It’s been a special kind of confusing that no new renewable infrastructure stocks have entered the public market through an IPO despite generating attractive performance numbers over the last several years. Typically, market strength leads to a flurry of new issuance as companies rush to access growth capital. Though here we are, the RENEW Index has returned 14.66% annually over the last three years, outperforming the S&P 500, and we’ve seen exactly zero new renewable infrastructure companies go public. It’s within this context we examine the increasing success of special purpose acquisition companies (SPACs) in the Renewables arena.
A SPAC is formed without existing commercial operations for the sole purpose of raising capital through an initial public offering (IPO) in order to purchase an existing company or companies. In some cases, investors know the acquisition target before the SPAC raises money; in some they don’t. When the acquisition company is not known, (or a target is only a partial use of funds raised), the SPAC sponsor is typically on the clock (~2 years) to complete an acquisition or return capital to investors. In a market devoid of traditional IPOs, we welcome the addition of valuable renewables assets to the public market, especially since acquisition targets tend to be on the leading edge of technology for the future. Recently, law firm Winston & Strawn indicated there are at least seven clean energy-focused SPACS currently on the prowl for assets. Four others have filed registration statements with the intention of going public before the end of the year.
As fundamental investors though, we are somewhat wary of “blank check” SPACs. We would just plain rather know the details of what we are buying before we invest. If that means we miss the IPO and wait to see what the actual assets are, then so be it. According to Goldman Sachs who analyzed 56 SPACS since 2018, the average SPAC underperformed the S&P 500 and the Russell 2000 indices three, six, and twelve months after their merger completion. Does that mean the assets are poor? Not at all. We think it indicates a large amount of “pump and dump” investing in a red-hot market, which allows the SPAC to overprice its IPO. Our preference is to wait and see what the assets are, perhaps gaining a better entry point along with more information.
We think there’s a large “sleeper” cell of investors looking for safe ways to invest in the Renewables Megatrend, with investment characteristics like: (1) long-term contracts with strong counterparties; (2) inflation adjusted cash flows that support healthy dividend yields; (3) direct participation in the Clean Energy Transition that will require multiple trillions of dollars to be invested over multiple decades; and (4) better risk-adjusted returns than other renewable investments. It’s nice to enjoy “Making Green While Going Green”, but it’s nicer to sleep well and with confidence while your portfolio does its thing.
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Michael Cerasoli, CFA
Michael leads the Renewables effort at Eagle Global Advisors, including the development of active and passive strategies, and portfolio management. He is also the Co-Head of the Energy Infrastructure team and Co-Chair of the Energy Infrastructure Investment Committee. He shares Portfolio Manager responsibilities for the firm’s four separate Energy Infrastructure strategies. Prior to joining Eagle in May 2014 Michael was employed by Goldman, Sachs & Co. for ten years where he covered Midstream for seven years and small/mid cap Oil Services for three. Prior to Goldman, Michael worked for three years as a sell-side equity trader at various Wall Street firms. He earned bachelor’s degrees in Economics and History from Union College, and an MBA from the Hagan School of Business at Iona College. Michael holds the Chartered Financial Analyst designation.
Curt is a Managing Director in the Energy Infrastructure Business, a member of the Energy Infrastructure Investment Committee, and co-head of the Renewable Energy Business at Eagle Global. Prior to joining Eagle, Curt held a similar position at an Midstream Energy-dedicated asset management firm in Dallas, Texas. He has 39 years of investment experience. He has served as a partner/principal in both a hedge fund of funds and a venture capital fund. Curt earned his BA in Economics from Grinnell College and a professional certification in Energy Innovation and Emerging Technologies from Stanford University.