There’s no denying that 2020 has been the year of the special purpose acquisition company.
Since the beginning of the year, 219 SPACs have raised $73 billion, according to widely reported market research from Goldman Sachs. That’s a 462% jump from 2019 and more than traditional public offerings raised by about $6 billion. By some counts, roughly one quarter of the SPACs that have been announced will target climate-related businesses.
Already, of the 78 deals that have either completed or announced a merger since 2018, just over one-third have been climate-related, as tallied by Climate Tech VC. And these SPACs have outperformed the broader technology market, with the 10 climate tech companies that have completed mergers averaging a 131% return on investment versus the 50% return of the total SPAC market (assuming average offering prices of $10 per share).
Clearly this has been a banner year for companies that are tackling the climate crisis across a number of verticals, but can it last?
There are a few reasons to think that it can — led chiefly by the demand for these kinds of public offerings from institutional investors, including the pension funds, mutual funds and asset managers handling trillions of investment dollars.
“[The] current wave [of SPACs] is because over the past 24 months the institutional investor universe has come fully into believing that climate solutions are going to be a major growth area in the 2020s and beyond, but they weren’t seeing options available to them for investing into,” wrote longtime clean technology investor, Rob Day, in a DM.
“The available publicly traded ‘green’ companies were already getting really bought up, and the private equity options were underwhelming as well (smallish in the case of VC, low returns in the case of large-format projects). Throw in a Robinhood market of retail investors with a lot of enthusiasm for EVs and such, and you have a nice recipe for this to happen.”
Large money managers agree with Day’s assessment.
“Industry commitments to mitigate climate change risk is providing investors visibility that there is momentum among decision makers to drive change,” said Richard Manley, the managing director and head of sustainable investing at CPP Investments. “There’s an appreciation within the public markets that the exciting transition solutions either within core operating subsidiaries or investments in the VC arms of corporate companies haven’t provided public equity investors the really focused opportunities they’ve wanted.”
CPP Investments, which has roughly $355.4 billion in total assets under management isn’t the only big financial manager that is making climate investments one of its core strategies. In January BlackRock committed to making climate change mitigation a component of its calculations for how to manage the $9 trillion in assets under management the financial services giant has.
“We are certainly seeing growth in the number of investors committing to aligning their portfolios with mitigation of global warming,” said Manley.
The need to put those millions to work quickly helps explain Tesla’s meteoric rise to assume a coveted position in the S&P 500.
It also explains how a company like AppHarvest can become a publicly traded company while only just completing the construction of its first tomato farm (the company, one of a host of indoor agriculture startups, grows tomatoes in high-tech greenhouses that use less resources than traditional farms and can produce crops more efficiently).
For its part, CPPIB is an investor in at least one SPAC that’s got a climate mitigation thesis. The pension fund for Canada is backing the SPAC that’s acquiring the electric vehicle charging technology developer and operator, ChargePoint.
That September deal for ChargePoint was followed in November with a SPAC for Nuvve, an early-stage developer of vehicle-to-grid energy management software and services.
Investors said they expect the pace of SPAC formation (especially SPACs targeting climate tech) to at least remain constant and potentially accelerate throughout 2021.
“There’s a lot of thought process in sustainability SPACs even as we speak,” said one investor who backs sustainable food companies. “People think about energy and alternative energy, but very seldomly do people think about food. Since Beyond Meat IPO’ed every bank has had coverage on this market. It’s triggered a lot of demand to be creative on how to deploy capital in the space … There will be more SPACs in the sustainable food space.”
Opportunities extend far beyond the sustainable food space. Electric vehicle manufacturers have been low-hanging targets for SPACs, especially after the early success of the Nikola acquisition and subsequent offerings in other climate-focused SPACs.
Nikola’s downfall also shows why investors might want to proceed with caution when it comes to these kinds of public offerings.
Investors in the company could only watch as deals with GM and with Republic Services collapsed after exaggerated statements from the company’s leadership about its capabilities and achievements were exposed. The stock is still trading above its initial offering price, but down significantly from the highs it reached over the heady summer of 2020.
“I’m wary of what the overall performance will end up being for a lot of these SPACs, but some will use that dry powder to become important, innovative companies in these sectors,” Day wrote. “And of course, a lot of patient venture capitalists are now sitting on some nice mark-ups, which will help them raise their next, bigger fund.”
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