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In the Global Pandemic, the Rise of Climate-Tech SPACs

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Neil Cummings
In the Global Pandemic, the Rise of Climate-Tech SPACs

In the Global Pandemic, the Rise of Climate-Tech SPACs

The emergence of the Special Purpose Acquisition Company, or SPAC, was one of the hottest trends in 2020. A SPAC is a shell company formed for the goal of generating funds through an initial public offering (IPO) in order to eventually acquire or combine with a private firm, thereby making the target private company public. SPACs help private companies to go public faster by skipping the time-consuming IPO or direct listing processes. The COVID-19 pandemic in 2020 has created a breeding ground for high levels of market and economic instability, thus this has been a particularly useful tool for private enterprises. The value of SPAC agreements increased 251% from 2019 to 2020, reaching over $32 billion raised last year. In fact, NBA Hall of Famer Shaquille O'Neal launched his own SPAC since the idea was so popular. The SPAC frenzy, according to many experts, including those at Deloitte, may be tapering down, but the climate technology sector appears to be the exception. Climate technology has gotten a lot of buzz in the SPAC world, and investors should take notice.

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SPAC agreements have raised over $7.5 billion USD for 28 climate technology businesses since the beginning of 2020. Climate startups saw an average share price growth of 131 percent from the time of their merger/acquisition to the end of the year, compared to an average of 50 percent across all other sectors. While there was a minor decrease in SPAC-related climate tech deals in 2021, Silicon Valley Bank (SVB) estimates that climate tech businesses might raise up to $40 billion in the next 24 months through SPAC deals. “Climate tech is leading the charge into the SPAC world,” said Kelly Belcher, managing director of SVB. “More investors and entrepreneurs have shifted their attention to climate innovation.”

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Climate technology's inherent high risk, high cost criteria for becoming a commercially viable business are one of the key reasons for its successful adoption to the SPAC. Climate technology involves a lot of money and a lot of hardware, especially when it comes to initiatives like installing a solar farm or creating direct air capture plants. As a result, securing private funding or meeting the standards for an IPO can be difficult for climate tech firms. Furthermore, many companies in this sector have only completed the conceptualization or basic prototyping stages of their technology and require capital to fully build out scaled solutions in order to deliver fully realised proof of concepts; this creates a chicken-and-egg situation for many companies seeking funding. Instead than using traditional private equity processes, SPACs allow institutional investors to make more "hype driven" bets. Investing in many climate tech businesses before the rise of SPACs was viewed as far too hazardous in many circumstances.

 

In many ways, the SPAC path may appear to be a no-brainer, but it has drawbacks and risks, just like any other method of expansion or mergers; SPACs should not be viewed as a faultless concept. While one of the benefits for companies is that they can determine their own valuation rather than relying on one provided by the market in an IPO, this can also be a significant disadvantage. Companies can easily overvalue themselves and even deceive investors. For example, this year, the creator of Nikola, an American business that specialises in zero-emission automobiles, was indicted on three charges of fraud for lying about the firm's financials and many other aspects in order to boost their valuation for their recent SPAC sale. Another American EV company, Lordstown Motors, is also under investigation by the SEC after announcing that they are out of cash and may go bankrupt by the end of the year, despite going public through a SPAC last year. The list of SPAC-related disasters and scandals goes on and on, creating major concerns among specialists, particularly about the possibility of a SPAC bubble.

Whether it's a bubble or not, Wall Street's SPAC boom is still going strong. CohnReznick predicts that 2021 will be another record-breaking year for climate tech and SPACs. With 28 climate tech SPAC acquisitions announced as of Spring and a median market cap of $1.1 billion, this estimate appears to be on track. The potential for new economic opportunities for green businesses that have hitherto struggled to raise funds has never been greater. As a result, we are on the verge of a new decade of climate revolution; the influence of SPACs and alternative investment methods allows for innovation on the front lines of climate change mitigation.

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