Security & Space: Planets are aligned

Allocation preferences

Understanding Security & Space

What is it all about?

The Security & Space strategy’s main goal is to provide exposure to segments ensuring the safety of people and infrastructure, be it physical or virtual (e.g., IT networks). By extension, the space segment is also addressed, as security increasingly relies on space-based applications. The investable universe is structured around security (physical security and cybersecurity), space (space-based services and their infrastructure), and defense. The latter is non-investable for the most part for ethical reasons but nevertheless monitored to account for its structuring dynamics.

A mix of inertia and disruption

The security sector is sensitive. Many aspects are heavily regulated or even directly managed by governments. This has historically led to a defensive profile from a stock market perspective and some business inertia favoring incumbents. Nevertheless, private businesses with aggressive growth strategies have been able to find some cracks.

Cybersecurity is the most blatant example. The rapid “computerization” of our modern societies, with several waves of innovation (computers, the internet, smartphones), have made communication networks and applications central to our lives - meaning they have become high-value targets. Cybersecurity, therefore, has become a critical sector. Individuals and businesses increasingly digitalize sensitive data, creating structural secular growth drivers. This is reinforced by technology and threats evolving regularly, requiring regular upgrades to existing infrastructure, while massive attacks can also create additional public pressure. Ultimately, the result is a complex, competitive landscape oscillating between large incumbents and smaller new entrants, the latter having the opportunity to become market leaders on the back of differentiating technology - if they are not acquired before.

Space is experiencing a once-in-a-lifetime transition. Traditionally the turf of governments (due to strategic reasons), the sector has progressively opened to private players, but has remained dominated by traditional defense contractors. The advent of SpaceX shuffled the deck: its breakthrough technology (reusable rockets) has allowed the decrease of launch costs by a significant margin, enabling the birth of a burgeoning yet fragile private ecosystem. Although governments remain the main customers, the sector is progressively shifting to private customers, building a complex ecosystem of applications and services and creating new market opportunities from scratch.

Hot topics

Politics, politics, politics

Security is a major state prerogative. In this context, the advent of the next U.S. administration opens many questions that could significantly impact the strategy dynamics. On the surface, this administration has taken a stringent stance against insecurity and immigration, which may lead to higher spending for the U.S. security apparatus, notably at the borders. However, it has also been very vocal regarding budget austerity, which was central to its campaign. This may lead to some turbulences, but we believe the disruption will mainly impact existing contractors, which will create opportunities for new ones. Nevertheless, significant changes are indeed coming: at the time of writing, this administration is not in place but is already questioning large defense programs previously untouchable, such as the costly F-35 jet fighter, which some want to replace with cheaper drones.

Space enters a new phase

Having made it through the downcycle, New Space players are more structured than ever. Most of these survivors have or are about to complete the technology development phase of their offering and are progressively starting their commercial deployment. This will have a significant positive financial impact, with cash inflows progressively offsetting capital spending and businesses becoming self-sustainable. In addition, these players will benefit from a new generation of launchers becoming operational, meaning fierce competition and pressure on launch prices. Finally, there will likely be a positive impact from policy, with the new U.S. administration not favorable to legacy government projects and likely to reallocate budget to smaller and more efficient players.

Security keeps mutating

The security sector is traditionally a defensive one, with a lot of inertia and a tamer growth profile. This situation is changing. New technologies are emerging, usually pushed by challengers rather than incumbents, forcing the market to adapt. While these changes do not happen overnight, they have the potential to trigger transformational changes in business models, which can lead to spectacular surprises. A perfect example is Axon, which has embraced cloud technologies to transform itself from a non-lethal gunmaker to a one-stop shop for law enforcement agencies. The advent of AI and advanced automation technologies may trigger many other seismic shifts of the sort, would it be for the sole fact that end-customers will demand the integration of technologies they see in their daily lives into their safety offering.

Catalysts

• Reaching the commercial stage. Space technologies face many uncertainties during the development phase, somewhat akin to biotechnologies. An increasing number of players are about to exit this phase to enter the commercial rollout, massively increasing the risk-reward ratio.

• Policy shifts. The new U.S. administration has made security and space a central topic for its policy. Major announcements may radically change the competitive landscape in favor of new players.

• Acknowledging mutations. Security has traditionally experienced a lot of inertia but is increasingly embracing new technologies. This structural transformation can materialize rather brutally in earnings, taking most investors by surprise.

Risks

• Brutal technology breakthroughs. Threats and defenses naturally co-evolve. If threats were to experience a sudden breakthrough making defenses obsolete, then current players would find themselves out of business. 

• The winner takes it all. The new U.S. administration has problematic conflicts of interest. The budget allocation may shift from traditional contractors to solely SpaceX.

• National security first. Governments, especially in times of transition or with strategic uncertainties, can make bold decisions that go against the interests of private companies.