Nikola, Quantumscape, Fisker.
Other than having gone public by merging with a special purpose acquisition company — a SPAC — what else do these three clean transportation companies have in common?
They are all what would be called “emerging growth” companies — not yet profitable but developing disruptive technologies with the potential for high impact and huge markets.
They also reflect some of the reasons SPACs have entered the clean energy space in a big way, said David Crane, former CEO of NRG and now co-founder of a clean tech SPAC, Climate Real Impact Solutions, which has quickly attracted $230 million in investments.
Speaking at a recent webinar on SPACs, sponsored by OurEnergyPolicy.org and Broadscale Group, Crane said the rise of these alternatives to traditional initial public offerings (IPOs) suggests major shifts on Wall Street. Beyond investors “fully embracing a different outcome for the mobility sector,” he said, the street is also turning from its short-term “quarter-to-quarter fixation” to look at longer-term growth prospects.
“The embrace of a future growth story is what makes public markets very interesting and should be very appealing to the target companies themselves,” he said, referring to businesses that might be potential merger partners for SPACs.
SPACs are publicly traded companies formed for the express purpose of attracting investments to be used to merge with a company in a given industry or technology, thus taking the target company public. VectoIQ, the SPAC that merged with electric and hydrogen-fueled truck maker Nikola Motor Company, was formed with a focus on transportation, specifically investments in autonomous vehicles and mobility as a service, according to its website.
Julia Steyn, VectoIQ’s chief commercial officer, called SPACs “the right vehicle for the times and what kind of companies are coming out of the pipeline from the VC (venture capital) stages in the mobility space per se.”
SPACs are “looking at specific deals, interesting deals,” Steyn said. “The teams are really focused on executing this one transaction, and even the investors have the flexibility to be part of something . . . to really impact the future.”
Why a SPAC?
The recent clean transportation mergers are just one part of what Crane sees as a fast-developing “SPAC bubble” on Wall Street. SPACs representing $53 billion in investments accounted for about half of all IPOs this year, according to Christopher Weekes, a managing director at Cowen, the investment bank that was involved in the VectoIQ-Nikola merger. His most recent count on 2020 SPACs is 143 — up from 59 in 2019 — with more than 70 in the pipeline, he said.
SPACs have been around since the 1990s, when they were often seen as shady outfits — “blank check” companies — that allowed businesses to go public by merging with what was essentially a shell company. Tighter regulation on Wall Street since then has made traditional IPOs inefficient and expensive, and SPACs more attractive, especially for small companies, Weekes said.
SPACs offer such businesses a path to the public market unconstrained by the limits on disclosure governing traditional IPOs. Companies going public through a SPAC can make projections about future revenues and growth that for IPOs are usually the domain of independent financial analysts, Weekes said.
“We’re talking about companies that might be pre-revenue, pre-cash flow,” he said. “The use of forward-looking projections is a really critical piece for those companies to be able to actually own their own destiny with respect to telling the story, owning the story and walking investors through the revenue projections.”
Another bright spot is SPACs’ accessibility to small, retail investors. Pre-merger shares generally cost around $10 apiece.
The downside here is that investing in a SPAC also means that investors’ money may be locked up — in an interest-bearing trust account — for up to two years while the SPAC looks for a target company for a merger. However, once that company is identified, investors have the opportunity to opt out and get their money back.
The fact that most investors stay in means that the target companies can “go in with confidence that they can merge with a SPAC and come out well capitalized to move the business forward,” Weekes said.
Flight to quality — and corporations
The current SPAC bubble is due mostly to Wall Street’s tendency to latch onto trends and run them to excess, Crane said. Failures are coming, he said, but he still sees SPACs as superior to traditional IPOs and believes a “flight to quality” will continue to drive interest.
“They’re going to be good SPACs with respected management and true governance in terms of a board of directors and thorough due diligence on the acquisition,” he said.”You’ll see companies put together that have the classic emerging growth revenue story, plus they have a disruptive technology that’s coming in the next couple years.”
Spinning out disruptive technologies developed in-house could also drive interest in SPACs in the corporate sector, both Crane and Steyn said. Here SPACS allow companies to demonstrate the value of new technologies while keeping majority control.
“I think where it becomes uniquely interesting for corporations is when there is a different CapEx profile, where you have to compete within your own organization for capital, which is never easy,” Steyn said. SPACs are “a simple and interesting instrument (for) figuring out how you keep that part of your business in good hands,” she said.
Looking ahead, Weekes sees the use of SPACs spreading out from the electric vehicle sector to a range of industries now taking on new commitments to sustainability, from energy, water and agriculture to environmental services and advanced materials.
“I think there will be an evolution of the IPO itself because of SPACs,” he said. “The SEC and other regulatory bodies would like to see healthy competition where companies have options.”
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