Once the hottest craze on Wall Street, special purpose acquisition companies have endured a fall from grace since the market peaked two years ago, but a few energy transition investors remain determined to succeed against the negative sentiment.

Investors use SPACs, also known as blank-check companies, to bring privately owned, fast-growing startups into public markets. The energy transition space has been a key beneficiary of the trend, with companies involved in electric vehicles, nuclear technology and battery storage among those being targeted.

Interest in SPACs exploded in early 2021 but collapsed almost as quickly amid challenging market dynamics. Investors started to come under heightened scrutiny from regulators aimed at closing loopholes that allowed target companies to overstate their financial projections. Many companies have also struggled with stock performance since concluding their SPAC mergers.

"We're now in SPAC 2.0 where things are being much more regulated and governed," said Per Regnarsson, CEO of ClimateRock, a clean energy SPAC that listed on the Nasdaq in May 2022, more than a year after the initial rush.

"There was a lot of money going into these [targets] ... with no revenues, no cash flows and just a lot of promises," Regnarsson said in an interview. "Now it's about investing in cash-flowing activities."

'Probably gone too far'

Some 311 SPAC IPOs were completed globally in the first quarter of 2021, according to S&P Global Market Intelligence data, compared with just 138 in the whole of 2022.

At its height, the market received backing from stars in the worlds of sport and entertainment, including Shaquille O'Neal, Serena Williams and Jay-Z. For some, this attention was unwelcome.

"When you get rappers and celebrities sponsoring SPACs, it's probably gone too far," said Robin Duggan, executive director at European SPAC sponsor Climate Transition Capital, or CTC.

The market hype resulted in an oversupply of SPAC investors chasing a dwindling number of private-sector targets. SPACs typically have a two-year window to undergo a "deSPAC" — the process of finding and merging with a target. If they fail, the money raised at IPO is returned to investors and the SPAC is liquidated.

This time pressure meant some SPACs ended up merging with companies with different risk profiles than they set out to target, or in sectors outside of their original business plans.

The rate of investors selling their shares back to the SPACs — known as redemption — grew from about 10% during the 2021 peak to 99% in some cases, according to Alasdair Steele, corporate partner and head of equity capital markets at law firm CMS in London.

"People were taking all their money out, which kind of defeats the object of the SPAC," Steele said in an interview.

In a sign of the difficult market dynamics, some SPACs have been forced into liquidation months before their original expiry date, including certain vehicles that include energy among their target sectors.

Broadscale Acquisition Corp., which raised $345 million at IPO in February 2021, recently brought forward its termination date by two months. Meanwhile, Fortistar Sustainable Solutions Corp. undertook a similar move Dec. 2 after failing to invest the $225 million it raised, nearly two years on.

"For the serial SPAC-doers who've got the track record ... [liquidation is] probably going to be better for their reputations than doing the wrong deal," Steele said.

Fighting through the stigma

ClimateRock opted for a relatively small IPO — raising $78.8 million — to put "less pressure" on redemptions, according to Regnarsson. In October, the vehicle agreed to merge with E.E.W. Eco Energy World PLC, a solar farm developer in Europe and Asia with a project pipeline of more than 10 GW.

The companies expect to close the deal in the first half of 2023, overcoming a milestone that has tripped up certain SPACs in the past.

That includes GFJ ESG Acquisition I SE, a Luxembourg-listed blank-check company, which terminated its deal to merge with German smart home startup tado GmbH in September, eight months after signing a letter of intent. GFJ quickly found another target in energy technology platform Learnd Ltd., signing a business combination agreement in October.

GFJ is one of a growing number of European-listed SPACs, which account for just a fraction of the global total and are vastly outnumbered by U.S.-based SPACs. Since Jan. 1, 2021, the U.S. has seen 627 SPAC listings compared with just 61 in Europe, according to Market Intelligence data.

European SPAC sponsor CTC looked to the Euronext Amsterdam to list a SPAC vehicle, Climate Transition Capital Acquisition I BV, in June 2021, raising €190 million. According to CTC's Duggan, the supply-demand dynamic for SPACs in Europe is the "exact inverse" of the crowded U.S. market.

"You've got an undersupply of capital and an oversupply of good businesses that need capital," Duggan said in an interview. "We've never yet spoken to a company where they've had another SPAC talking to them."

CTC is still on the lookout for a target, focusing on opportunities in the decarbonization of energy, transport and heavy industry. During a shareholder meeting in June, Duggan said CTC has identified a database of over 400 investable companies and an active pipeline of 20 to 30 businesses.

Target companies are also apparently not scared off by the U.S. experience. "The closer you get to a real opportunity, the less of a problem the perception is," Duggan said.

While CTC's quest is complicated by the uncertain economic environment in Europe as a result of Russia's invasion of Ukraine, there are "strategic benefits" to being publicly listed, according to Executive Director Joris Rademakers. Executives are therefore determined to push on to prove that SPACs are viable funding models for energy transition businesses.

"If we can help get companies to the market earlier, we would have succeeded in our mission," Rademakers said in an interview. "Unfortunately, SPACs have got a bad name, but I'm happy to fight through that."

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