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In the frothy EV sector, companies focused on parcel-delivery vans have a stronger business case than most

When you think of electric vehicles, you might think first of a Tesla. But a more financially rewarding use of the technology that is upending the automotive industry could be the vans that deliver your online shopping.

Until recently, such unassuming vehicles occupied an easily ignored niche within the multitrillion-dollar automotive industry. That is changing fast. This week, privately held Rivian Automotive raised $2.65 billion at a $27.6 billion valuation to fund its rollout of EVs, including a delivery vehicle for e-commerce giant Amazon.com, which holds a stake in the startup. Last week, General Motors said it was creating a new company, BrightDrop, to focus on selling EVs to the delivery market. It expects to ship 500 units to its launch partner, FedEx, FDX 0.79% later this year.

Startups are rushing into the space, in some cases armed with cheap capital from an ebullient stock market. California startup Canoo GOEV -1.38% went public in December with a plan to focus squarely on so-called last-mile delivery—getting goods to your door. Arrival, a British startup that has received funding and a big order from United Parcel Service, plans to follow suit later this quarter.

Electric vans are at the confluence of two big trends. One is the rise of e-commerce at the expense of bricks-and-mortar retail, to which the Covid-19 pandemic has given a boost. E-commerce accounted for 21% of U.S. retail sales last year, a big jump from 15.8% in 2019, according to consulting firm Digital Commerce 360. Vans are shovels in this gold rush.

In 2019, U.S. fleet sales of vans rose 19%, their best performance in years, according to research firm J.D. Power. Last year they fell back 21% as florists, pet-grooming businesses and the like delayed purchases during the pandemic. But van sales held up much better than the wider fleet market, thanks to the growth of the delivery business.

The other trend is vehicle electrification. The likes of UPS, DHL and FedEx have all committed to reducing their carbon emissions and need electric delivery trucks to do it. So has Amazon, which ordered 100,000 electric vans from Rivian, the first of them due later this year.

There is financial logic here in addition to environmentalism. Delivery vehicles lend themselves to EV technology in ways passenger vehicles don’t.

Logistics operators and small contractors are focused on careful cost calculations, including over the lifetime of their vehicles. That increases the attractions of EVs, which tend to have low running and maintenance expenses. Both Arrival and Canoo claim that their vehicles, when production versions are launched in 2022 and 2023 respectively, will offer cost savings relative to internal-combustion equivalents.

One reason such calculations are possible is that vans don’t typically need the long driving ranges required of passenger cars. The race to make affordable electric cars is hamstrung by the expense of batteries big enough to assuage consumers’ reasonable desire to head off for a weekend without worrying about running out of juice. By contrast, vans are often driven around cities for predictable distances and can be recharged overnight at depots. Fleet owners are much less likely than consumers to buy vehicles with batteries bigger than they need.

Another advantage of EVs, as Tesla has shown, is the facility with which software can be integrated into their overwhelmingly electronic systems. Unlike Tesla fans, van owners stand to benefit financially from this advantage. Logistics is a data business. The more tools for cost-efficient routing, driving, loading and the like that manufactures can offer fleet owners, the more business they will attract. Startups claim they have an edge in attracting software developers, but scale and safety-conscious integration with hardware—skills Detroit may prove better at—will also be key.

Ford has by far the most to lose in this market. It sells almost half of all vans in the U.S., and is also the largest player in Europe. It hopes to have an all-electric version of its benchmark Transit cargo van in showrooms at the end of this year.

GM’s relative weakness means it can play the disrupter with BrightDrop, which is being run as a stand-alone business by an external hire from the venture-capital industry. The arrangement hints that BrightDrop could be partially spun out of GM to take advantage of investors’ insatiable appetite for new automotive technology. This strategy has worked nicely with GM’s driverless-car operation Cruise. The unit raised another $2 billion this week at a $30 billion valuation, including from Microsoft, sending GM stock to a postbankruptcy record.

Lithium-ion batteries aren’t powerful enough to serve heavy trucks, or yet cheap enough to make long-range passenger EVs cost-competitive with gas-driven ones. But vans could be a sweet spot for a financially rational rollout of the new technology in the coming years. In a sector where valuations are often hard to justify, companies focused on local logistics may be best placed to deliver.

Interest in taking clean technology companies public surged after a decade when few such companies reached public markets

Clean technology startups have become a hot commodity on the public markets as special-purpose acquisition companies flush with cash hunt for targets.

The trend is likely to draw more venture investors to clean technology, after a decade when few such companies backed by venture capital went public.

“The venture industry moves toward returns,” said Dan Oros, partner at G2VP, a venture firm focused on sustainable industrial technology that spun out of the Kleiner Perkins Green Growth Fund and has had three companies that agreed to merge with SPACs in recent months. “If investors start making huge returns in [electric vehicle] companies, battery companies…industrial-tech companies, then they will invest in those things.”

At the same time, some VCs worry that early-stage companies with capital intensive business models in industries where market conditions are hard to predict, such as energy, won’t meet the expectations of public markets. That could have negative implications for earlier-stage startups, investors say.

Some 30 companies in the sustainability, environment, energy and advanced transportation sectors, several of them backed by venture investors, announced mergers with SPACs in 2020, according to Nomura Greentech, a division of investment bank Nomura Securities International Inc.

About $14.3 billion was due to be invested through SPAC and related transactions into such ESG companies, according to Nomura Greentech. ESG companies focus on the environment, social good or corporate governance.

Roughly half of the SPAC mergers in the broader ESG category were specifically focused on the electric-vehicle market.

Pavel Molchanov, director and equity research analyst at investment bank Raymond James & Associates, cites a single reason for the sector’s attraction.

“It’s one word: Tesla,” according to Mr. Molchanov, who says Tesla Motors Inc.’s success is inspiring both entrepreneurs and investors.

About 30 more SPACs that raised $9 billion in capital were still looking for clean technology acquisition targets as of the end of the year, according to Nomura Greentech.

SPACs are solving two problems for clean technology venture investors and startups—providing a clearer path to an exit and offering scale-up funding for capital-intensive businesses. In that way, SPACs are decreasing the risk of investing in earlier stage startups, Mr. Oros said.

“That’s the difference in investing in this space today versus investing in 2005 as a venture capitalist. You can now see that there are public-market investors to put the scale capital behind it,” said Jeff McDermott, head of Nomura Greentech. Nomura Greentech had a record year by revenue and deals primarily because of the SPAC deals it facilitated, Mr. McDermott said.

One of the most recent SPAC deals for a venture-backed startup was the planned acquisition of electric-bus company Proterra by ArcLight Clean Transition Corp. , in January. The deal allows the company, backed by G2VP and other venture investors, to raise more than $600 million, and gives it an enterprise value of about $1.6 billion.

Last year, G2VP’s portfolio company Luminar Technologies Inc., provider of sensors for autonomous vehicles, merged with a SPAC then listed on public markets. Luminar’s market capitalization was roughly $7 billion in mid-January, rising from the deal at an equity value of $3.4 billion.

Historically such companies have had difficulty in going public. Just a handful of venture-backed clean tech companies that went public in the past decade, such as Sunrun Inc., and Enphase Energy Inc., reached market caps of $1 billion or more.

Venture-backed companies in the clean technology sector that announced SPAC mergers include greenhouse-farming startup AppHarvest Inc., backed by firms including Revolution Ventures. Energy-storage company Stem Inc., backed by Activate Capital Partners and others, is expected to have an enterprise value of $1.35 billion upon completion of its SPAC deal.

Today’s public investors are eager to buy into clean technology startups, Mr. McDermott said, because technology costs are coming down, government policies are favorable, and ESG strategies and mandates, especially around reducing carbon emissions, have gained traction. Investors believe, Mr. McDermott said, that trends such as a move to renewable energy and electric cars, will be longstanding.

So far, ESG SPACs have performed well. ESG SPACs roughly tripled in value in 2020, according to Nomura Greentech, which calculated this performance weighted by market capitalization assuming an investor owned the same percentage of each of the SPACs. Their cumulative enterprise value stood at $137.27 billion as of the end of the year.

But many of the public-market newcomers are early-stage businesses, some with no revenue. Others are signing contracts for products they plan to make at not-yet-built factories.

“Public markets can be fairly unforgiving,” said David Kirkpatrick, managing director at SJF Ventures, a growth equity firm focused on sustainability technologies. “What’s the patience going to be for hanging in there based on press releases and technical milestones?”

Clean technology investors are familiar with failed projections and dashed dreams. Venture investors rushed into the solar sector in the early 2000s with plans to make solar panels at a certain price and efficiency. But by the time they managed to get to scale, the competitive landscape changed, prices dropped, and many upstarts went bankrupt.

The current SPAC boom must show performance over the long term, with companies meeting promises, producing products at market-required cost and not running out of capital, Mr. Oros said. “Otherwise,” he said, “it’s going to be a repeat of the clean tech bubble.”

Exit of the Trump administration, seen as best hope for mortgage-finance giants’ privatization, delivers blow

The end of the Trump administration is the end of the best hope for hedge-fund investors in a long and painful trade: Betting that Fannie Mae FNMA -2.14% and Freddie Mac FMCC -2.96% would one day be returned to private hands.

A long list of investors has bet that policy makers would eventually privatize the companies, and that once that path became clear, the value of the shares in these companies would increase dramatically. Most hedge funds hold preferred shares that carry a dividend. These shares are junior to the government’s stake and thus don’t get paid dividends until after the government is paid. So their value is greatly diminished by the large stake the government retains.

In one scenario where hedge funds would profit, Fannie and Freddie would raise fresh capital, junior preferred shares would be converted to common stock, and the government would write down or eliminate its senior preferred shares.

Investors including John Paulson, Anchorage Capital Group, Discovery Capital Management LLC, Blackstone Credit, Perry Capital, Bill Ackman’s Pershing Square Capital Management LP and PointState Capital LP have been involved in the trade. Many funds are now expected to have lost money on the investment, though some early buyers and active traders profited.

It was a risky bet. But other complex, long-shot trades, including the subprime bet that the housing market would collapse, resulted in big paydays for some funds.

The trade seemed likely to pay off four years ago, when Treasury Secretary Steven Mnuchin stated his goal was to move the companies out of government control. But as the months passed, the likelihood declined significantly. Last week, Mr. Mnuchin said it wasn’t happening on his watch. The most commonly traded class of Fannie’s preferred shares have now fallen more than 40% from mid-November, to near $6. Common shares of Fannie have fallen from $3 at the end of November to $1.83 at Thursday’s close.

“We’re back to square one in terms of getting them out of conservatorship,” said David Barrosse of Washington, D.C.-based policy-analysis firm Capstone LLC, which counts hedge funds as its clients. “Investors are severely disappointed that more wasn’t done before the end of the Trump administration.”

The Trump administration’s deferral of key decisions narrows investors’ paths to victory, though some remain hopeful.

These investors cite the expectation that the Supreme Court will weigh in on legal issues stemming from the government’s 2012 decision to channel nearly all of Fannie and Freddie’s profits to the Treasury, or of a settlement after a ruling. Some legal experts said the likelihood of a broadly favorable ruling for shareholders is remote. A ruling to reverse the profit sweep could trigger additional litigation, a Cowen Washington Research Group note said last week.

Greg Dowling, of Cincinnati-based investment consulting firm Fund Evaluation Group, said a Supreme Court victory was plausible but that trades involving politics, regulation and litigation are difficult to navigate. “For every big short,” he said, referencing the subprime trade, “there are thousands of other trades that sound so plausible but just never pan out.”

Traders said some hedge funds fatigued by the trade or worried about a negative Supreme Court ruling have been trimming their shares in recent weeks. Still, giant mutual-fund complex Capitol Group Cos. has been a buyer, said people familiar with the firm.

The back-and-forth has gone on so long that it has outlived some of the early players in this trade; Mr. Paulson’s firm and Perry Capital have effectively turned into family offices or shut down. Others, like Anchorage and Blackstone Credit, formerly known as GSO Capital Partners, are largely or entirely out of the trade. Both Anchorage and Blackstone Credit, which exited the trade in 2020, have made money on the trade, said people familiar with the matter. But the length of the investment means that even for funds that made money, their internal rate of return is generally low, investors said.

Perry is likely one of the biggest winners to date, booking at least hundreds of millions of dollars in profit, investors said. Perry, one of the earliest to get involved, began snapping up shares of the companies for pennies on the dollar in 2010.

Fannie and Freddie are central players in the mortgage market, buying mortgages from lenders and packaging them for issuance as securities. The government effectively nationalized them in 2008 in a bid to stabilize the housing market as mortgage defaults mounted.

In return for injecting about $190 billion into the firms, the government created a new class of stock—senior preferred shares—that paid an annual 10% dividend, along with warrants to acquire nearly 80% of the firms’ common stock.

Political and legal developments have sent Fannie and Freddie shares on a wild ride since hedge funds began buying in after the financial crisis.

The Treasury revamped its bailout agreement in 2012 to require nearly all the firms’ profits be swept away to the government as dividend payments on its preferred shares, upending hedge funds’ bets. Investors filed suit over the change. Fannie and Freddie have returned about $300 billion to the government. A recapitalization of Fannie and Freddie was viewed as a nonstarter by officials in the Obama administration.

The Trump administration breathed new life into the wager. Mr. Mnuchin, a former Trump-campaign finance director who had run the mortgage-trading desk at Goldman Sachs Group Inc., said overhauling Fannie and Freddie was a priority. Close ties between John Paulson and Mr. Mnuchin, who with Mr. Trump was an investor in Mr. Paulson’s hedge funds in 2016, were another reason hedge funds were bullish.

The Trump administration in September 2019 said it would work with federal agencies to shrink the government’s role in housing and return the mortgage companies to private hands. Fannie and Freddie along with their regulator, the Federal Housing Finance Agency, hired financial advisers and outside attorneys in 2020 as they sought help on future stock offerings. Advisers close to President Biden have said he would be in no hurry to privatize the companies, which guarantee roughly half of the $11 trillion U.S. mortgage market.