SPAC Mergers as a Catalyst for Energy Tech Exits
The energy tech sector historically is one where exit activity does not show obvious growth or could be described as exploding. But does the current global socioeconomic environment provide a perfect storm to change that? We looked at a few trends to try and gauge how much is the sector’s exit activity might be changing going forward.
Energy Tech Targeting SPAC vehicles
Big news in energy tech space exits are dominated by SPAC activity. With big names in batteries, electric vehicles and hydrogen, SPACs are emerging as a preferred route for market validation of these companies’ technologies and business models. The special purpose acquisition companies or SPACs are blank cheque companies, which are made with the objective of merging with another operational company. It usually comes with an expiration date of a couple of years and after a company is acquired, that company becomes listed. It is an alternative to a growth investment or an IPO and is convenient for the company being acquired as in many cases it has large capital needs but lack traditional metrics for an actual IPO. And as SPACs usually come with a specific sector target it may also come with the benefit of having strategic investors and advisors joining the company cap table and adding value beyond capital. While it involves more complexity in terms of execution, it currently has less scrutiny attached to it compared to an IPO (case in point — Nikola Motors). While previously hedge funds and private equity firms have dominated the special purpose acquisition vehicle instruments, we can see a shift as more institutional and traditional investors are looking to use or are raising SPACs.
We can see from the landscape above that SPAC merger announcements in energy tech has accelerated in the second half of 2020, with over € 27B+ in potential company value floated on the markets. The most activity is seen in companies working on electric vehicles, EV charging, batteries, and hydrogen.
Sustainable investment profitable and no longer optional
Another driver for more liquidity for energy tech companies to an extent is the almost unilateral decision by EU, US and major economies to tie recovery funds and some traditional financing instruments to the sustainable energy transition. More than ever, we can see green strings attached to the next period of EU financing as well as recovery package, that will lift the companies working to reduce the drawdown of carbon and the adverse climate affects it causes. For the immediate opportunity in the transition, companies to benefit the most are ones providing energy tech solutions that reduce the contribution of the companies who are polluting the most. Another argument to support this trend — oil companies moving away from oil. The recent shifts in oil and gas companies’ strategies, almost unanimously expanding renewable investment and moving into business models closer to the electron — be it setting up electric utilities or expanding electric vehicle infrastructure assets. These factors are furthered by institutions and regulators requiring concrete metrics showing the impact of reducing pollution, signaling that offsetting or greenwashing pledges are no longer tolerated. Finally we are seeing that banks are looking into SPACs and special green financing instruments as a means to participate in (profit from) and accelerate the energy transition.
M&A heating up
Recent weeks have shown an explosion of M&A deals across all sectors and segments. We are already seeing headlines that state “this type of activity was last seen before the previous crisis”. There may be multiple reasons behind this. In our view, there has been a positive effect from the C19 Pandemic. In the beginning of the year, it has forced many companies that were planning their acquisition timelines for 2020 to postpone and outright cancel the process. There is little support from shareholders for a sizeable strategic acquisition when management has no credible forecast on the next quarter, much less the long run. Not to mention the slowdown in available leverage from institutions trying to evaluate the potential risks and outcomes of the pandemic themselves. However, the crisis provided new challenges and made current ones that much more important to solve, and the companies had to figure out the most efficient ways to de-lever, secure supply chains, cut costs or digitize faster. This seems to be true from the fact that the activity in mergers and acquisitions have started to ramp up in the second half of the year, when the economic outlook started to be positive, backed by rising equity markets, low interest rates and institutions looking to deploy the vast amounts of accumulated dry powder.