When global financial markets plummeted early in the COVID-19 pandemic, going public through a traditional IPO became a lot harder. So, investors—and companies looking to go public—leaned on special purpose acquisition companies (SPACs) in a big way.

SPACs have been around since the 1990s and the dot-com era, but the volume of SPAC IPOs, and the number of de-SPAC business combination transactions with their target companies, skyrocketed during the pandemic.

In 2019, 30 de-SPAC transactions—when the public SPAC and its target combined—came to fruition in the U.S. during 2019, according to the law firm White & Case, which has advised clients on hundreds of SPAC business combinations and IPOs. In 2020, that figure jumped to 99. Then, in 2021, the U.S. market nearly doubled with 196 de-SPAC deals.

Those combinations were fueled by billions of dollars of SPAC investment.

In 2020, 247 U.S.-listed SPAC IPO launched in 2020 — a 319% increase year-over-year from the 59 SPAC IPOs seen in 2019. SPAC IPOs ballooned to 612 in 2021.

The U.S. market was in the middle of a veritable SPAC boom.

De-SPAC Transactions Volume
The U.S. market saw a historic number of de-SPAC transactions during the pandemic, fueled by an uptick in SPAC IPOs. (Source: White & Case, Refinitiv data)

“Sometimes a SPAC can be viewed as a means of getting public when it may be a little more challenging to go public through a regular-way IPO,” said Joel Rubinstein, a partner at White & Case who has counseled clients on SPAC transactions since 2005.

“Certainly, when we had the SPAC boom in 2020 and 2021, earlier-stage companies were able to go out using SPAC vehicles in a way that they might not have been able to do had they tried to go the regular way,” he told Hart Energy.

SPAC vehicles are industry-agnostic, but the market saw a flurry of energy-focused SPAC activity during the boom.

A large number of those SPACs, and the target businesses they acquired, were focused on clean energy and the energy transition: electric vehicles, electrification, battery storage, renewable natural gas and other areas focused on reducing emissions.

Fewer of the business combinations have focused on oil and gas or oilfield service companies. That was the case early on in the SPAC boom, too.

So the question remains: Why did markets see more upside in early-stage technology plays and green energy—sometimes companies that haven’t generated a single dollar of profit—than cash-flow positive E&Ps?

“In a certain sense, if you’ve got a cash-flow positive, even traditional oil and gas company, that could be also something that would be good in today’s market,” Rubinstein said.

“The early stage companies where you’re trying to go out based on long-range projections—those are beyond difficult to try to get any money for these days,” he said. “The appetite for that has totally dried up.”

SPAC attack

There are a number of reasons companies chose to race down the SPAC track versus going through the highly regulated, traditional IPO process.

When working through an IPO, companies are required to make filings with the Securities and Exchange Commission that eventually become public.

“The market can tell when you’re about to launch your road show and how long that process has gone,” said Nick Dhesi, a partner at Latham & Watkins focused on M&A transactions, IPOs and other investment structures.

“Then, on the back-end of what, again, is a partially public process, that’s when you’re really setting a price and seeking to close your deal,” he said.

What the SPAC process offers to a company seeking to go public, or the target company, is essentially confidential price discovery. A SPAC and its target company can confidentially negotiate with potential counterparties and third-party investors to align around the underlying value of that target business—all before anything is filed with the public.

“You can figure out the value of your business and get people committed to finance it without having to say anything publicly,” Dhesi said.

One of the ways these confidential negotiations play out is through a private investment in a public equity (PIPE) vehicle, in which institutional investors agree to buy units at a certain price before the securities begin trading publicly.

“I think that was the allure to PIPE investors: to be able to invest at …that standardized $10 [per unit] price but based on a business that they expected to grow well beyond where that deal was priced—based on forward-year projections,” Dhesi said.

A SPAC’s combination with its target company is also more akin to a merger than a private company offering shares to go public.

When two parties evaluate a potential merger, they use a multiple projections and forward-looking information to determine what will change on a combined or standalone basis.

The same is true for SPAC deals: SPACs and their target companies can market a potential merger based on where they expect the combined business to be down the road, not based on current performance.

“It was really a rife environment for earlier-stage companies to be able to tap into that capital and go public when we were in the pandemic and there wasn’t a lot of capital floating around,” Dhesi said.

It was this discussion about public disclosures by SPACs—or, arguably, the lack thereof—that eventually helped bring the SPAC boom to its knees.

Last spring, the SEC proposed new regulations to strengthen disclosures in SPAC IPOs and merger transactions involving shell companies and private businesses.

The overhanging threat of federal intervention poured freezing water on a red-hot SPAC market. Deals stalled as accountants and legal advisers wrestled with determining what new information needed to disclosed.

The due diligence bar for SPAC deals had just been raised significantly, White & Case attorneys wrote at the time.

Souring appetites

The SPAC and de-SPAC deal drop-off was also prompted by the lackluster returns many of these transactions have generated for investors.

Near the apex of the SPAC fervor, the De-SPAC Index, a medley of high-profile de-SPAC’d stocks including companies like DraftKings, Virgin Galactic, QuantumScape and others, launched in May 2021.

But the de-SPAC exchange-traded fund had more than 77% of its value wiped out in less than two years, according to data from Yahoo Finance. The De-SPAC Index ultimately shut down and liquidated its assets in January 2023.

To a certain degree, investors stopped believing the lofty financial projections that SPACs and their target companies were pitching. Many investors that invested into a SPAC before finding a deal to target have pulled their money out once a deal was announced.

SPAC investors are generally given the opportunity to exit their investment by redeeming their shares—though the terms for warrant redemptions may vary greatly across the SPAC universe, the SEC notes.

When investors buy SPAC units, that bucket of money is held in trust for future use. When investors redeem their positions, the trust bucket gets smaller. And those buckets of cash have gotten a lot smaller over time.

The amount of capital held in trust fell from $200 billion at the top of the boom in 2021 to below $50 billion come 2023, according to data from SPAC Research, a data consultancy.

“Once that trend started, I think it really only accelerated,” Dhesi said.

“That’s what led to going from mid-2021, when redemption rates were around 1%, to really the opposite where you were in the high 90s for a lot of these deals that were getting done 12 to 18 months later,” he said.

Chasing green

Though investor interest in SPACs is much smaller than just two years ago, SPAC-related combinations continue to transact in the energy and power space.

Energy and power was the third-largest sector for de-SPAC deal volume and fourth-largest by deal value during the first half of 2023, according to White & Case’s latest analysis.

The sector continues to benefit from clean energy and low-carbon subsidies, including provisions passed under the Inflation Reduction Act last year.

In February, publicly traded Nubia Brand International Corp. announced plans to merge with Honeycomb Battery Co., a battery materials and components developer, in a deal valued at around $954 million.

Power & Digital Infrastructure Acquisition II Corp. unveiled plans to merge with Montana Technologies in a $618 million deal this summer. Montana Technologies develops energy-efficient HVAC and water technology systems.

And ESGEN Acquisition Corp. plans to merge with residential solar player Sunergy Renewables LLC in a $410 million announced this spring.

The three made up the top de-SPAC deals announced in the energy and power space so far this year, per White & Case.

Houston-based services and technology provider Nabors Industries sponsored a clean energy-focused SPAC, Nabors Energy Transition Corp., that plans to merge with Australian concentrated solar developer Vast Solar.

This summer, Nabors’ second energy transition SPAC, Nabors Energy Transition Corp. II, closed its IPO at $305 million.

Renewable natural gas producer Archaea Energy went public by merging with blank-check company Rice Acquisition Corp., led by former EQT Corp. director Daniel Rice, in 2021. Archaea was acquired by BP in a $4.1 billion acquisition that closed in December 2022.

The second Rice SPAC, Rice Acquisition Corp. II, completed a combination with NET Power in June. NET Power develops and licenses lower-emission power generation technology.

The oil and gas sector is seeing some SPAC action, albeit significantly less. Drilling Tools International went public through a merger with ROC Energy Acquisition Corp. this summer. DTI provides drill collars, stabilizers, crossover subs, wellbore conditioning tools, drill pipe and tubing in North American, European and the Middle Eastern markets.

Last year, private equity firm Grey Rock Investment Partners merged with a SPAC backed by former U.S. House Speaker Paul Ryan to form publicly traded Granite Ridge Resources. Granite Ridge owns interests in wells in the Permian Basin, the Eagle Ford, the Bakken, the Haynesville Shale and the Denver-Julesburg Basin, according to regulatory filings.

Earlier in the pandemic—in August 2020—Pure Acquisition Corp. merged with HighPeak Energy to form a publicly traded Midland Basin E&P.

Oil and gas interests used blank-check vehicles to go public even before the pandemic SPAC boom. Magnolia Oil & Gas was formed through the combination of publicly traded TPG Pace Energy Holdings Corp. and EnerVest’s South Texas division in 2018.

Falcon Minerals was formed through a 2018 SPAC merger between Osprey Energy Acquisition Corp. and Blackstone-backed Royal Resources. Last year, Desert Peak completed a $4.8 billion reverse merger with Falcon Minerals to form publicly traded Sitio Royalties Corp.

The past few years have seen SPACs blast off to the moon—and crash back down to earth. But as public markets make up losses from last year, and investors seek shareholder returns, the energy space see more SPAC deals on the horizon.

“The SPAC market is likely to be right behind the IPO market in the same way because there’s a backlog,” Rubinstein said. “There are a ton of companies have wanted to go public.The equity capital markets have essentially been closed for 18 months for regular-way IPOs, with only very limited exceptions.”

Amid a deluge of backlogged regular-way IPOs, the SPAC process offers companies an alternative to be able to go public more quickly, he said.