It is three weeks since ReNew Power, one of India’s largest renewable energy firms, listed on the Nasdaq stock exchange in New York. The listing helped ReNew to raise $1bn and reflected a market capitalisation of $4.5bn.
The figures are notable, but the most excitement is about how ReNew did it.
ReNew achieved its public conversion by merging with blank cheque company RMG Acquisition Corporation II – officially called a ‘special purpose acquisition company’ (SPAC) – led by Robert Mancini, a former executive at private equity firm Carlyle.
It is an unconventional route compared to traditional listing, but it “made a lot of sense and went very fast”, said Sumant Sinha, CEO at ReNew Power.
The ReNew deal has been closely followed by investors all over the world as it could mark the start of a wave of transactions that enable foreign companies to access the capital-intensive markets within the US.
It is not the only renewables firm to take the SPAC route. In August, German battery storage developer Ads-Tec revealed it was listing via SPAC in a $580m deal; and gravity storage firm Energy Vault announced its own deal last week.
However, growing scrutiny of these investment vehicles has recently slowed transactions in other sectors. What are they and how common will they be?
What is a SPAC?
SPACs are exchange-listed corporations that have no business operations but hold investors’ cash for the sole purpose of acquiring a private company.
They are generally formed by experienced management teams or big names that have influence to attract investment from institutional and retail shareholders, even though all parties know that the future acquisition target is still unidentified.
Once formed and listed, a SPAC has two years to identify a target and complete the transaction. When the merger takes place, investors will then own stock in the newly formed entities, with the management team also receiving ‘founders shares’ as a fee of the deal – usually a hefty 20% of the total, which shows why they’re so popular to set up.
SPACs have risen from the fringes of the financial world to immense popularity in their last few years. They raised nearly $80bn in 2020, up from $13.6bn in 2019 – and last year’s total was surpassed in the first three months of 2021.
Why are they attractive for target companies?
From the target’s perspective, merging with a SPAC usually offers a quicker and cheaper route to the public markets than the traditional IPO.
This is partly because SPACs do not have to comply with the tougher listing rules and regulations of the traditional initial public offering (IPO) process. Lower costs also make this method more financially attractive to businesses and their owners, because financial rewards can be transformed into bonus cheques or redeployed back into the company for growth purposes.
However, despite the recent attention for SPACs, some investors believe that their steep growth in popularity will not continue.
The attraction of SPACs is also a potential downside. While they are quicker than traditional IPOs, this speed is achieved because the companies don’t face as much scrutiny in areas including their valuation. This comparative lack of scrutiny has led to poor performance of the shares of some of these newly-traded entities.
The fact they can also hold investors’ cash for two years, with no guarantee of a deal at the end of it, will dissuade some risk-averse investors too.
But despite the risks, SPACs can offer companies in the clean energy market the capital they require to develop, build and maintain large-scale projects, especially in countries like India that have enormous potential. They can offer firms the chance to tap into funding pools they wouldn’t otherwise be able to.
The solid start to trading for ReNew Power’s share price is encouraging too. The company started trading at $9.55 per share before rising to $10.54 at the start of September before slipping back to $9.75 on 13th September. But it is instrumental that the company can hold up in the public market for a sustained period of time – where others have failed before.
As the number of viable US-based acquisition targets declines, SPACs are increasingly turning their attention to foreign markets. This is good news for foreign companies, including in renewables. This boom isn't over yet.