in a smaller NewSpace company. With Raytheon's market cap at over $50B, the investor can deploy a lot more capital at once. Furthermore, the larger companies have higher trading volume and therefore more liquidity, so it's easier for the investor to quickly get their money out when they want to exit the investment.
As a result, for the most part the investors in legacy space and NewSpace are two different sets of investors. Over time as the winners in the NewSpace arena get stronger and bigger, you will start to see some of those traditional institutional investors move toward the newer companies.
Having said that, we have seen so far some investments from institutional names like Fidelity, T. Rowe Price, and BlackRock. A bunch of them have invested in several of the PIPEs that the de-SPAC companies have done. Several of them have invested in the larger late-stage private rounds that companies like SpaceX, Relativity, ABL, Astranis and others have done.
So there has been some crossover, but in aggregate it is two sets of investors and we're going to have to sort some of the wheat from the chaff before the traditional legacy investors move towards the NewSpace investments.
When a public space company is looking to raise money, what are the key market factors and core parts of the company’s profile that you weigh when considering whether to raise equity or debt capital?
I think for almost any NewSpace company today, the right corporate financing is equity capital. There's a lot of risk to a NewSpace company right now. You've got technology risk, market risk, and competitive risk. When you add these in aggregate, there's not many NewSpace companies that are in a position where debt is a viable option. The right corporate finance answer for them is to go to the equity markets. You're going to see over time though as businesses mature and people start generating real EBITDA and cash flow, that's when you're thinking about adding debt to the balance sheet.
An interesting case in point there would be Tesla. When Tesla IPO'd, it was a $300M market cap company, not that different from a small space company today. There was a lot of business risk associated with them being able to produce even one car, let alone tens of thousands per year. As they hit their milestones and went from the Roadster to the Model S and now the Model 3, they built up production facilities and battery facilities. The business risk and the technical risk came off the table, so they were able to move to engage in different types of corporate financing, starting from equity and moving to debt. They began with an IPO, then did a few secondary equity offerings, then a mix of convertible debt, and then they did a high-yield debt financing.
It created an interesting case study of how the operational milestones of Tesla over time matched with the ways in which they brought in capital. It's actually a case study I shared with a client of mine recently to demonstrate that evolution. That's the sort of thing you're going to see successful space companies do. Equity at first, eventually some convertible debt mixed in, and then you'll start to think about some of the high-yield debt bank markets, whether that's asset-backed lines of credit or a high-yield offering or something like that.
We're still in the early stages of that process, so I don't see NewSpace companies tapping high-yield debt markets any time soon.
Many SPACs across high-growth industries are now trading below their “IPO” price. How would you counsel executives at post-SPAC companies that need to tap the capital markets while their stock prices are depressed?
As a CEO, you can only control what you can control. Therefore, there are two things I'd say.
First, you've got to execute on your operational milestones, whether they're technical, market, or business-related. At the end of the day, that's the most important thing in being able to raise capital. That will drive the stock price and it will drive perceptions of risk/reward and therefore potential investor appetite.
The second thing I'd say is that markets are window-driven. Last year, 2021 was an absolute boom for equity markets in terms of issuance, IPO's, equities, etc. Then the first quarter of 2022 was a desert. I think there were two IPO's and two follow-on rounds. It doesn't matter how great you are right now, the capital markets are pretty closed for most high-growth companies.
So the advice is that you've got to execute on your business plan, but then you've got to be ready so that if the window does open, you can quickly tap it because these windows do open and close. The worst thing would be to do everything right operationally on the business front but not get yourself in a position where you're mentally prepared to tap markets. That preparation means having spent time talking about it with your board and saying "if the markets do open up, we're going to raise X amount of capital and we think the right strategy is equity because..." Being prepared is critical because if you're not prepared and the window opens and closes, that's not where you want to be.
What excites you most about the future of the space industry?
I'm most happy that there are a lot of talented companies and a lot of talented people that took advantage of a good environment to raise money last year and in aggregate, a lot of capital came into the space environment. There's not going to be 100% success rate, but you don't need a 100% success rate to see a lot of exciting things coming out of all these great projects.
More broadly I'm excited that there's a lot of talent in terms of business leaders and engineers. There are a number of exciting projects and a ton of smart people working on anything from disruptive launch technologies, disruptive in-space hardware, and disruptive business models. There is a real market for space. That includes both providing services on Earth from space and, not that far around the corner, a broader in-space economy that's moving outside of LEO and ultimately toward the lunar environment. I think the talent in this industry is going to solve interesting challenges in the next decade that are going to benefit all of us on Earth and I'm super excited about that.