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.