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EPISODE 276

Vinson & Elkins Partner Sarah Morgan Offers a Lawyer’s View of the Energy Transition

41 minutes · December 20, 2021

As we approach the end of 2021, some of the most notable SPAC mergers of the year focused on the energy transition, a hallmark of the globe’s long march to net-zero carbon emissions. Sarah Morgan, the head of Vinson & Elkins’ M&A and Capital Markets Group, visited the library to break down prospects for the 500+ SPACs that are still searching for a target before their trusts expire, with many hunting in the electric vehicle and energy transition space. Looking ahead to 2022, Sarah is setting her sights set on the regulatory and market trends that will shape next year.

Speaker 1:

From the library of the New York stock exchange at the corner of Wall and Broad streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs and harness the engine of capitalism, right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.

Josh:

As 2021 rolls into 2022 Wall Street is waiting for the other shoe to drop. I'm going to get to that, but have you ever wondered where that phrase actually comes from? The colloquialism, now frequently employed in the Twitter verse to explain the second part of a chain reaction has a direct connection to the New York Stock Exchange. At the dawn of the 20th century the exchange helped raise the capital to transform New York City from a port town into a global manufacturing and commerce metropolis, one that required skilled and unskilled labor alike. The need for workers and the subsequent influx of emigres into the island of Manhattan led to the rise of multi-dwelling buildings. These single family homes in increasingly high apartment buildings brought with it some interesting side effects. One of these was that these new buildings often stacked bedrooms on top of one another, so that each tenant would become intimately aware of the sounds coming from the upstairs neighbor, including when they dropped their shoe on the ground after a long day.

Josh:

That concussion soon followed with the sound of the other shoe dropping. The concrete and steel reinforced floors of skyscrapers that now house the banks, regulators, legal councils and exchanges that make up modern Wall Street, keep the sound of actual shoes from reverberating through the building, but there's another shoe to drop born out of the 222 billion dollars earmarked for a unique capital raising activity. It could potentially fund the transformation of the economy in the same way that those factories and tenement residents did so many years ago. The first shoe started dropping in 2019 when hundreds of special purpose acquisition companies or SPACs began listing on exchanges and raising capital to be held in trust.

Josh:

The second shoe is in the framework of the SPACs that gave their sponsors just two years to find a target and successfully DeSPAC or face the prospect of returning the raised funds back to the investors. As of this recording, 528 SPACs are actively searching for a company to bring public before the clock runs out. So friends, the clock is ticking and joining us today is Vinson and Elkins' partner, Sarah Morgan, to talk about what's going to happen when all those 2019 and 2020 SPACs run out of time, how SPACs may be the key to our nation's energy transition and the legal and regulatory framework that help drive the markets. Our conversation with Sarah Morgan is coming up right after this.

Speaker 3:

As the gold auction and also the LBMA gold price. It is the world's price for gold, particularly gold which is delivered in London. Four banks would travel to a room next to the Bank of England twice a day in order to run an auction verbally. And it worked like that for about a hundred years. When some of these firms moved out to Canary Wharf, they decided that actually it was too much to be sending people to the room. So they moved it to a phone call to buy and sell and establishing a price. IBA took over the auction in 2015, and we moved it to an electronic auction on the WebICE platform. So it's fully audited to proper electronic liquidity window or market. Buyers and sellers can come together. It's still run as an auction in rounds of 30 seconds. And the final price we use as the benchmark for the entire gold market. It's been extremely successful since we took over. Volumes have increased and they've pretty much more than doubled.

Speaker 3:

And we've actually nearly tripled the number of participants that we have as well. And we publish the data transparently on our website. So anyone can come and see what actually happened in the auction. And we introduced a centrally cleared model with ICE as the central counterparty, because that makes it much easier for new firms to join. It's up to 79% of the volume has gone cleared. This is kind of the pattern that ICE has seen through how different markets have developed, but normally that takes 10 years. Whereas actually it's taken 10 weeks in the auction.

Josh:

Our guest today, Sarah Morgan, is a partner at Vinson and Elkins and co-head of the firm's mergers and acquisitions and capital markets practice group. In this role she represents private companies, public companies, investment banks, management teams and private equity in all forms of capital raising transactions. Sarah's work has been recognized by Chambers USA and Legal 500 US. And she's been named a Texas Rising Star by Super Lawyers. She's also selected to be included in the BTI Client Service All Stars list. Welcome Sarah, Inside the ICE House.

Sarah:

Thank you so much for having me. It's a pleasure to be here.

Josh:

What brings you to Manhattan on this late week in December?

Sarah:

Well, other than visiting with you guys here, I had promised my four year old that we could come to the city for Christmas. So I'm taking her to Rockefeller Center and doing all the Christmas things in New York.

Josh:

What's been the highlight so far?

Sarah:

Well, we just got in yesterday, actually the highlight was your Christmas tree. So I told her that she was going to see the biggest Christmas tree she'd ever seen in her life, which of course I meant, Rockefeller Center. And she came in and saw the Christmas tree that you guys had outside. And she was, oh my gosh, mom is that it? And I was, well, there's a lot of big Christmas trees in New York. But she loved it. She just absolutely loved it.

Josh:

Ours, a 68 foot Norway spruce from Renton, Massachusetts. We always sort of have a little Christmas tree envy around November and December. We were comparing what Rockefeller had this year. They had to go all the way to Maryland to find a 79 foot tree. So we were beat out by 10 feet, but ours is still the oldest, continuously lit Christmas tree in all of New York City.

Sarah:

Well, it looks absolutely fabulous. So we did that and took a picture of her with the fearless girl statue as well.

Josh:

And that again is a highlight and sends a really important message. So four years old, maybe too young to appreciate what fearless girl's message is. But what do you think when you watch her standing next to that bronze statue?

Sarah:

I don't know. She's already pretty fearless. Over the decades that I've been in the legal practice, first of all, there were tons of people that paved the way for me and I never felt any real constraint on my growth or my practice just from being a female. I felt like I had every opportunity available to me and I think that that's even more true for her and her generation. I'm not even sure it will dawn on them that at some point was a real constraint for people. It's very exciting.

Josh:

So I gather Sarah that this is not your first visit to this venerable building.

Sarah:

No, but it's always the best to come here. I've been here for a few bell ringing ceremonies, most recently for Nerdy, for a DeSPAC transaction with one of TPG's SPACs. And it was fantastic. Always fantastic to visit you guys.

Josh:

We had a great event with the Nerdy SPAC merger celebration. We've talked to founders and investors from seed to late stage, and also regulators on all the work they do, but we have never had an outside council talking about that process. How much time does the process take and what's the experience like?

Sarah:

From start to finish, the answer has actually changed over the last year or so. A year or so ago I would've told you that it's slightly faster than a regular way IPO process. That may have changed a little bit in the last year for a couple reasons which we'll get into, but I think you could still, if you're approaching everything quickly, you could probably still get done within six to eight months for a deSPAC from signing LOI to closing the deal. But there's been a couple of things that have slowed it down a little bit in the last year. One is just the market's gotten choppier. It takes more time to get your pipe raise and that slows you down on the front end. And then on the back end, the SEC is digging and more... Well, first of all, they're completely overloaded. So they are taking longer to turn around things, which is a little frustrating, but also they're just, they're digging in on disclosures, more focusing more on points. And so it's taking a little bit longer to clear the SEC than it has historically.

Josh:

Unpack how it actually works, from the origination of the SPAC process, guy like me walks into the office of Vinson and Elkins and says, Sarah, I want to launch a SPAC. What do I do?

Sarah:

So we actually, we have quite a large SPAC group and we do everything from the SPAC IPO, either issue our underwriter side to the deSPAC transaction. We represent both SPACs and the target companies. So, and I'm going to separate those two so that the SPAC IPO can actually get done incredibly fast if there's not some brand new SEC accounting issue, which we'll talk about in a second. But SPAC IPOs, if the market is receptive, can get done in eight to 10 weeks and there's not a huge amount of work there.

Sarah:

Most of the work there is actually on the formulating what your target industry and getting that message out to investors. There's not a huge amount of work to be done on the legal side. There's been some innovation and terms over the last couple years and things change, depending on the market. So there's always some work to be done around that. But the SPAC IPO is not what I would call the most time intensive part of the process. It's really the deSPAC, the business combination with the target. And that's the one I that I was referring to that takes six to eight months.

Josh:

Any kind of IPO, especially when the company holds big event here on the trading floor, like Nerdy, are some of the most enjoyable days to work here. Do you find yourself, in your role, getting caught up in the excitement of the listing day, or is it just with you and your colleagues at Vinson and Elkins, a sense of relief when the deal goes off without a hitch?

Sarah:

It's both. First of all, with a deSPAC combination... Again, of course, with a regular way IPO, you always have the question of pricing, how is this going to price? The proceeds, but then you have the exact same question with a DeSPAC combination, because there's always the possibility that the SPAC holders can redeem. So you don't know how successful your transaction is going to be until the very end. We pay close attention to that and do everything that we can to help facilitate a successful and quick transaction. It's interesting because with a deSPAC they have all of that time to really prepare to be the public company. They've been talking to investors for usually three to four months from the signing of the deSPAC to the actual closing. So by the time that we close, the management team is pretty sharp and has a well worn statement to investors that they've polished over time. So in that respect, I think they get a little bit more practice and a little bit more runway on talking with investors than you would in a normal IPO process.

Josh:

Bring me into your office. Talk to me about your shelf of deal toys, and which stands out to you as sort of the most treasured items based on either the amount of work headaches or triumph that it represented.

Sarah:

I've done several deSPAC transactions. I think that two that I most recently completed, the Navitas Semiconductor transaction and the Nerdy transaction, which is an online tutoring company, are near and dear to my heart. Again, because I spent most of this year working on those. And they were both very, very successful transactions in terms of not as many redemptions as the market was bearing at the time. They've both done reasonably well. And so I think those were both really exciting and it was fun to work on something that was different, online tutoring company and then the Navitas semiconductor's near and dear to my heart because they do have an energy transition story that they're going to be a big part of powering solar and everything else, which is very connected to everything else we're doing. So both of those were great, really successful transactions, great sponsors, TPG and Live Oak are both very good sponsors.

Josh:

In that vein, and we're going to talk about the energy transition a lot more in just a couple minutes, but talking about that ticking clock that I mentioned in the introduction, 133 billion dollars in trust set to expire in the coming months. Are the conversations happening now, in either the client or the regulatory side to change the framework to allow some of these funds to roll over?

Sarah:

So they can extend, they just have to pay for it. Right? It's possible to extend the life of the SPAC by having a charter amendment. But there's two consequences of that. Usually people have the opportunity to redeem their funds at the charter extension and you typically have to pay a fee per month to extend it. So people would like to avoid that. But the buildup that you mentioned is very, very real. When we had looked at similar numbers to yours over 500 SPACs hunting, and based on the current slowdown in the pipe market, particularly beginning of this year, almost every deSPAC transaction that got signed. So there's several transactions packed in there. Right? There's the business combination agreement that's between the SPAC and the SPAC target. And that's just the agreement between them with respect to the transaction. But almost every SPAC had a third party, private placement raised alongside of it, which we call a pipe that fulfilled sort of two functions. Right?

Sarah:

The first was because of the redemption feature of the SPAC, where the SPAC holders have the ability at the end of the business combination to say, Hey, I'd rather have my money back than have shares of your stock. It's truly conditional capital. SPAC is conditional capital. You could absolutely... There's a few examples of SPACs where there's been almost a hundred percent redemptions. And so to provide target, better certainty of the capital that they need to achieve the growth forecast that they've predicted, you want certain capital. And the pipe has typically provided that layer of certain capital. So it's equity that's committed no matter what to the deSPAC transaction, provided conditions are met. And so that's sort of reason one for it. And then reason number two is, it's smart, third party, institutional capital validating your valuation. Right? That it's saying, Hey, we think this is a good price for this business.

Sarah:

We're going to buy in at 10 dollars a share too, just like you, the public. That's very important again for the marketing of the SPAC. And people would make sure that they had pipe investors, really well known investors that they could tout in their investor presentation, because it's a big part of marketing it to say, Hey, these guys think this is a good idea too. So getting back to your question of the hunting SPACs and the amount of time that they have and whether they can find any more time. You really have a simple math problem here. We did a survey of the average remaining time of the SPACs is 14.4 months. And then again, because of the pipe process that I mentioned and that it's slower in the pipe market now, more challenged and it's taking longer.

Sarah:

There aren't as many deals getting announced per month as there were sort of first quarter of this year. And so if you took the average deal closings per month and applied it across all the SPACs hunting, it would take 32 months to clear all of the existing pre-deal SPACs. Well, that's a problem when your average remaining time is 14.4 months. Right? And compounding that problem is the SPAC IPO market now is demanding a shorter term. Right? It used to almost be unequivocally two years for a SPAC to find its target. And now a lot of SPAC IPOs are getting done with 15 month terms and 18 month terms.

Sarah:

So it's creating this kind of colossal bulge of SPACs. I do think it's probably fair to say that a fair number of those are not going to find targets. I think that the ones with well established sponsors, the ones that have kind of unique stories, they're still a ton of deals that are going to get done, but not all 533 or whatever your current number was, are probably going to get a deal done in that period. And not all of them are probably going to keep extending to get deals done. So it's going to be a super interesting 2022 for SPAC land.

Josh:

Bring me back a little bit in time, a couple years ago to the firm. When did you realize that SPACs would become something that you and your team would really need to understand and make a business effort?

Sarah:

Oh, I would love to tell you that it's a creature of my brilliance, knowing that there was a massive SPAC wave coming. We really got drawn into it by our private equity clients, probably five or six years ago. One of my private equity clients that I represented, the target ended up doing a deal with a SPAC. And then we had a few private equity clients that said, Hey, we want to sponsor SPACs. So we had a team and we have a very large M and A and capital markets group, over 200 attorneys. So we had a team of capital markets lawyers, including myself who were, Hey, we're going to go figure this out. So we did. And we spent a lot of time on it and we wrote a primer and dug in to make sure that we did a good job for those clients that were asking for it.

Sarah:

And then over the last four years it's been... It's been a part of my practice, but not as large as sort of normal way IPOs. It's probably done one or two deSPACs a year. We've done a few SPAC IPOs per year, which was par for the course for what the SPAC market was prior to 2020. And then in 2020 it just exploded. And if you were lucky enough to be a law firm with a group of people who had significant experience in this space, which we were, and I'm going to go ahead and call it luck and not foresight or anything, then your practice exploded too. And so it went from being probably 10 to 15% of my practice to something more like 75% this year. So it's been a wild year. I'm kind of tired.

Sarah:

And just to give you some scope of the numbers that we're talking about, so I'm looking at this graph and there was a hundred billion dollars raised in just Q1 of 2021 on SPAC IPOs. The amount of money that was raised from 2017 to 2019 total was 10 billion in SPAC IPOs. The product exploded and it's been through a number of changes and there's been a lot of innovations. We'll see if any... Some of them stick. I don't think it's going away. I don't think that we're ever going to see anything like the back half of 2020 and the first half of 2021 again. Frankly because it's unsustainable for all the reasons that I just explained. The math problem I just explained.

Josh:

The math problem is one reason why it's kind of unsustainable.

Sarah:

Yeah.

Josh:

And this is less of an issue during the tenure of Jay Clayton, but much more so as we've now got into the SEC under Gary Gensler. Every utterance by the SEC chairman could upend or throw a curve ball at the SPAC empire. Define that both either exciting or kind of nerve wracking to be advising clients in a process that's operating in a constantly involving regulatory environment with not a whole lot of legal precedent.

Sarah:

Well, I think the SEC has made a lot of statements and then they've done things on the accounting side, sort of changed decades long positions with respect to SPAC accounting that I don't think has fundamentally changed the way people think about SPACs or that frankly anything that investors care about. It just sort of produced delays. But they are rightfully very focused on disclosure and conflicts and concerned about disclosure and diligence around forecasts. I don't think that any of the statements that they've made this year have fundamentally changed the way that our clients have approached deSPAC transactions, because our clients have always been very, very careful and very, very diligent in the manner in which they approach them in the diligence process and diligence in the forecast and unpacking the assumptions and making sure that they're unpacking them for investors and making sure that any conflicts are vetted or fully disclosed to investors in the proxy.

Sarah:

I think a lot of good sponsors have always done that. And now the SEC is forcing it and making sure that everyone's doing it. This summer they came up with kind of this list of 20 questions that they issued to every SPAC, regardless of whether they were in the process. And it really was focused on that. Just making sure that people are making things abundantly clear to investors and really, really disclosing any conflicts and all of the... Being very specific about the interest of the sponsor and the transaction and how it might, in certain ways, it may not be completely aligned with the average common stock investor.

Josh:

So Sarah, SPACs are just a part of your purview at Vinson and Elkins, and we're going to get into the specific of some of your focus areas in the second half of our conversation, but can you explain the role that your practice plays in overall capital markets.

Sarah:

We have a very large M and A and capital markets group, and that's just how we're organized. And under the umbrella of that is actually several sub-practices. There's private equity, there's fund formation, there's capital markets, there's corporate governance, there's ESG. We have a large shareholder activism group in New York, huge M and A, great private M and A, public M and A. And so all of that sits under M and A and capital markets. And in particular, we have a large capital markets team that works across the office, and that's kind of the half of M and A capital markets that I'm more focused on. My other co-head is more just on the M and A side. And I'd say the vast majority of our work that comes through that group is either coming through from private equity or is coming through from our public company, client base, and then other funds. As we look forward to 2022, we, like several other law firms, had a completely insane 2021.

Sarah:

It was very, very robust year, both in the M and A side and the capital markets side. And we don't expect a significant amount of slowdown in 2022. But if you ask me what I'm really, really excited about, it's really energy transition. I think that decarbonization is the next mega trend. It's like the digitization of everything. The decarbonization of everything is the next mega trend. And it's here. I think there's alignment across governments, across individuals, across corporates, across institutions. And we're right in the middle of all of that. So that's something that I'm super, super excited about that I'm sure we'll talk more about later. We have a large digital infrastructure practice and the infrastructure bill, the boost there is great. We're super excited about that. And then shareholder activism. For better or for worse, people were emboldened by the 2021 proxy season. And so we're going to see some crazy ESG activism this year, and we have a great group for that. So we're super excited about those things and just a very busy 2022.

Josh:

As we look forward to 2022, let's dive a little bit back into the beginning of your career. You've been with a firm for many, many years. And in 2013 you were the youngest woman ever to be named partnered in the firm's now hundred year history, as you shared with me. What initially sparked your interest in the law?

Sarah:

When I was in college I knew that I wanted to be involved in transactions, doing deals that...

Josh:

Where were you in college?

Sarah:

Rice University in Houston, Texas. I loved reading deal sheet even back in the day, which says a lot.

Josh:

[crosstalk 00:22:55] nerdy, but.

Sarah:

Oh, I'm super nerdy, super nerdy. And I thought I was going to be an investment banker. So I had a couple of friends do summer interns at investment banks. And they were, oh, we worked 90 hours a week. And I was, well, that sounds awful. And then I was, well, I'll do the legal side of this. It'll be a lot of attention to detail. And I was, this is interesting to me. I'd like to go to law school. Anyway, it's a long running joke between me and my husband, who was a career investment banker.

Sarah:

And he's, you worked so much harder than I ever did as a transactional attorney versus an investment banker. I knew, going into law school, that I was going to be a transactional lawyer and that I wasn't going to be a litigator. I was very lucky because University of Virginia is geared towards transactional work. They have a business in the law program and I took every class that was in that. That was really the start of it. And then I came to V and E in Houston, again, because of the Rice connection and they had the largest, most prominent corporate group in Texas at that time. And I was, well, that's where I want to be. I want to be doing the biggest, largest, most high profile deals. I'm very pleased to say that we still have one of the highest market shares in Texas for both M and A and capital markets work. So the firm has definitely held up well through the couple of decades that I've been there.

Josh:

I got a chance to see your mom and dad who came with you to the exchange and are on this trip with you and your daughter to New York at the end of 2021. Curious, did their influence sort of steer you toward what ultimately would've been this investment banking career that you thought about at Rice or eventually this law career?

Sarah:

So I grew up in the panhandle of Florida. Right? So the Redneck Riviera, very small agricultural community, great place, Mariana, Florida kind of where Alabama, Georgia and Florida come together. But my dad was actually a farmer for most of my childhood but our family have varying business interests and he was definitely very interested in that and involved in that. And then he did kind of a reverse Green Acres and sold the farm when I went to college and became a banker. And so he's always had a lot of interest in business and we've talked about it. And then I would come to him with ideas in college and he would tell me why they weren't safe investments or why they didn't make sense. So I think he definitely shaped a lot of my interest in the transactional world.

Josh:

You made your way to Rice and Houston and you know everything is bigger in Texas, especially when considering the actual state and its population, but also its economic impact is often overlooked. We had Jerry Jones on this podcast just before the pandemic and got a Texas size earful from him about the future of the natural gas market, which has since seemed prophetic. But since we're recording this at the New York Stock Exchange, I'll use a stat that my colleague Chris Taylor uses all the time and he says Texas has more listed companies than any other state in the nation, including New York. And economists predict about five and a half percent growth of GDP across the country. But what would you say from your vantage point at Vinson and Elkins in Texas is the state of the state's economy?

Sarah:

I think it's booming. Right? Texas is 9% of the GDP. Second only to California, according to the Federal Reserve. And that's huge. Right? And I think it's only going to grow. Again, there's a very hospitable business environment there. We want businesses to come to Texas. There's no income tax. There's a lot of incentives for companies to settle there and then it has and will remain the energy capital of the world. That's in the energy transition world too. And they're doing everything as a state to make sure that there's climate tech incubators, and that there's going to be jobs in that. We have one of the highest growth rates in renewables of any state in the country. And so I think Texas is very focused on bringing tech to Austin, keeping energy and just driving economic growth. And we see a ton of that in our new client base, that there's just companies that are forming there all the time. So it's a very exciting place to be.

Josh:

Was this always the case or have you seen that evolving over the past couple years? How is Texas poised to handle the transition from the oil and gas that Jerry Jones talked about that built the state into an economic powerhouse to really the carbon zero path?

Sarah:

Well, I think that there was a little tough love from 2014 to the downturn that lasted through 2020, but it did really force the state and companies and the Texas economy to focus on, okay, what's next? What's our story? How are we going to pivot? And look oil and gas isn't going away. Right? Any model that you look at, it's a critical part of the energy transition. It may decrease as a percentage of the energy mix over time, but the total amount of energy is expected to grow. So I don't think that those jobs or those companies are going away, but the state and everything in it, including our firm, is very focused on the energy transition and its role in it. And I think that everywhere from government to private capital is super focused on that, on supporting that and supporting traditional energy's role in that.

Josh:

After the break Vinson and Elkins partner, Sarah Morgan and I discuss the markets and regulatory framework for driving that energy transition and her outlook for the M and A space in the coming year. That's all coming up right after this.

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Josh:

Welcome back. Before the break Vinson and Elkins partner, Sarah Morgan and I were discussing her career development and the state of the SPAC industry. So Sarah, on a recent episode, I think you've heard it, Mark Carney explained this hard math that supported the COP 26 announcement of 130 trillion in climate pledges to get the globe to net zero. The number is close to some of the numbers that we've highlighted and you've highlighted in your own writing to accomplish the goal of the Paris Accord. For scale, the total market cap of NYSE listed companies is 30 trillion. Where will all the funding come from?

Sarah:

That's a very good question, because it's a ton of money. I mean just a massive amount of capital, but we're seeing it now. Right? We're seeing over the last few years, and particularly this year, a number of growth, private equity funds raised around this traditional infrastructure, institutional money raised around this, venture capital raised around this. Even you'll see within traditional energy companies, they all have their own sort of venture labs and everything there. And then the government's going to play a huge role. And so I think that it's a very ambitious number. It's a very ambitious amount of money. I think that there's going to be a diversified source of that. And ultimately the public. That the capital markets are going to play a huge role in this. And we see this in the increased amount of ESG and sustainable investment funds that are being raised and that money is all going to have to find a home.

Josh:

Many of the companies that are coming to market to drive the clean energy transition are some of these SPAC combinations that we've been talking about. Electric vehicles have been especially fertile grounds for deSPACing. Why do you think that SPACs are such a crucial and attractive way to fund reducing carbon?

Sarah:

Well, I think it's a couple of things and I think we did our calculation and 20% of the deSPACs that have happened in the last year have been broadly energy transition. A lot of, as you point out, in the electric vehicle and charging infrastructure space, I think one of the things that's so attractive to those kinds of companies, is those tend to be, at this point in time, more early stage high growth companies, they really want to be valued on *further out, forecasted EBITDA or revenue. And the SPAC structure allows you to disclose, in fact, requires you to disclose the forecast that the board relied upon and your proxy materials. So you're better able to get the forecast out there to your investors and explain what you believe the growth trajectory is, than you are in a traditional IPO process where typically the underwriters would say, Hey, we don't really want to take liability on a forecast.

Sarah:

So we're only going to let you say limited things about the specifics of your growth. So I think that's one thing. And then I just think the nature of the sponsors that are coming into the SPAC space. A lot of it is people that are credentialed in this area and they have that as a target industry. They see the same thing. Right? That there's huge growth here. And one of the things about SPACs is they tend to look for areas that have huge total addressable markets. I would venture to say, there's not going to be many larger total addressable markets in some of these areas in energy transition. Exactly for the reason that you just said, the very, very ambitious net zero goals that policy makers have set and the amount of money that has to be spent to achieve those goals.

Josh:

Speaking of policy makers, what role do you think the government should play in sort of greasing the skids to help renewable and net zero energy industries get off the ground on the path toward profitability?

Sarah:

I think that it is appropriate for them to have incentives. I very much hope that the Build Back better Act gets passed. I think there's a lot of powerful incentives towards decarbonization there. It's effective. Right? They've had incentives for solar and wind energy for a long, long time. They've had tax credits and it's finally reaching cost parity. Right? It has worked, the technology has caught up. So I think that's going to be a very important part of this. Right? To incentivize companies to invest in this.

Sarah:

You're going to have to show them a path to profitability. And that's part of the role that the government's playing here to support this. And they're also supporting it with their buying power. Right? The electrification of the government fleet and things like that. So I do think that you have more buy-in across the board, not just in the US, but from other governments that they are going to have to do something and they're setting policy accordingly. And that creates a more stable environment for investment. Right? That people think, okay, they're serious about this. They're not going to yank away our tax credits or they're not going to do something to change this. And that makes it more investible.

Josh:

2022 is going to be a critical midterm election year, potentially impacting how the Build Back Better Act will be passed. And the infrastructure act is going to be implemented. How are you advising clients who depend on government subsidy support or partnership?

Sarah:

I do not, as a matter of course, try and predict elections. Look, I think that hopefully the Build Back Better Act has enough momentum to get past maybe even before the end of the year. And there's a lot of things in there, at least on the energy transition side that I think there's a lot of consensus around. I think there's other parts of it that are more controversial between the two parties. But I think that until something is passed, people have to have... Plan for their base cases to be living without those incentives.

Sarah:

And it has to be investible on that basis. And I think there's a lot of other things that provide momentum that some of these energy transition companies are still going to look at this and say, this is a safe, good bet because there's state level incentives that are happening everywhere. States are adopting this. I think that on the regulatory side that the restrictions on emissions are only going to get tougher. And then just the cost of capital for those companies relative to other companies is pretty low right now. But I do think government plays a critical part of this. It certainly would be a huge boost to get the Build Back Better Act passed, and we'll see what happens.

Josh:

What do you think, in your mind, is the number one change that should or needs to happen, either from a regulatory, legislative or government spending perspective to unlock the value of the transition energy economy and really begin to tap into the valuations needed to fund a complete carbon neutral future?

Sarah:

So it's interesting that you say, what is the one change? I am an all of the above person. The first time that I really dug into climate change stuff I was lucky enough to go to the World Economic Forum at Davos with my husband a few years ago. And it was all about climate change. And there was someone presenting on the Princeton Wedge Theory that there's these 15 different paths to reducing emissions. And you could play this game to kind of decide which was the best one. And what should you focus on? And most people that played the game realized afterwards, actually you need them all. You need all of these technologies. You still need to switch coal to natural gas. Right?

Sarah:

You need carbon capture for existing emissions. So to me, I think that what the current administration is doing and what capital is doing and providing a path for multiple different technologies and being reasonable about the amount of traditional energy that we're going to need to make it through the energy transition truly is the best path. Right? Because there's not going to be one silver bullet. You need all of the above. And so providing support, legislative support and capital to all of the above, I think is going to be the quickest path to net zero.

Josh:

As we wrap up Sarah, we've been focusing on just one type of merger for most of the conversation, but you recently spoke on a financial times panel about your broader mergers and acquisitions outlook. What are you seeing both in the SPAC and traditional M and A activity as the markets continue to navigate the pandemic and the regulatory environment?

Sarah:

Well, so if you tell me what happens with inflation and interest rates, I'll tell you what happens with the M and A market. Look, despite the uncertainties on where inflation goes, and I think people have greater, certainly around interest rates right, now than they did when I spoke on that panel. I think it's going to be a very robust year. I think there's still a lot of momentum, a lot of dry powder out there. It almost has to be a robust year for SPACs because the number of SPACs out there hunting and the incentives that they have to find targets, but we're seeing still a huge amount of M and A just on the private equity side and sort of the public market side. I think it's going to be very active.

Sarah:

There's very high valuations right now, both on the private and public market. And as long as that continues and as long as there's liquidity, we're going to see a ton of M and A. Now, the government may do their best to slow that down a little bit. The FTC may pump the brakes. There's obviously a new regime in town and they are asking more questions and they got rid of early termination. And so it may take you longer to get your deal done to get through HSR, but I don't think that's going to slow down the pace of deals.

Josh:

The creation of more public companies has been written about. Corrie Driebusch did a big piece in the Wall Street Journal a couple weeks ago. We've been talking so far in our conversation, mostly about mergers and acquisitions, but there's another contribution to more companies, which is when a company divides itself and does a divestiture. Headline grabbing developments announced with Johnson and Johnson, General Electric, which are NYSC ticker symbols, J and J and GE respectively, really planning to break up their businesses. Do you believe this is part of a trend of two well known companies or is that skewing our perspective?

Sarah:

I think in terms of spinoffs, I don't know that we see momentum for a disproportionate number. I think there's always a certain number of spinoffs per year. I think there's some interesting questions that we're seeing in kind of the energy patch where you have two disparate halves of something and one company you're like, well, will you get a better valuation if you spinoff the green half and leave the traditional half over here? But I don't know that we've seen a broad trend towards more spinoffs. Now, if you have, obviously that's a huge end goal of shareholder activists sometimes. So I think if you have more shareholder activism around that, you may have more talk. I don't know that it's necessarily going to ultimately result in more spinoff companies. Do you think... Traditional IPOs had a banner year in 2021 and as far as we can see, based on activity in our shop are going to have a huge year in 2022 as well.

Josh:

What are you most looking forward to working on next year?

Sarah:

I have probably four or five energy transition IPOs that I'm mandated on now that I'm super excited. Can't talk a ton about them, but they're all different. So I'm excited to see how those go, to see those companies take the traditional IPO route versus the SPAC route.

Josh:

Without naming any of those, what kinds of technologies are you just finding personally very exciting?

Sarah:

Well hydrogen, again, because of the role that I think it's going to play in storage and fuel in the future, I think is very, very exciting. It's very early stage. And then again, the electrification of everything and everything that comes along with that, both from the power side, more renewables, wind and solar, and then because of that, and you have this intermittent energy, you need more storage. And so we're working with a bunch of storage companies and then all of this again requires more transmission and grid reliance. So it's a virtuous cycle that feeds on itself and it requires all of these components and we're active in all of those verticals. So it's really exciting to kind of work on all of these and see the interconnectivity between them too.

Josh:

And we certainly need a strong grid to power the lights on the Rockefeller Center and the New York Stock Exchange Christmas trees. So with that, I'll let you get back to your daughter and your folks and enjoy the rest of your visit to Manhattan. Thanks so much for spending some time with us and talking about your business and your work and what's to come. It's been incredibly illuminating.

Sarah:

Oh, well thank you so much. It's been a pleasure to be here.

Josh:

Well, that's our conversation for this week. Our guest was Sarah Morgan, partner at Vinson and Elkins and co-head of the firm's mergers and acquisitions and capital markets practice group. If you like what you heard, please rate us on iTunes so other folks know where to find us and if you've got a comment or question you'd like one of our experts to tackle on a future show, email us at [email protected] who tweet at us @icehousepodcast. Our show is produced by Pete Asch with production assistance from Stephan Capriles and Ken Abel. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.

Speaker 1:

Information contained in this podcast was obtained in part from publicly sources and not independently verified. Neither ICE nor its affiliates, make any representations or warranties, express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.

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Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice.