By Jinjoo Lee
Investor appetite for sustainable investments and yield have both been huge lately, but there have hardly been any debuts of cash-generating renewable-energy companies recently. Could SPACs, or special purpose acquisition companies, be the answer?
Of course it is possible to gain indirect exposure through a utility with heavy renewables exposure such as NextEra Energy, which recently surpassed Exxon Mobil in market capitalization. NextEra was the top developer of wind energy in 2019. But the second and fourth largest -- Invenergy and Apex Clean Energy, respectively -- are privately owned. Large solar developers such as 8minute Solar Energy, too, are private.
A burgeoning group of clean energy-chasing SPACs is aiming to change that. At least four filed since August are specifically targeting the renewable energy industry, according to a recent note by Trevor Pinkerton, partner at Norton Rose Fulbright. An even larger universe of SPACs -- 16 by Mr. Pinkerton's count -- are casting a wider net, looking for companies that help promote energy transition. At least one prominent renewable developer is eyeing a public market debut. Tom Buttgenbach, chief executive of 8minute Solar Energy, told The Wall Street Journal in August he is considering at least a partial public debut to take advantage of the growing interest in sustainable investments.
Experience shows it hasn't been easy. The last time renewable energy companies went public in droves was in the 2013-2015 period in the form of yieldcos, so named because they promised attractive dividends from operating already-developed wind and solar facilities. One solar developer, SunEdison, went bankrupt after failing to deliver on its untenable growth promises with sister yieldco TerraForm Power, souring the market for other yieldcos. Pattern Energy Group and 8point3 Energy Partners have been delisted and taken private, while others, including Clearway Energy, have sold off large pieces to private capital.
A handful remain publicly listed -- including Clearway Energy, NextEra Energy Partners LP and Brookfield Renewable Partners -- and have managed to outperform the S&P 500 year to date.
Aside from the SunEdison debacle, there are other reasons why public markets haven't been as appealing for the industry. One is that there is no shortage of private capital -- especially pension fund money -- chasing relatively low-yielding renewable energy investments. Many have increased their allocation for alternative investments in recent years. Public markets, meanwhile, tend to favor rapid growth stories or splashy scale -- not features of existing renewable developers or operators. Judging by green bonds' relatively modest pricing advantage compared with plain vanilla bonds, investors don't seem to be overly generous on valuation just because investments are cleaner.
Compared with oil and gas, there is also less of a direct incentive for going public. Tax-advantaged master limited partnerships, for example, are available only to those generating income from natural resources such as oil and natural gas or commodities. A House infrastructure bill that passed this summer proposes to expand that eligibility to include renewable energy. There is a good chance of that bill becoming law if Joe Biden becomes president and the Senate turns majority Democrat.
In the current market, SPACs are mostly trying to buy companies with "hockey stick-shaped" business plans," according to Ted Brandt, Chief Executive Officer of Marathon Capital. It advised battery-operated truck company Hyliion Inc. on its combination with Tortoise Acquisition Corp. Mr. Brandt noted that likely targets include energy storage companies, renewable-related software, renewable natural gas or companies in the business of financing rooftop solar.
SPACs are more likely to find targets in those adjacent areas, bypassing the safe, boring green projects favored by yieldcos or pension funds. Because they have incentives to close a deal, SPACs tend to keep their mandates broad enough to be realistic. ArcLight Clean Transition Corp., a SPAC that filed a prospectus in late September, is clearly focused on finding a renewable energy-generating target. However, the company is also open to energy storage, the distributed electrical grid, zero-emission transportation, carbon capture and even sustainable manufacturing, among others.
It will take a lot more than hungry SPACs to lure renewable-energy companies back to the public markets.
Write to Jinjoo Lee at firstname.lastname@example.org
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