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>Deal activity is picking up, but so is deal size shrinkage.&nbsp;Seven new deals have been announced across multiple sectors in the past week (see Figure 2). This brings the total of announced deals in the first half of the month to 13, worth an aggregate ~$4 billion. The past year has seen significant deal value compression. Deal size average YTD is less than $750 million and only $309 million in September versus $2.3 billion for the whole of 2021. Funding challenges for SPACs and generally lower company valuations amid economic and market uncertainty are the key culprits.</li>
<li>The SPAC supply/demand imbalance continues to correct.&nbsp;The lack of appetite for SPACs continues to manifest itself. The list of pending SPAC IPOs continues to shorten and currently stands at 116, the smallest number since January 2021. YTD, there have been twice as many S-1 filing withdrawals (148) than new S-1 filings (70). There has been only one new SPAC IPO pricing to report this month. Perhaps epitomizing the current appetite for SPAC IPOs, SPAC underwriter EF Hutton decided to launch its own SPAC, EF Hutton I (EFHTU). The consumer- and retail-focused SPAC raised gross proceeds of $115 million. YTD, 75 SPAC IPOs have been priced, with 559 SPACs searching for IBC targets.</li>
<li>Whither the retail investors?&nbsp;This week’s SPAC Talk Focus looks at the involvement of retail investors with SPACs. Retail investor interest in SPACs was at its zenith at the peak of the SPAC boom in early 2021 but has since all but abandoned them. While there are pockets of retail investor interest in selected SPACs, Digital World Acquisition Corp. (DWAC), where retail investors make up the majority of shareholders, may perhaps be wishing that it did not have to deal with this investor class as it continues to struggle to secure sufficient votes for a deadline extension to complete its IBC with former President Trump’s social media company.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/325/original/image_919207685201663285407138.png?1663285411" class="editor-image img-responsive" data-smartkarma-image-id="298325"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN SEPTEMBER 2022</h2>
<p>Figure 1: IPO Pricings/Completed Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/326/original/image_680000632211663285437842.png?1663285438" class="editor-image img-responsive" data-smartkarma-image-id="298326"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 2: IBC Announcements/Terminations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/327/original/image_666598550221663285464158.png?1663285465" class="editor-image img-responsive" data-smartkarma-image-id="298327"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 3: De-SPACings</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/328/original/image_792850232231663285487602.png?1663285488" class="editor-image img-responsive" data-smartkarma-image-id="298328"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h3>SPAC/DE-SPAC RETURNS</h3>
<p>Figure 4: Live IBCs (Initial Business Combinations)—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/329/original/image_413208131241663285517374.png?1663285518" class="editor-image img-responsive" data-smartkarma-image-id="298329"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 5: Top 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/330/original/image_719926727251663285538968.png?1663285540" class="editor-image img-responsive" data-smartkarma-image-id="298330"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 6: Bottom 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/331/original/image_260965892261663285626423.png?1663285627" class="editor-image img-responsive" data-smartkarma-image-id="298331"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 7: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/332/original/image_521395027271663285664134.png?1663285665" class="editor-image img-responsive" data-smartkarma-image-id="298332"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 8: Top 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/333/original/image_469769567281663285710521.png?1663285712" class="editor-image img-responsive" data-smartkarma-image-id="298333"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 9: Bottom 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/334/original/image_824295065291663285733912.png?1663285735" class="editor-image img-responsive" data-smartkarma-image-id="298334"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>Retail Investors Have Little Love for SPACs</h2>
<p>In last week’s focus, we discussed the increasing prevalence of SPAC deadline extensions. While for the most part extensions have been granted, it is not always plain sailing to get sufficient votes for the extension. Even those SPACs with transactions yet to close can struggle to secure a shareholder-approved deadline extension. We brought a current example of the latter involving SPAC Digital World Acquisition Corp. (DWAC), which last week was seeking an extension of up to one year to close its deal with Trump Media &amp; Technology Group.</p>
<p>At the time of writing last week’s focus, we reported that DWAC rescheduled its stockholder meeting twice from its original scheduled date of September 6 to 12pm and then 3pm on September 8, the actual deadline day for the SPAC to complete the merger. However, after our SPAC Talk was published last week, we learned that the DWAC stockholder meeting was rescheduled for a third time to October 10, as DWAC could not secure the requisite 65% approval threshold needed to get the extension. DWAC sponsors did retain the option to pay $2.875 million into the SPAC’s trust to enforce a clause within the merger agreement that would allow a three-month delay in the timeline by which the deal is to be consummated. DWAC sponsors have a built-in option to extend for a second three-month period subject to the payment of an additional $2.875 million by the sponsors.</p>
<p>The reason for bringing up the DWAC experience is that it provides a pertinent segue into the focus topic of the week—retail investors and SPACs. How so? Well, a Reuters report indicated that DWAC’s failure to garner the required votes last week was down to retail investors, who according to DWAC CEO Patrick Orlando, make up most of the SPAC’s shareholders. Reuters cited Orlando as saying that it was challenging to get retail investors to vote through their brokers.</p>
<p>The proliferation of trading apps targeting retail investors in recent years, perhaps the best-known being Robin Hood, has given retail investors some degree of influence that they had not been able to exert before, the most pertinent example of which is the creation of the so-called meme stock. SPACs also became a magnet for retail investors running into the peak of the boom in early 2021. While the initial SPAC IPO subscribers are overwhelmingly institutional investors, retail investors got sucked into the SPAC euphoria investing around the time of IBC deal announcements, often at inflated prices.</p>
<p>Figure 10 presents a chart from SPAC Research, which depicts the ownership of SPACs by 13F filers. The 13F is a quarterly report that is required to be filed by all institutional investment managers with at least $100 million in assets under management. The implication from this chart is that retail investor enthusiasm for SPACs reached its zenith in March 2021, coinciding with the value peak of the SPAC market. At that time, retail investor ownership of SPACs accounted for ~ 25%. Since then, retail investor interest appears to have significantly waned, with ownership shrinking to less than 10% of the estimated SPAC market value. But at the same time, institutional ownership has been growing, which is not as counterintuitive as it might seem. For institutional investors/hedge funds earning a couple of hundred basis points spread relative to US treasuries in what is a riskless trade is an attractive investment proposition that may not be appreciated by the typical retail investor. Of course, while the overall impression from the chart is that retail investors have all but abandoned the SPAC asset class, there are a few exceptions where SPACs have higher retail investor ownership such as DWAC.</p>
<p>Figure 10: Retail Investor Enthusiasm for SPACs Is All but Dead</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/335/original/image_404487466301663285769694.png?1663285771" class="editor-image img-responsive" data-smartkarma-image-id="298335"></figure>
<div class="content-remarks">
<p>Source: SPAC Research</p>
</div>
<p>To conclude, one might reasonably ask whether retail investors’ lack of interest in SPACs, barring perhaps a few exceptions, reflects retail investor overall positioning in equities in an uncertain economic environment spawning high market volatility. In the S&amp;P Global Market Intelligence June 2022 Capital Flows report, the research firm noted that across institutional investors, hedge funds, and retail investors, the latter group of investors has proven to be the most bullish of the three and the only group with net inflows into the market on a YTD (to July 6, 2022) basis. So, it does appear that SPACs are a specific equity category with which retail investors have fallen out of love.</p>
<p>Figure 11: Retail Investors Remain Generally Bullish on Equities</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/298/336/original/image_809544519311663285810621.png?1663285812" class="editor-image img-responsive" data-smartkarma-image-id="298336"></figure>
<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 and Healthcare sectors 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


Deal activity is picking up, but so is deal size shrinkage.&nbsp;Seven new deals have been announced across multiple sectors in the past week (see Figure 2). This brings the total of announced deals in the first half of the month to 13, worth an aggregate ~$4 billion. The past year has seen significant deal value compression. Deal size average YTD is less than $750 million and only $309 million in September versus $2.3 billion for the whole of 2021. Funding challenges for SPACs and generally lower company valuations amid economic and market uncertainty are the key culprits.
The SPAC supply/demand imbalance continues to correct.&nbsp;The lack of appetite for SPACs continues to manifest itself. The list of pending SPAC IPOs continues to shorten and currently stands at 116, the smallest number since January 2021. YTD, there have been twice as many S-1 filing withdrawals (148) than new S-1 filings (70). There has been only one new SPAC IPO pricing to report this month. Perhaps epitomizing the current appetite for SPAC IPOs, SPAC underwriter EF Hutton decided to launch its own SPAC, EF Hutton I (EFHTU). The consumer- and retail-focused SPAC raised gross proceeds of $115 million. YTD, 75 SPAC IPOs have been priced, with 559 SPACs searching for IBC targets.
Whither the retail investors?&nbsp;This week’s SPAC Talk Focus looks at the involvement of retail investors with SPACs. Retail investor interest in SPACs was at its zenith at the peak of the SPAC boom in early 2021 but has since all but abandoned them. While there are pockets of retail investor interest in selected SPACs, Digital World Acquisition Corp. (DWAC), where retail investors make up the majority of shareholders, may perhaps be wishing that it did not have to deal with this investor class as it continues to struggle to secure sufficient votes for a deadline extension to complete its IBC with former President Trump’s social media company.

SPAC STATISTICS


Source: WTR

SPAC HAPPENINGS IN SEPTEMBER 2022
Figure 1: IPO Pricings/Completed Liquidations


Source: WTR Research

Figure 2: IBC Announcements/Terminations


Source: WTR Research

Figure 3: De-SPACings


Source: WTR Research

SPAC/DE-SPAC RETURNS
Figure 4: Live IBCs (Initial Business Combinations)—Key Stats


Source: WTR Research

Figure 5: Top 5 Live IBCs by Share Price


Source: WTR Research

Figure 6: Bottom 5 Live IBCs by Share Price


Source: WTR Research

Figure 7: De-SPACs—Key Stats


Source: WTR Research

Figure 8: Top 5 De-SPAC Performers by Share Price


Source: WTR Research

Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
Retail Investors Have Little Love for SPACs
In last week’s focus, we discussed the increasing prevalence of SPAC deadline extensions. While for the most part extensions have been granted, it is not always plain sailing to get sufficient votes for the extension. Even those SPACs with transactions yet to close can struggle to secure a shareholder-approved deadline extension. We brought a current example of the latter involving SPAC Digital World Acquisition Corp. (DWAC), which last week was seeking an extension of up to one year to close its deal with Trump Media &amp; Technology Group.
At the time of writing last week’s focus, we reported that DWAC rescheduled its stockholder meeting twice from its original scheduled date of September 6 to 12pm and then 3pm on September 8, the actual deadline day for the SPAC to complete the merger. However, after our SPAC Talk was published last week, we learned that the DWAC stockholder meeting was rescheduled for a third time to October 10, as DWAC could not secure the requisite 65% approval threshold needed to get the extension. DWAC sponsors did retain the option to pay $2.875 million into the SPAC’s trust to enforce a clause within the merger agreement that would allow a three-month delay in the timeline by which the deal is to be consummated. DWAC sponsors have a built-in option to extend for a second three-month period subject to the payment of an additional $2.875 million by the sponsors.
The reason for bringing up the DWAC experience is that it provides a pertinent segue into the focus topic of the week—retail investors and SPACs. How so? Well, a Reuters report indicated that DWAC’s failure to garner the required votes last week was down to retail investors, who according to DWAC CEO Patrick Orlando, make up most of the SPAC’s shareholders. Reuters cited Orlando as saying that it was challenging to get retail investors to vote through their brokers.
The proliferation of trading apps targeting retail investors in recent years, perhaps the best-known being Robin Hood, has given retail investors some degree of influence that they had not been able to exert before, the most pertinent example of which is the creation of the so-called meme stock. SPACs also became a magnet for retail investors running into the peak of the boom in early 2021. While the initial SPAC IPO subscribers are overwhelmingly institutional investors, retail investors got sucked into the SPAC euphoria investing around the time of IBC deal announcements, often at inflated prices.
Figure 10 presents a chart from SPAC Research, which depicts the ownership of SPACs by 13F filers. The 13F is a quarterly report that is required to be filed by all institutional investment managers with at least $100 million in assets under management. The implication from this chart is that retail investor enthusiasm for SPACs reached its zenith in March 2021, coinciding with the value peak of the SPAC market. At that time, retail investor ownership of SPACs accounted for ~ 25%. Since then, retail investor interest appears to have significantly waned, with ownership shrinking to less than 10% of the estimated SPAC market value. But at the same time, institutional ownership has been growing, which is not as counterintuitive as it might seem. For institutional investors/hedge funds earning a couple of hundred basis points spread relative to US treasuries in what is a riskless trade is an attractive investment proposition that may not be appreciated by the typical retail investor. Of course, while the overall impression from the chart is that retail investors have all but abandoned the SPAC asset class, there are a few exceptions where SPACs have higher retail investor ownership such as DWAC.
Figure 10: Retail Investor Enthusiasm for SPACs Is All but Dead


Source: SPAC Research

To conclude, one might reasonably ask whether retail investors’ lack of interest in SPACs, barring perhaps a few exceptions, reflects retail investor overall positioning in equities in an uncertain economic environment spawning high market volatility. In the S&amp;P Global Market Intelligence June 2022 Capital Flows report, the research firm noted that across institutional investors, hedge funds, and retail investors, the latter group of investors has proven to be the most bullish of the three and the only group with net inflows into the market on a YTD (to July 6, 2022) basis. So, it does appear that SPACs are a specific equity category with which retail investors have fallen out of love.
Figure 11: Retail Investors Remain Generally Bullish on Equities

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 and Healthcare sectors 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.

Delwinds Insurance Acquisition Corp (DWIN US)

SPAC Talk: Missing Love for SPACs from Retail Investors