Decarbonizing everything depends, to some degree, on financing a lot that's new. It’s hard for companies to raise money to do new things unless they can share their vision for growth. Special purpose acquisition companies (SPACs) give operators the freedom to share earnings expectations while raising public equity.
Over 25 "green" businesses have set sail into public markets by announcing mergers with SPACs, loaded (or soon to be loaded) with cash but facing difficult journeys ahead. Among them is EVgo, the target of David Crane’s first SPAC acquisition, announced last month.
Like their peers, Crane's SPACs will focus, initially, on pure-play green businesses. However, in subsequent transactions, he sees an opportunity to help brown companies monetize green investments – an approach that, were it available at the time, might have helped Crane in his previous quest to decarbonize NRG.
The clock is ticking in the race to decarbonize global markets. Governments and corporations have been slow to invest in planet-saving technologies. Can SPACs provide a speedy financing solution?
David Crane, former CEO of NRG and prominent SPAC investor, believes SPACs have a role to play. In an interview with the CEFF in December, he discussed his plans to lead a family of climate SPACs, highlighting the vehicle’s suitability for climate investment.
SPACs – Special-Purpose Acquisition Companies or, as they’re colloquially known, ‘blank-check companies’– are booming. According to SPACInsider, nearly 250 SPACs went public in 2020, raising over $80 billion in aggregate – 6x the amount raised in 2019; more than was raised in the preceding decade.
SPACs provide an alternative way for companies to go public, often called a ‘reverse merger.’ They first go public as shell companies, then look for businesses to acquire.
While SPACs’ potential to advance climate goals is clear, their high costs, and the degree of investors’ current excitement for them, make one wonder whether the movement will soon cool – or evaporate. For the present, SPAC sponsors are rushing to satisfy red-hot demand and green businesses are benefiting.
“The SPAC world is a high-volume, high-velocity business,” said Crane. “You are renting someone else's money for two years,” he said. “It's much better for [investors] if you rent it for only 3-6 months as opposed to the full two years.”
So far Crane has co-founded two climate SPACs, which he leads as CEO. The first, Climate Change Crisis Real Impact I Acquisition Corporation, “rented” its $230 million of funds for about four months before announcing, on January 22, its merger with EVgo, a provider of electric vehicle charging infrastructure in the U.S. The second, Climate Real Impact Solutions II Acquisition Corporation, closed on an IPO the following week with gross proceeds of over $240 million.
Crane is joined by co-founders John Cavalier, Chief Financial Officer, and Beth Comstock, Chief Commercial Officer. John Cavalier was formerly Managing Partner of private equity firm Hudson Clean Energy Partners. Prior to that, he held several executive roles at Credit Suisse, including Global Chairman of the firm’s Energy Group and Vice Chair of the broader bank. In 2005, he launched Credit Suisse’s first dedicated renewable energy investment banking effort. Beth Comstock joins the team after a long career at GE where she initiated clean-energy and digital transformations, including the creation of Ecomagination and GE Ventures & Licensing. She has held various executive roles at GE, including Vice Chair, Chief Marketing and Commercial Officer, and President of Digital Media at NBC Universal. Veteran private equity investor and Yale Lecturer Dan Gross is serving as Chief Investment Officer.
Crane (together with Cavalier) signed an agreement with PIMCO to co-sponsor three “climate SPACs.” The team plans to use their SPACs to acquire “purpose driven companies” – businesses which “are not just about making money but about saving the world from melting.”
They have been facing stiff competition.
Green businesses are among SPACs’ favorite acquisition targets. Since last year, over 25 green businesses announced plans to go public by merging with SPACs. They span diverse sub-sectors of clean technology, including electric vehicle manufacturing, electric vehicle charging, energy storage, solar, and hydrogen. More than half were announced to be acquired by SPACs with no avowed interest in sustainability; the remainder by green-focused SPACs.
Currently, over fifteen SPACs are looking specifically for green businesses, with watchwords like “energy transition,” “sustainability,” and “climate” peppering their filing statements. Crane’s SPACs fall within this group: specifically of the “climate” variety.
He chose to frame his investment mandate in climate terms “not because [his team] would be looking at anything different,” but to signal his team’s bona fides in the sustainability world. “We didn't come recently to the party,” he said, alluding to his team’s decades of experience in climate and clean energy.
The recent-party-comers are arriving from the oil patch, where, according to law firm Haynes and Boone, there have been over 500 bankruptcies since 2015. They include former oil and gas executives like Alan Levande, Daniel Rice, James Musselman, Michael Morgan, and Scott McNeil, who now lead green SPACs, and private equity firms like Riverstone, Arclight, and Apollo, which previously invested heavily in oil and gas and are now sponsoring green SPACs. Crane joked that “energy transition SPAC” is “the euphemism that every person who was an oil and gas person yesterday uses to describe themselves today.”
While competition is fierce, the team’s addressable market is vast. Using a carbon pricing method, the SPACs’ prospectuses identify an “economic opportunity of approximately $2 trillion per year” (40 billion tonnes per year of global carbon emissions multiplied by an estimated cost of avoiding carbon of $50 per tonne).
“No [other SPAC] had talked about [the opportunity] that way,” Crane said. In doing so, Crane’s SPACs address themselves to all companies which can help curb carbon emissions – that is, one would think, just about any company. In conversation, he made a couple of distinctions which guide to narrower territory.
First, like most green SPACs, Crane's will focus initially on pure-play green companies rather than on decarbonizing brown ones. For him, this is a practical, rather than philosophical, choice. “I am not a climate purist,” he said. In his former role as CEO of NRG, a traditional utility, Crane said he “tried to shift the company hard toward low to no carbon sources of generation” beginning in 2008/2009. “We had some successes and some failures,” he said. Ultimately, transitioning the business proved to be a “very difficult challenge.” At the end of 2015, he was fired from his post as CEO. (Read his farewell letter and reflections in GreenBiz.)
The investments will focus initially on pure-play green companies rather than on decarbonizing brown ones.
Second, in terms of risk, Crane described his first SPAC’s preference as “left of center”: in between low-risk “revenue companies,” on one end of the spectrum, and high-risk “moonshot companies,” on the other; closer to the conservative end.
His team ultimately found the balance they were seeking in EVgo, a provider of charging infrastructure formed ten years ago by NRG. EVgo projects moonshot-like revenue growth: from under $20 million in 2020 to over $1 billion by 2027. But, unlike a moonshot, it already has a large operating footprint, with more than 800 fast-charging locations serving over 220,000 customers.
“Hopefully,” Crane said, “when we get into subsequent SPACs, we will get a little more exotic in terms of the types of companies and the types of technologies that we're backing.”
The more exotic – one might say “riskier” – businesses have, so far, been the fare of most SPACs buying green businesses. Of the green businesses that have merged with SPACs, roughly one third are pre-revenue and roughly half had less than $5 million of revenue in 2020. Prototypical of these is Nikola, a pre-revenue, zero-emission semi-truck maker that sparked the green SPAC boom when it announced plans to merge with a SPAC in March 2020.
Most green businesses for sale today are early-stage. Crane joked: “If a company ever called us up and said ‘hey we're a sustainability company with substantial free cash flow,’ we'd probably hang up on them because we thought it was a prank call.”
Despite, or perhaps because, many climate companies lack historical revenues, they make good candidates for SPAC acquisitions. This is because of regulatory nuances. According to law firm Fenwick & West, when businesses share financial projections in connection with exit transactions – a critical aspect of their pitch to investors – they are protected from liability by a safe harbor provision in the Private Securities Litigation Reform Act (assuming the projections “are identified as forward-looking and are accompanied by meaningful cautionary language”). Notably, this safe harbor provision “expressly does not apply” during IPOs, which is the reason companies typically don’t include financial projections in IPO documentation. According to Crane, going public via a SPAC is also faster, requiring just a few months of management's time as opposed to, sometimes, a year for a traditional IPO.
For emerging climate companies and their founders, the benefits of going public are many, according to Crane. After years of labor, founders can prove the worth of their companies while monetizing their holdings at high public equity valuations. They can also attract top-talent management by giving them public shares. Typically, SPAC mergers also allow existing owners to maintain control while loading company balance sheets with cash. For example, after merging with Crane’s first SPAC, existing EVgo shareholders will retain majority ownership; and the merger will leave the company with $575 million of cash – enough to fund operations until 2026 when the business is projected to become cash flow positive.
Of course, many green businesses that merge with SPACs may fail or turn out not to be ready for ‘prime time.’ Investors (including retail investors) who buy shares of SPACs (or companies that have become independent) may lose their money, particularly when entering and exiting late. As of last Friday, the stock price of Nikola was trading more than 60% below its high. As Crane observed, “the market goes strong in one direction and then corrects itself.”
From a climate perspective, the green SPAC movement seems beneficial while it lasts.
From a climate perspective, the green SPAC movement seems good while it lasts. Since last year, over 25 green companies – most pursuing a sustainable mobility theme – have announced plans to set sail into public markets through SPACs, loaded (or soon to be loaded) with cash and led by talented teams. What are the chances at least one goes on to revolutionize the high-emissions transportation sector?
SPAC investors’ demand for business-model simplicity, however, may ultimately limit the vehicle’s potential to drive decarbonization. According to Crane, given the “high-volume, high-velocity” nature of SPACs, “even the institutional investors want to keep it very simple.” He relayed a popular rule of thumb: “if you want to bring a company to the market through a SPAC, you should be able to describe their business and the moat that protects their business model in one tweet.”
While simplicity holds virtue, some important climate businesses (e.g. providers of grid modernization software) are inherently complex and, therefore, unsuitable targets for SPACs.
Some observers have compared the recent green SPAC boom to the clean energy YieldCo boom from 2013-2015. Both captivated Wall Street and drove large amounts of capital into green businesses. The YieldCo boom faltered in 2016 amidst the bankruptcy of YieldCo sponsor SunEdison, although some YieldCos endured and have achieved success. The fate of the green SPAC boom is yet to be seen.
Crane, who created the first clean energy YieldCo, NRG Yield, while CEO of NRG, was quick to draw a distinction between the two green finance movements. YieldCos are “all about free cash flow” while SPAC's are “nothing about free cash flow,” he said. They are “opposite ends of the spectrum.”
An important similarity may emerge, however. Both may be used to satisfy the preferences of purist investors, although they cater to different types or purism. In the first case, investors prefer low-risk assets to be separated from higher-risk assets (they value such assets higher separately), so companies spin off low-risk assets into YieldCos. This was NRG's rationale for creating NRG Yield. In the second case, investors prefer green assets to be separated from brown assets, so companies spin off green assets into SPACs. This type of transaction has not become popular yet, but it’s an approach Crane would like to explore.
“When we get into subsequent transactions,” he said, “one of the areas that I think we have a competitive advantage and could do a great service to the [climate] movement is to work with the big corporations – whether they be the oil and gas companies or the big electric utilities – and help them carve out their green businesses into a pure-play green investment.”
Like NRG under Crane’s leadership, many traditional utilities and oil and gas companies are beginning to reinvest profits earned from brown assets into green assets. The problem for ESG investors is that these green assets, while substantial on their own terms, appear insubstantial as a percentage of total company operations. According to Crane, “they're never going to get credit for [their green assets] unless they create a separate vehicle.”
“When I came under pressure in my last year [at NRG],” he reflected, “I had to find a way to carve out the green stuff...If SPACs had been available at that time, I could have just spun all the green businesses into different publicly traded companies.”
Under the paradigm Crane envisions, traditional utilities and oil and gas companies could become breeders of green businesses which they monetize through SPACs.
Whether acquiring climate businesses from large brown corporations or from clean-technology entrepreneurs, green SPACs may provide a critical funding source for climate businesses to reach scale, filling the current void between low-risk “revenue businesses" and the high-risk "moonshots."