Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>More correction in SPAC market needed.&nbsp;There are no new SPAC IPOs again to report this week, which makes it 26 days since the last IPO was priced. So far this month, we’ve seen two new S1 filings and two IPO registrations withdrawn, leaving the backlog of IPOs at 149. The backlog has shrunk by 120 since the end of 2021, but there are still 591 live SPACs searching for IBCs. With five live SPACS searching for one that has managed to announce a merger deal, and notwithstanding some modest improvement in recent months, the market remains oversaturated.</li>
<li>De-SPAC completions.&nbsp;After reporting the surge in deal flow in May in last week’s SPAC Talk, there has not been much of a follow-up so far in June. Only one deal has been announced thus far—Americas Technology Acquisition Corp’s (ATA) $208 million merger with bus rideshare tech company Rally Communitas Corp—which was on the first day of the month. Two de-SPACings have been completed this week and we expect more to come, with several transaction approval votes scheduled in June. Robotics company Symbiotic, which claims the world’s largest retailer—Walmart—as one of its clients, became public through its $4.8 billion merger with a Softbank-backed SPAC. Gene technology company Senti Bio, valued at ~$600 million, is the second company to be de-SPACed so far this month.</li>
<li>Who says you can’t make money out of SPACs?&nbsp;While de-SPAC investments have been nothing less than a disaster as the stats in Figure 4 only serve to remind us, the strongly negative bias toward de-SPACs has unjustifiably spilled over to a negative perception and lack of respect for SPACs as an investable asset class. As we discuss in our SPAC Talk focus below, due to their unique structure and in contradistinction to de-SPACs, SPACs lend themselves to a low-risk arbitrage investment strategy, which can yield relatively attractive fixed income type returns.</li>
</ul>
<h2>SPAC STATISTICS</h2>
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<h2>SPAC/DE-SPAC RETURNS</h2>
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<h2>SPAC TALK FOCUS</h2>
<h2>Capturing Yield Through SPACs</h2>
<p>From an investment perspective, you might be forgiven for thinking that SPACs as an asset class have been nothing less than a disaster, particularly over the past year. This negative perspective is certainly validated when looking at SPACs through the de-SPAC lense. Indeed, as we have repeatedly shown, more than 90% of post-merger SPACs that have been de-SPACed since the start of 2021 are trading under water by an average 50% below the SPAC redemption price of $10 (see Figure 4). But while the principal raison d’être for a SPAC’s creation and IPO is to be a conduit through which a private (typically early-stage, emerging growth) company can be taken public through the backdoor (as an alternative to the more regulatory rigorous front-door approach of a traditional IPO), its unique structure lends itself to alternative low risk and investment strategy at the pre-merger stage.</p>
<p>Pre-merger SPACs and post-merger SPACs are two different investment animals. While the post-merger SPAC or de-SPAC is a high-risk, often speculative, equity investment proposition, the $10 plus put option attached to pre-merger SPACs lends the SPAC asset class to a potentially lucrative low-risk arbitrage investing strategy when purchasing the SPAC at a discount to its NAV because an investor has the option to cash out at the redeemable NAV at the time of the deal vote or at maturity (i.e., as the SPAC’s de-SPACing process moves to completion, or when the SPAC is alternatively liquidated).</p>
<p>The major and most stable portion of the yield to pre-merger SPAC investors will be determined by the size of discount at which the SPAC is purchased relative to the cash value in trust, which includes the original funds raised from the SPAC IPO as well as any additional contributions made by the sponsors to the trust. Over the past year, there has been an increasing tendency for sponsors to overfund SPAC trust accounts as an incentive to entice IPO investors (in 1Q22, trust accounts averaged $10.17 per unit at the IPO versus the unit price of the SPAC of $10). There is also typically a requirement for sponsors to make additional contributions to the trust when deadline extensions are requested and effected by SPACs. Moreover, trust value will be further enhanced since the cash held in trust is normally invested in safe interest-bearing instruments (i.e., treasury bills) until de-SPACing or liquidation, although, until recently, this will not have amounted to very much. SPAC IPO investors will get additional returns from the issue of a portion of free warrants, although with average warrants having decreased substantially to $0.22 per warrant, the incremental benefits are likely to be fairly small.</p>
<p>According to Accelerate AlphaRank (www.accelerateshares.com), the estimated average arbitrage yield generated by live pre-merger SPACs (incorporating those seeking targets and those with announced IBCs) as at the end of May 2022 was 4.6% and has risen from negative yield territory through much of 2020 and early 2021. There seems to be an evident correlation between de-SPAC performance and SPAC yield.</p>
<p>Our data indicate that the average yield to liquidation (excluding the impact of warrants) for SPACs with announced IBCs is 2.5%, with an average time horizon of about six months to liquidation and 3.3% for SPACs still searching with an average time horizon of about nine months to liquidation. These compare favorably with current offerings for US treasuries (see front page chart).</p>
<p>So, who says you cannot make a return out of SPACs?</p>
<p>Figure 7: SPACs Do Yield Returns</p>
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<p>Source: Accelerate AlphaRank</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


More correction in SPAC market needed.&nbsp;There are no new SPAC IPOs again to report this week, which makes it 26 days since the last IPO was priced. So far this month, we’ve seen two new S1 filings and two IPO registrations withdrawn, leaving the backlog of IPOs at 149. The backlog has shrunk by 120 since the end of 2021, but there are still 591 live SPACs searching for IBCs. With five live SPACS searching for one that has managed to announce a merger deal, and notwithstanding some modest improvement in recent months, the market remains oversaturated.
De-SPAC completions.&nbsp;After reporting the surge in deal flow in May in last week’s SPAC Talk, there has not been much of a follow-up so far in June. Only one deal has been announced thus far—Americas Technology Acquisition Corp’s (ATA) $208 million merger with bus rideshare tech company Rally Communitas Corp—which was on the first day of the month. Two de-SPACings have been completed this week and we expect more to come, with several transaction approval votes scheduled in June. Robotics company Symbiotic, which claims the world’s largest retailer—Walmart—as one of its clients, became public through its $4.8 billion merger with a Softbank-backed SPAC. Gene technology company Senti Bio, valued at ~$600 million, is the second company to be de-SPACed so far this month.
Who says you can’t make money out of SPACs?&nbsp;While de-SPAC investments have been nothing less than a disaster as the stats in Figure 4 only serve to remind us, the strongly negative bias toward de-SPACs has unjustifiably spilled over to a negative perception and lack of respect for SPACs as an investable asset class. As we discuss in our SPAC Talk focus below, due to their unique structure and in contradistinction to de-SPACs, SPACs lend themselves to a low-risk arbitrage investment strategy, which can yield relatively attractive fixed income type returns.

SPAC STATISTICS


SPAC/DE-SPAC RETURNS




SPAC TALK FOCUS
Capturing Yield Through SPACs
From an investment perspective, you might be forgiven for thinking that SPACs as an asset class have been nothing less than a disaster, particularly over the past year. This negative perspective is certainly validated when looking at SPACs through the de-SPAC lense. Indeed, as we have repeatedly shown, more than 90% of post-merger SPACs that have been de-SPACed since the start of 2021 are trading under water by an average 50% below the SPAC redemption price of $10 (see Figure 4). But while the principal raison d’être for a SPAC’s creation and IPO is to be a conduit through which a private (typically early-stage, emerging growth) company can be taken public through the backdoor (as an alternative to the more regulatory rigorous front-door approach of a traditional IPO), its unique structure lends itself to alternative low risk and investment strategy at the pre-merger stage.
Pre-merger SPACs and post-merger SPACs are two different investment animals. While the post-merger SPAC or de-SPAC is a high-risk, often speculative, equity investment proposition, the $10 plus put option attached to pre-merger SPACs lends the SPAC asset class to a potentially lucrative low-risk arbitrage investing strategy when purchasing the SPAC at a discount to its NAV because an investor has the option to cash out at the redeemable NAV at the time of the deal vote or at maturity (i.e., as the SPAC’s de-SPACing process moves to completion, or when the SPAC is alternatively liquidated).
The major and most stable portion of the yield to pre-merger SPAC investors will be determined by the size of discount at which the SPAC is purchased relative to the cash value in trust, which includes the original funds raised from the SPAC IPO as well as any additional contributions made by the sponsors to the trust. Over the past year, there has been an increasing tendency for sponsors to overfund SPAC trust accounts as an incentive to entice IPO investors (in 1Q22, trust accounts averaged $10.17 per unit at the IPO versus the unit price of the SPAC of $10). There is also typically a requirement for sponsors to make additional contributions to the trust when deadline extensions are requested and effected by SPACs. Moreover, trust value will be further enhanced since the cash held in trust is normally invested in safe interest-bearing instruments (i.e., treasury bills) until de-SPACing or liquidation, although, until recently, this will not have amounted to very much. SPAC IPO investors will get additional returns from the issue of a portion of free warrants, although with average warrants having decreased substantially to $0.22 per warrant, the incremental benefits are likely to be fairly small.
According to Accelerate AlphaRank (www.accelerateshares.com), the estimated average arbitrage yield generated by live pre-merger SPACs (incorporating those seeking targets and those with announced IBCs) as at the end of May 2022 was 4.6% and has risen from negative yield territory through much of 2020 and early 2021. There seems to be an evident correlation between de-SPAC performance and SPAC yield.
Our data indicate that the average yield to liquidation (excluding the impact of warrants) for SPACs with announced IBCs is 2.5%, with an average time horizon of about six months to liquidation and 3.3% for SPACs still searching with an average time horizon of about nine months to liquidation. These compare favorably with current offerings for US treasuries (see front page chart).
So, who says you cannot make a return out of SPACs?
Figure 7: SPACs Do Yield Returns

Source: Accelerate AlphaRank
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: The Rodney Dangerfield “I Get No ReSPACt” Asset Class