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>
<ul>
<li>SPAC IPO pipeline continues to contract:&nbsp;The past week saw a further contraction of the SPAC IPO pipeline. As of February 16, 2022, the number of pending SPAC IPOs had shrunk to 220. Much of this was due to eight new SPAC IPOs being completed, but withdrawals/abandonments of IPO-registrations continue to outpace new S-1 registration filings by a ratio of two to one, albeit at a lower rate than last week. Meanwhile, 603 SPAC IPOs were searching for targets as of February 16, up nine from a week ago. In addition to eight new completed IPOs, another deal terminated when SPAC Astrea Acquisition Corp (ASAX) dropped its proposed IBC with HotelPlanner and Reservations.com after it saw a 90% plus redemption rate ahead of the shareholder meeting scheduled for February 15 to approve the IBC.</li>
<li>It is not only the SPAC sector that has been suffering:&nbsp;The traditional IPO market has not been too hot either. While 2022 has started very slowly for SPAC IPOs, especially compared with 1Q21, the traditional IPO market has fared even worse, all but drying up. As of February 16, only 15 new traditional IPOs (of at least $50 million in size) had been completed in 2022 versus 40 new SPAC IPOs. Moreover, average SPAC proceeds are ~$180 million vs ~$133 million per traditional IPO.</li>
<li>Green shoots of hope?&nbsp;For all the negative news in SPAC land we have been reporting since initiating SPAC Talk three weeks ago, there are success stories, many of which could be attributed to the SPAC sponsor, the topic of this week’s SPAC Talk Focus below. Additionally, there may be some very early signs of green shoots starting to appear. One of the two new SPAC IPOs that came to market in the past week, Axios Sustainable Growth Corp (AXAC.U), upsized its offering by 20% to $150 million. On the de-SPAC side, Concord Acquisition Corp (CND) has just announced a doubling of the initial equity value of its IBC with Stablecoin operator Circle to $9 billion, going against the recent trend of downward revisions. De-SPAC values have also seen a modest pickup recently which could indicate some bottoming out is in progress.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/287/original/image_63265390621645410852857.png?1645410856" class="editor-image img-responsive" data-smartkarma-image-id="258287"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/289/original/image_50578619141645410884820.png?1645410886" class="editor-image img-responsive" data-smartkarma-image-id="258289"></figure>
<p>Source: WTR Research</p>
<h2>SPAC/DE-SPAC RETURNS</h2>
<p>Table 1: Live IBCs (Initial Business Combinations)—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/290/original/image_39380250251645410921238.png?1645410922" class="editor-image img-responsive" data-smartkarma-image-id="258290"></figure>
<p>Source: WTR Research</p>
<p>Table 2: Live IBCs &gt;15% Positive Return</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/291/original/image_23677228061645410953174.png?1645410955" class="editor-image img-responsive" data-smartkarma-image-id="258291"></figure>
<p>Source: WTR Research</p>
<p>DWAC remains comfortably at the top of the pile of the small list of positive performers, valuing the proposed de-SPAC at an EV/pro forma 2025 revenue multiple of between ~8X (full earnout) and 9.5X (no earnout). For now, all publicity related to former President Trump is good news for DWAC. We do not have a table this week for negative returns greater than –5%. While two-thirds of the 109 pending de-SPACs are trading below the $10 threshold, these are all within the 3% range, which we would regard as the normal range, given the redemption rights afforded to SPAC IPO investors right up to the point of de-SPACing.</p>
<p>Table 3: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/292/original/image_77601988571645410994246.png?1645410996" class="editor-image img-responsive" data-smartkarma-image-id="258292"></figure>
<p>Source: WTR Research</p>
<p>Table 4: Top 5 De-SPAC Performers</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/293/original/image_52125948681645411019124.png?1645411021" class="editor-image img-responsive" data-smartkarma-image-id="258293"></figure>
<p>Source: WTR Research</p>
<p>Table 5: Bottom 5 De-SPAC Performers</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/294/original/image_50349208891645411046779.png?1645411048" class="editor-image img-responsive" data-smartkarma-image-id="258294"></figure>
<p>Source: WTR Research</p>
<h2>SPAC TALK FOCUS</h2>
<h2>SPAC Sponsors: The Transition from Penny Stock Promoters to Serious Investors of Pedigree</h2>
<p>When SPACs first appeared in the 1980s, they were a dubious asset class used in the main by penny-stock promoters or by some Chinese companies with questionable accounting practices, seeking to raise money they would otherwise have been unable to raise through the more regulated traditional IPO route, both with the aim of fleecing millions off unsuspecting investors. As a result, the federal government introduced the Penny Stock Reform Act of 1990, which took steps to stop these fraudulent activities. SPACs re-emerged as a more legitimate investment class in the early 2000s, with the requirement that the IPO funds raised from investors be put in escrow, as well as a limit on the amount of time for the SPAC to make a qualifying acquisition. However, SPACs disappeared again from the investor radar in the aftermath of the market meltdown and Great Financial Crisis of 2008/9, mainly because there were fewer privately held businesses looking to go public at the time. It is only since 2020 that the SPAC market has exploded back into life like never before, and that SPACs appear to have emerged as a serious asset class. Over the last two years, SPACs have for the first time seriously rivalled the traditional IPO market as a route for private companies to gain access to the publicly traded arena.</p>
<p>Although the prevailing de-SPAC meltdown may feel like the return of the ghosts of the past, we are a far cry from the penny stock promoter-driven roulette table of the 1980s. An important differentiator and sign of the SPAC’s elevation to an investable and likely durable asset class is the proliferation of SPAC sponsors who include among them some highly regarded sponsor teams with proven investor pedigrees, backed up by extensive proprietary deal sourcing networks and experience as M&amp;A dealmakers. The SPAC is essentially its sponsor team—its founders, management and director—and markets itself based on that team and what it can bring to a potential target.</p>
<p>That said, there undoubtedly remains quite a bit of chaff in the SPAC investment space, but there are also hidden gems to be uncovered. Not uncommon in thematic-oriented investments, when in fashion the rising tide raises all ships, whether seaworthy or not. Similarly, when enthusiasm wanes, even the better-quality companies can get caught up in the sell-off. This is more so in an investment category where there is still limited research coverage. such as the SPAC space.</p>
<p>Furthermore, not all SPAC sponsor teams are created equal. Given how critical the sponsor team is to the success of a SPAC and ultimately de-SPAC investment, it behooves investors to do their due diligence on the sponsors and home in on SPACs with sponsors backed up by a strong track record of accomplishment.</p>
<h2>SPAC Sponsors—Who Are the Best Performers?</h2>
<p>So let us look at who is at the top of the sponsor performance pile. Based on all SPACs that have been de-SPACed since the start of 2021, 29 out of 220 were generating positive annualized returns as of February 15, 2022 from the date of the SPAC’s IPO, of which 12 were generating positive annualized returns of more than 20%. Those are listed in Table 6 and show that serial SPAC sponsor Churchill Capital Corp (founded by former Citi investment banker Michael Klein) sits comfortably on top of the pile, returning more than 120% per year since CCIV’s IPO on July 30, 2020.</p>
<p>Table 6: Top Performing Sponsors (De-SPACs With Annualized Returns &gt;20%)</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/295/original/image_365138572101645411089383.png?1645411091" class="editor-image img-responsive" data-smartkarma-image-id="258295"></figure>
<p>Source: WTR Research</p>
<p>It is perhaps no coincidence that more than 50% of the list (seven) of the high returning SPAC investments in Table 6 are associated with serial sponsors. They are typically made up of seasoned investors and deal makers with reputations that precede them. This arguably gives them a head start over lesser-known sponsors, enabling them to attract more funds from SPAC IPO and PIPE investors, which in turn gives them the ability to target better quality companies. Of course, Table 6 is mainly a reflection of de-SPAC performances over a relatively short period (since the start of 2021), and therefore it could be argued that this may not accurately represent the sponsor’s track record and is merely a snapshot in time for one of their investments. The counterargument is that this period represents a particularly challenging one for de-SPACs, and therefore outperforming in that environment can be viewed as reputation- enhancing for the sponsors in the list.</p>
<p>Nonetheless, in Table 7, we have created a league table of sponsors who have completed at least two de-SPACs. This list measures the performance of the sponsors’ entire portfolio of de-SPACs, which in some case goes back to before 2020. There are many more serial SPAC sponsors than are highlighted in Table 6. Table 7 below represents a more complete picture of sponsor track records. It indicates that the three outstanding sponsors are Kensington Capital, Churchill Capital, and dMY Technology Group, all of whom appear in Table 6 as well. These three have, according to our calculations, achieved sustainable double-digit IRR across their portfolios of SPACs that have been de-SPACed. All three also have pre-deal SPACs in their portfolios, so it might be worthwhile taking note of them. There are a couple of others that have achieved reasonable high single-digit returns success, including prolific SPAC sponsor Chamath Palihapitiya, although his sponsorship of Clover Health Investments (NASDAQ: CLOV) is the main blot in his portfolio of four de-SPACs, which has severely damaged overall returns from his Social Capital SPACs.</p>
<p>Table 7: League Table of Serial Sponsors Track Record</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/258/296/original/image_231646049111645411128667.png?1645411131" class="editor-image img-responsive" data-smartkarma-image-id="258296"></figure>
<p>Source: WTR Research</p>
<h2>DISCLOSURES</h2>
<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

SPAC IPO pipeline continues to contract:&nbsp;The past week saw a further contraction of the SPAC IPO pipeline. As of February 16, 2022, the number of pending SPAC IPOs had shrunk to 220. Much of this was due to eight new SPAC IPOs being completed, but withdrawals/abandonments of IPO-registrations continue to outpace new S-1 registration filings by a ratio of two to one, albeit at a lower rate than last week. Meanwhile, 603 SPAC IPOs were searching for targets as of February 16, up nine from a week ago. In addition to eight new completed IPOs, another deal terminated when SPAC Astrea Acquisition Corp (ASAX) dropped its proposed IBC with HotelPlanner and Reservations.com after it saw a 90% plus redemption rate ahead of the shareholder meeting scheduled for February 15 to approve the IBC.
It is not only the SPAC sector that has been suffering:&nbsp;The traditional IPO market has not been too hot either. While 2022 has started very slowly for SPAC IPOs, especially compared with 1Q21, the traditional IPO market has fared even worse, all but drying up. As of February 16, only 15 new traditional IPOs (of at least $50 million in size) had been completed in 2022 versus 40 new SPAC IPOs. Moreover, average SPAC proceeds are ~$180 million vs ~$133 million per traditional IPO.
Green shoots of hope?&nbsp;For all the negative news in SPAC land we have been reporting since initiating SPAC Talk three weeks ago, there are success stories, many of which could be attributed to the SPAC sponsor, the topic of this week’s SPAC Talk Focus below. Additionally, there may be some very early signs of green shoots starting to appear. One of the two new SPAC IPOs that came to market in the past week, Axios Sustainable Growth Corp (AXAC.U), upsized its offering by 20% to $150 million. On the de-SPAC side, Concord Acquisition Corp (CND) has just announced a doubling of the initial equity value of its IBC with Stablecoin operator Circle to $9 billion, going against the recent trend of downward revisions. De-SPAC values have also seen a modest pickup recently which could indicate some bottoming out is in progress.

SPAC STATISTICS


Source: WTR Research
SPAC/DE-SPAC RETURNS
Table 1: Live IBCs (Initial Business Combinations)—Key Stats

Source: WTR Research
Table 2: Live IBCs &gt;15% Positive Return

Source: WTR Research
DWAC remains comfortably at the top of the pile of the small list of positive performers, valuing the proposed de-SPAC at an EV/pro forma 2025 revenue multiple of between ~8X (full earnout) and 9.5X (no earnout). For now, all publicity related to former President Trump is good news for DWAC. We do not have a table this week for negative returns greater than –5%. While two-thirds of the 109 pending de-SPACs are trading below the $10 threshold, these are all within the 3% range, which we would regard as the normal range, given the redemption rights afforded to SPAC IPO investors right up to the point of de-SPACing.
Table 3: De-SPACs—Key Stats

Source: WTR Research
Table 4: Top 5 De-SPAC Performers

Source: WTR Research
Table 5: Bottom 5 De-SPAC Performers

Source: WTR Research
SPAC TALK FOCUS
SPAC Sponsors: The Transition from Penny Stock Promoters to Serious Investors of Pedigree
When SPACs first appeared in the 1980s, they were a dubious asset class used in the main by penny-stock promoters or by some Chinese companies with questionable accounting practices, seeking to raise money they would otherwise have been unable to raise through the more regulated traditional IPO route, both with the aim of fleecing millions off unsuspecting investors. As a result, the federal government introduced the Penny Stock Reform Act of 1990, which took steps to stop these fraudulent activities. SPACs re-emerged as a more legitimate investment class in the early 2000s, with the requirement that the IPO funds raised from investors be put in escrow, as well as a limit on the amount of time for the SPAC to make a qualifying acquisition. However, SPACs disappeared again from the investor radar in the aftermath of the market meltdown and Great Financial Crisis of 2008/9, mainly because there were fewer privately held businesses looking to go public at the time. It is only since 2020 that the SPAC market has exploded back into life like never before, and that SPACs appear to have emerged as a serious asset class. Over the last two years, SPACs have for the first time seriously rivalled the traditional IPO market as a route for private companies to gain access to the publicly traded arena.
Although the prevailing de-SPAC meltdown may feel like the return of the ghosts of the past, we are a far cry from the penny stock promoter-driven roulette table of the 1980s. An important differentiator and sign of the SPAC’s elevation to an investable and likely durable asset class is the proliferation of SPAC sponsors who include among them some highly regarded sponsor teams with proven investor pedigrees, backed up by extensive proprietary deal sourcing networks and experience as M&amp;A dealmakers. The SPAC is essentially its sponsor team—its founders, management and director—and markets itself based on that team and what it can bring to a potential target.
That said, there undoubtedly remains quite a bit of chaff in the SPAC investment space, but there are also hidden gems to be uncovered. Not uncommon in thematic-oriented investments, when in fashion the rising tide raises all ships, whether seaworthy or not. Similarly, when enthusiasm wanes, even the better-quality companies can get caught up in the sell-off. This is more so in an investment category where there is still limited research coverage. such as the SPAC space.
Furthermore, not all SPAC sponsor teams are created equal. Given how critical the sponsor team is to the success of a SPAC and ultimately de-SPAC investment, it behooves investors to do their due diligence on the sponsors and home in on SPACs with sponsors backed up by a strong track record of accomplishment.
SPAC Sponsors—Who Are the Best Performers?
So let us look at who is at the top of the sponsor performance pile. Based on all SPACs that have been de-SPACed since the start of 2021, 29 out of 220 were generating positive annualized returns as of February 15, 2022 from the date of the SPAC’s IPO, of which 12 were generating positive annualized returns of more than 20%. Those are listed in Table 6 and show that serial SPAC sponsor Churchill Capital Corp (founded by former Citi investment banker Michael Klein) sits comfortably on top of the pile, returning more than 120% per year since CCIV’s IPO on July 30, 2020.
Table 6: Top Performing Sponsors (De-SPACs With Annualized Returns &gt;20%)

Source: WTR Research
It is perhaps no coincidence that more than 50% of the list (seven) of the high returning SPAC investments in Table 6 are associated with serial sponsors. They are typically made up of seasoned investors and deal makers with reputations that precede them. This arguably gives them a head start over lesser-known sponsors, enabling them to attract more funds from SPAC IPO and PIPE investors, which in turn gives them the ability to target better quality companies. Of course, Table 6 is mainly a reflection of de-SPAC performances over a relatively short period (since the start of 2021), and therefore it could be argued that this may not accurately represent the sponsor’s track record and is merely a snapshot in time for one of their investments. The counterargument is that this period represents a particularly challenging one for de-SPACs, and therefore outperforming in that environment can be viewed as reputation- enhancing for the sponsors in the list.
Nonetheless, in Table 7, we have created a league table of sponsors who have completed at least two de-SPACs. This list measures the performance of the sponsors’ entire portfolio of de-SPACs, which in some case goes back to before 2020. There are many more serial SPAC sponsors than are highlighted in Table 6. Table 7 below represents a more complete picture of sponsor track records. It indicates that the three outstanding sponsors are Kensington Capital, Churchill Capital, and dMY Technology Group, all of whom appear in Table 6 as well. These three have, according to our calculations, achieved sustainable double-digit IRR across their portfolios of SPACs that have been de-SPACed. All three also have pre-deal SPACs in their portfolios, so it might be worthwhile taking note of them. There are a couple of others that have achieved reasonable high single-digit returns success, including prolific SPAC sponsor Chamath Palihapitiya, although his sponsorship of Clover Health Investments (NASDAQ: CLOV) is the main blot in his portfolio of four de-SPACs, which has severely damaged overall returns from his Social Capital SPACs.
Table 7: League Table of Serial Sponsors Track Record

Source: WTR Research
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 - SPAC Success: Check the Sponsor!