Climate SPACs: Should they be part of a green portfolio?
A growing share of climate tech investment has been funded through SPAC mergers and acquisitions. Learn how to research opportunities and scrutinize the risks of climate SPACs before adding them to your portfolio.
By GreenPortfolio Team
January 29, 2022
Global ambition to decarbonize will require an economic transformation that relies on maturing early-stage technologies as well as scaling those currently deployed. With increased focus on allocating greater levels of public and private capital to innovation, climate tech investments are drawing increasing interest, funding, and scrutiny.
The growth of climate tech and SPACs
According to PwC, $87.5 billion was invested in climate tech from mid-2020 to mid-2021, representing three times the value of the prior period and 14 percent of all venture capital investments. Key sectors for investment have been transportation and logistics, energy and power, and agriculture and food according to Silicon Valley Bank.
Climate tech startups, which are often early-stage, have also utilized more innovative financing structures in the past two years, including significant investment made through Special Purpose Acquisition Companies, known as SPACs. SPACs, which enable private companies to go public via a relatively simpler process than a traditional IPO, have seen significant growth in recent years across all sectors. Dubbed by some as the SPAC boom, nearly 200 companies have gone public in 2021 via a SPAC transaction, three times the number in 2020 and up from just 13 five years earlier. Suited for early-stage companies that may not be ready for a traditional IPO, SPACs have made up nearly one-third of climate tech funding from mid-2020 to mid-2021. In 2021, more than 30 climate tech SPACs completed deals and 25 completed IPOs, according to data compiled by S&P Global.
While venture capital, private equity, and offerings exempt from SEC registration are often limited to participation accredited investors, defined as investors that meet certain criteria set by the Securities and Exchange Commission (SEC) for net income, net worth, or professional knowledge, participation in a SPACs is permitted for a wider set of individuals. This allows for more involvement in early-stage investments but also creates more exposure to significant risk for individual investors. Understanding the investment structure and how to research a SPAC investment can help mitigate some of the risks.
What to consider when investing in a SPAC
A SPAC is a shell company that raises capital through an initial public offering (IPO) and uses the proceeds to complete a merger or acquisition of a private company, resulting in a publicly traded operating company. Shareholders in the SPAC become shareholders in the new company. If a merger or acquisition is not completed within the timeframe specified in the SPAC prospectus, generally 24 months, the initial capital is returned to shareholders. A shareholder that selects to not participate in the identified merger or acquisition will also have the opportunity to redeem the initial capital. Note, the redemption amount is based on the IPO price rather than the price at which an investor purchased the shares.
Because investment in a SPAC is made prior to the identification of the target company, a prospective investor considers the investing and sector experience of the management team, called the SPAC sponsor. The SPAC prospectus may detail a sector or theme of the business target . Climate tech investors should use this information to screen the potential investments and impact. Additional details in the prospectus will detail the timeframe for completing a merger or acquisition, how funds will be held until a transaction is complete, whether a shareholder vote is required to approve a merger or acquisition, and the terms of warrants that give investors the option to purchase additional shares.
Risks of investing in SPACs
The SEC notes key risks and considerations when investing in a SPAC:
- Price fluctuations – once the SPAC IPO is complete, the units may be listed on an exchange and are tradeable. The units are often priced at $10 during the IPO but once they are listed, the price can fluctuate with the market. Redemptions if a merger or acquisition is not completed will be based on the IPO issuance price, rather than based on the price purchased in the market.
- Interest of sponsors versus shareholders – SPAC sponsors invest alongside shareholders, typically holding 20 percent, but may receive more favorable terms. The sponsors as well as other institutional investors that receive private placements therefore may have an incentive to complete a merger or acquisition even when a quality target company is not available. This is a considerable risk particularly when there are many SPACs and few target companies.
- Dilution – investors may see their shareholdings diluted if financing is raised post the IPO or through the exercise of warrants.
SEC Chairman Gary Gensler has also spoken on the focus in the coming year on strengthening the quality of SPAC disclosure with rigor similar to that required by a traditional IPO in order to protect investors.
How to research climate tech SPACs
Allocation of capital is also an important consideration with transportation and mobility investments, including EV companies, drawing much of the capital and attention in recent climate SPAC deals. While clean transportation is a critical part of the energy transition, innovation in electrification and power, agriculture, green hydrogen, and carbon capture are among other technologies that will play a key role in decarbonization and will require significant capital investments.
Screening tools such as SPAC Track enable investors to screen for SPACs with a ‘sustainability’ target, providing additional details on the status, IPO date, IPO size, underwriters, and links to SEC filings. The range of performance of SPACs highlights the emphasis on conducting thorough research prior to investing. Bain Capital analyzed SPAC performance between 2016 and 2020 found significant variation between the investments with many of the gains occurring prior to a merger or acquisition. S&P Global found a similar trend in climate SPACs in 2021. Like all green investments, the target companies should be scrutinized for their climate impact and metrics, along with the potential for ‘greenwashing’. While platforms can help identify SPAC investments in the climate tech space, thorough due diligence falls in the hands of the investors.
Investors that are looking to build a climate-friendly portfolio while limiting risk should consider diversified funds that provide transparency into their holdings. GreenPortfolio reviews funds and robo-advisors that focus their holdings on those that have a positive environmental impact or that exclude fossil fuel investments.
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