SPACs becoming popular option to finance US cleantech companies
Corporate structures known as special purpose acquisition companies (SPACs) are attracting hundreds of millions of dollars from investors seeking to enter the US clean technology space, but the rapid influx of capital could lead to an overheated market, experts said in the last few weeks.
"A SPAC is a publicly listed shell company—a company that only exists on paper—designed to acquire a private company and convert it into a public one," Chloe Holzinger, senior analyst for IHS Markit's Global Clean Energy Technology group, explained in a January report.
Investment managers register SPACs with the US Securities and Exchange Commission (SEC). As part of those registrations, they must provide the SEC with information such as the amount of money they intend to raise or have raised already and the general industry in which they intend to invest. Also, they must make their investment during a limited period of time, usually 18-24 months.
After the acquisition target has been identified and agreed to the purchase, shares in the company can be sold to the public in a new listing as an initial public offering (IPO), also known in these cases as the "de-SPAC" process. For companies in fast-moving industries, the SPAC version of an IPO is a streamlined route to accessing the funds needed for growth. For investors, the SPAC is a chance to get involved at an early stage with a company where the investment will pay off when it goes public.
The benefit is significant, explained Josh Sherman and Lynn Loden of Opportune LLP, which provides tax, risk management, and financial analysis services to private and public companies. "SPACs are clearly a faster path to an IPO … because they have no historical financial statements or related disclosures through which investors can assess the current management team's operating results, financial returns, or ability to monitor controls and costs," they wrote in a January letter to clients.
But the risks to investors are significant as well. "SPAC investors are simply betting on an all-star CEO or private equity sponsor for the chance to approve the company's first acquisition and balance sheet structure, in return for a share of the financial [stake] previously held only by the sponsor and management team," they wrote.
Increasingly, cleantech and electric mobility are seen by US investors as growth industries, and it's led to a surge in SPACs seeking investments in this space.
"In 2020, 16 cleantech and electric mobility startups choosing to go public via SPACs received an average valuation of $2 billion, with the resulting net proceeds from the merger averaging $470 million among the companies that disclosed this metric," Holzinger wrote. "It is remarkable that 50% of this cohort do not yet offer any commercial products."
That's potentially only the tip of the iceberg, said David Oelman, partner, capital markets and acquisitions, at the law firm Vinson & Elkins, in a January webinar about SPACs.
"One study [by Goldman Sachs] estimates that $16 trillion has been committed globally for cleantech investments for 2020-2030, and that $70 trillion will be required to meet the goals of the Paris Climate Agreement in 2050," he said. "I have lived through several trends in my career…. It seems to me we're in one of those trends, certainly very early on."
Oelman said that a 2020 survey of 425 asset managers by investment bankers Macquarie Group found that, on average, they plan to double their assets under management in the "sustainability" sector to 37%. "There's plenty of money available to invest," Oelman said.
SPACs are much more common in the US cleantech industry than in Europe or China, and Holzinger said there's a good reason for the discrepancy: need. "SPACs are kind of filling the void in the US of cleantech investing. In many other regions, such as China and Europe, there has simply been a lot more government funding and support for these types of companies and technologies," she said.
To cite one example, Sweden-based Northvolt received billions of dollars of loans and incentives to build electric vehicle (EV) battery plants in Europe. "We don't see that kind of government support in the US for lithium-ion cell manufacturers," Holzinger said. "So, they are looking for other ways of getting that financing. Right now, SPACs are a totally viable way of securing those funds."
Seeing this unmet need, US investors in 2020 began to drive the interest in SPACs "to a completely unprecedented level," said Sarah Morgan, a Vinson & Elkins partner.
For the first time, the number of IPOs created from SPACs surpassed the number of traditional IPOs (in all sectors) in 2020—and, as Morgan pointed out, "that's in a year when the IPO market did pretty well."
While IPO investments doubled, SPAC funds increased six-fold last year. "We think it was the convergence of a few factors, including several high-profile SPACs and the entry of several high-profile SPACs sponsors, both of which made the product more well known to investors," she said.
The pace picked up in the second half of 2020, and in the fourth quarter it raced ahead to what would be more than 520 SPACs over the course of a year. "That seems like a crazy number, but the first quarter so far is hotter than Q4 2020. There could be $20 billion of issuance in January alone," she said.
As of mid-January, Vinson & Elkins pegged the number of active SPACs at more than 300, with $94 billion held in trust. Another 52 SPACs had been announced but were yet to complete their IPOs, and they represent investment commitments of another $15 billion. "So, that's more than $100 billion hunting" for target companies in cleantech and otherwise, Morgan said.
The firm identified 24 transactions announced in 2020 and through the early weeks of 2021, heavily weighted toward the mobility sector: EVs, EV batteries, EV infrastructure, and autonomous vehicles.
Ramey Layne, another Vinson & Elkins partner participating in the webinar, said: "These are pre-revenue alternative energy companies that [investors] thought could grow into [profitability] over time."
Vinson & Elkins says that new SPACs are also targeting renewable power generation; grid flexibility/resilience (energy storage); carbon mitigation; next-generation fuels such as hydrogen; and industrial applications. Because a SPAC sponsor is allowed to change its investment strategy without being charged with misleading investors, the investors can broaden their hunt as new ideas emerge.
And deals are emerging in cleantech, energy transition, and the environmental-social-governance (ESG) space, as never before, Morgan added. Those industries are targeted, according to her estimates, by 6% of the dollar value of transactions in 2020, but as recently as two years ago, none were in that space. "This really started in the second half of last year, and we see it growing in 2021," Morgan said.
The sector has been active so far in 2021, agreed IHS Markit's Holzinger. "In particular, we may see several more SPAC mergers that are specifically battery or storage-related," she said. "A lot of the … prior [deals] were in electric mobility and EV charging … so you're seeing investors in new areas."
The latest, announced just 16 February, is Li-Cycle, which says it is North America's largest lithium-ion battery recycling company, merging with Peridot Acquisition Corporation, a SPAC owned by Carnelian Energy Capital.
From a cleantech industry perspective, the interesting aspect of the newest SPACs is that they are in "process technologies," said Holzinger, rather than in mobility. "Process technologies can require a heavy amount of capital at the front end in order to build the production lines and manufacturing facilities," Holzinger explained, making them ideally suited to the rapid turnaround of a SPAC.
Rising payouts, higher risks?
Vinson & Elkins found that the mean and median price performance of SPACs that had recently completed business combinations was rising. Citing information from SPAC Insider, Morgan noted that the median share price of SPACs that reached IPO in 2018 and subsequently closed business combinations was $12.04/share, but it was $21.28/share for SPACs that completed their IPO and business combinations in 2020. "This shows that on average, the market believes the recent SPACs have found attractive targets," Morgan said.
Speed is on the rise as well. "We see that the time from IPO to close of SPACs is faster than before. Deals are getting done quicker," Morgan said, putting turnaround times at as little as four to seven months.
These new SPACs offer significant shares of equity to the IPO investors because they are early-stage companies that need a lot of capital, Layne said. "They're marketed to investors that … you invest now and in four, five, six years when we grow into the market, this thing is going to be valued in multiples like Tesla," he said.
In some cases, public investors have reacted as if SPAC companies are like Tesla, even though they have yet to bring a product to the marketplace. Sometimes, the investors then react just as strongly in the other direction when evidence surfaces that the companies need more time than they expected to generate revenue and profits.
For example, Nikola Motor Company went public in June 2020, becoming known as the "Tesla of trucking." The company's stock price surged from about $11/share to nearly $80/share, but then plummeted when—as a public company—it shared more information about the slower-than-expected progress it was making on developing electric trucks. Still, as Holzinger pointed out, Nikola was over $20/share in February 2021, and many multiples above Nikola's value when it was absorbed into a SPAC. For early investors, as well as for the company itself, the SPAC served its purpose of infusing the company with cash so that it can advance its technology.
But there's a chance the market could overheat, said all of the analysts and observers. Opportune's Sherman and Loden likened current conditions to the state of mind of investors at the height of the shale oil and natural gas boom, which accumulated an estimated $100 billion for acquisitions from 2010 through 2016. "Just like SPAC proceeds today, those funds had to be spent," they wrote.
The result was overinvestment in shale oil and gas producers, followed by surging production, plummeting prices, and bankruptcies.
Is that danger zone being entered for cleantech today? Nobody can say for sure, but Morgan observed that "as long as the SPAC market is as hot as it is, once SPAC issuers have completed the IPO, they are coming back with second, third and fourth SPACs. We think this will recycle itself as long as the market is constructive."
Layne added that in some cases, sponsors are able to raise funds for a new SPAC simultaneous to starting the registration process with the SEC, and before their prior SPAC has even completed its transaction.
Tempering this risk to some degree is the fact that many of these recent SPAC targets have commitments from institutional investors to buy stock in the companies at the opening price set for the IPO. This floor value serves to reduce the risk to SPAC investors and the operating company, Layne pointed out.
The bottom line is that care must be exercised. "Don't get us wrong, we love SPACs. Opportune has led all financial statement, disclosure and valuation aspects of over a dozen reverse mergers and 'de-SPAC' transactions dating back to 2005," wrote Sherman and Loden from Opportune.
"Attracting capital to the public markets is a good thing, and SPACs have certainly fit that bill in 2019 and 2020. But let's stop solely touting the 'blank check' and start focusing on what really matters—the acquisition and needed governance going forward. Like any acquisition: buyer beware," they wrote.
Risk comes with opportunity, Holzinger agreed. "It's been really interesting to see how investors have taken to cleantech," she said. "Historically, Wall Street has not reacted so positively to these technology developers."
The next question will be how those companies that went public through SPACs perform. Will the combination of cash to invest and positioning in the high-growth energy transition translate into the products and services—and profits—that investors are expecting? Only time will tell.
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