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>Drip, drip, drip:&nbsp;Only two new SPAC IPOs were completed in the past week—media &amp; entertainment SPAC PowerUP Acquisition Corp (PWUPU) and renewable energy-focused Clean Energy Acquisitions Corp (CLINU)—bringing the number of SPAC IPOs to just 42 so far this year. With just a few days remaining in February, this is well short of the 189 SPAC IPOs priced in the first two months of 2021. If there are any crumbs of comfort, the two IPOs were at the higher end in size at $200 million-plus. In fact, the PWUPU IPO at $287.5 million was the largest of the 18 IPOs completed this month, and 52% above the average IPO size of~$190 million YTD. The IPO pipeline contracted by two, reflecting the two aforementioned completed IPOs, with one new S-1 filed and one withdrawn in the past week.</li>
<li>Deadlines are fast approaching:&nbsp;There are currently 604 SPACs still searching for merger targets. However, a number of these face fast-approaching deadlines by which time they are required to have completed IBCs (initial business combinations). Six are on deadline by end-March. One, Burgundy Technology Acquisition Corp (BTAQ), has already announced it will liquidate on March 1. The remaining five are also on the liquidation block unless allowed extensions.</li>
<li>SPACs for up listings?&nbsp;Amid some shareholder approval meeting postponements, there have been no further de-SPACs since February 14. However, the seventh deal termination of the year (and probably not the last) was announced on February 24. ARYA Sciences Acquisition IV cancelled its merger transaction with Caritas Therapeutics, the gene therapy division of biotech firm Amicus (NASDAQ: FOLD). There are 109 SPACs still in the de-SPAC process. While de-SPAC completions may have stalled, one new de-SPAC deal is worthy of note. SPAC Brilliant Acquisition Corp (BRLI) announced on February 24 its intention to merge with OTC Pink Sheet payments and crypto firm Nukkleus (NUKK). Could this be the start of a new trend of using SPACs for capital raising for listed firms in addition to back-door IPOs for private companies?</li>
</ul>
<h2>SPAC STATISTICS</h2>
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<h2>SPAC/DE-SPAC RETURNS</h2>
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<p>The pending Media &amp; Entertainment de-SPACs remain the best performers with the market’s love affair with DWAC and its Trump association continuing despite market concerns over the events in Eastern Europe. The appetite for DWAC was whetted further in the past week by the launch of Trump Media’s social media app Truth Media on February 21, 2022, notwithstanding apparent early teething problems with the app’s functionality.</p>
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<p>There is only one outlier on the negative side. Supernova Partners Acquisition Co II (SNII), which has a pending merger with Rigetti Computing, a quantum computing company, saw its share price drop by 16% on February 23 following a business update by Rigetti, even though the update contained little to justify such negativity.</p>
<p>While two-thirds of the 109 pending de-SPACs are trading below the $10 threshold, except for SNII, they 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>
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<h2>SPAC TALK FOCUS</h2>
<h2>The Importance of Underwriters in the SPAC’s Key Life Events</h2>
<p>Having discussed last week how critically important the sponsor is to SPAC investment success, this week we pivot our focus to another important player in SPAC processes, the SPAC IPO underwriter. Typically, the traditional IPO underwriting role does not go much beyond the underwriter’s ability to determine an appropriate price at which the IPO can be successfully placed with the underwriter’s institutional client base. However, while the SPAC IPO process may be simpler from the regulatory perspective, the role of the SPAC IPO underwriter is much more involved. SPAC underwriters have two separate elements of the SPAC to consider—the IPO and the IBC—which means that the underwriter is required to have the capacity and ability to market and sell two different transactions to two different sets of investors. What do we mean by this?</p>
<p>As we have seen by the high redemption rates (currently running at &gt;90%) ahead of the completion of the de-SPAC process, it is quite apparent that a very large number of SPAC IPO investors do not actually care about the IBC. They are essentially in the SPAC IPO for the optionality of trading or exercising the warrant and exploiting the arbitrage opportunities that avail themselves, while at the same locking in a yield via the IPO shares. By contrast, de-SPAC investors who like the combination and the target sector are likely to be more fundamentally oriented. Thus, it is important for the SPAC underwriter, particularly the book runner, to have solid relationships across a diversified institutional investor base.</p>
<p>The SPAC underwriter has other important key functions to perform. In order to consummate an IBC transaction with an operating target, the SPAC will usually require equity capital in addition to the founders’ initial investment and the SPAC’s IPO proceeds. This additional capital is typically in the form of either a forward purchase arrangement or PIPE transaction. To this end, underwriters usually play an instrumental role in identifying and arranging for the sale of equity to investors to participate in this follow-on capital raise. Furthermore, not only are an underwriter’s relationships with a diversified institutional investor base of critical importance as described above, with more SPACs than there may be quality targets, underwriters’ connections with private companies can be just as important to SPAC sponsors. Investment banks are constantly building relationships with private companies to keep the door ajar to be selected for a future book runner role on an IPO, which by the same token provides a supply pipeline of potential targets for SPACs.</p>
<p>There are other differences between traditional IPO underwriters and SPAC underwriters. A key difference is the fee structure. In a traditional IPO, the underwriters typically receive a discount of around 6% to 7% of the gross proceeds, which is paid at the closing of the IPO. In a SPAC IPO, the underwriters will typically receive a discount of 5.5% of the gross proceeds, but only 2% of the discount is paid at the closing of the IPO. The balance of the discount is deposited in the SPAC’s trust account and is deferred and payable to the underwriters at the closing of the IBC. If a business combination is not consummated, the deferred 3.5% is not paid to the underwriters, but instead used with the rest of the funds in the SPAC’s trust account to redeem the public shares.</p>
<p>Now, it may seem that SPAC underwriters may be getting a worse deal than the traditional IPO underwriters, especially when considering the wider scope of the SPAC underwriter's role, but with redemption rates at very high levels, the actual total fees received by the underwriter(s) are likely to be significantly higher than 5.5% or even 7% of the net IPO proceeds post-redemption. Unlike non-consummated IBCs, there is no obligation for underwriters to waive their claim to the 3.5% deferred commission, although some do because it helps with goodwill and the potential for future business with the client. Back in September 2021, the Financial Times highlighted an extreme example in the then just-completed de-SPAC involving SPAC Locust Walk Acquisition Corp and biotech company eFFECTOR Therapeutics (EFRT), which saw a 50% redemption of IPO shares resulting in the underwriters (Cantor Fitzgerald was the lead investment bank) receiving total fees of 122% of the SPAC’s IPO proceeds net of redemptions. This was after the underwriters had waived half the deferred commissions due to them.</p>
<h2>Who Are the Leading SPAC Underwriters?</h2>
<p>About 15-20 years ago, SPAC underwriting was mainly the domain of smaller boutique investment banks, with the likes of Early Bird Capital, Morgan Joseph, and Maxim Group leading the charge.</p>
<p>Figure 1: League Table of SPAC Underwriters in 2007</p>
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<p>Source: Early Bird Capital Investor Presentation 2007</p>
<p>However, as SPACs and de-SPACs have grown larger, the SPAC underwriting landscape has changed with the bigger investment banks taking charge. In 2021, the top 15 SPAC underwriting positions accounting for more than 80% of the SPAC deals were mostly occupied by global investment banks. with Citigroup the clear market leader holding 13.5% market share of the SPAC bookrunner volume as highlighted in Table 7. Table 8 shows the top three bookrunners by SPAC focus category in 2021.</p>
<hr>
<p>Table 7: The SPAC Underwriters League Table in 2021</p>
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<p>Source: SPAC Research</p>
<p>Table 8: League Table of Serial Sponsors Track Record</p>
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<p>Source: WTR Research, SPAC 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

Drip, drip, drip:&nbsp;Only two new SPAC IPOs were completed in the past week—media &amp; entertainment SPAC PowerUP Acquisition Corp (PWUPU) and renewable energy-focused Clean Energy Acquisitions Corp (CLINU)—bringing the number of SPAC IPOs to just 42 so far this year. With just a few days remaining in February, this is well short of the 189 SPAC IPOs priced in the first two months of 2021. If there are any crumbs of comfort, the two IPOs were at the higher end in size at $200 million-plus. In fact, the PWUPU IPO at $287.5 million was the largest of the 18 IPOs completed this month, and 52% above the average IPO size of~$190 million YTD. The IPO pipeline contracted by two, reflecting the two aforementioned completed IPOs, with one new S-1 filed and one withdrawn in the past week.
Deadlines are fast approaching:&nbsp;There are currently 604 SPACs still searching for merger targets. However, a number of these face fast-approaching deadlines by which time they are required to have completed IBCs (initial business combinations). Six are on deadline by end-March. One, Burgundy Technology Acquisition Corp (BTAQ), has already announced it will liquidate on March 1. The remaining five are also on the liquidation block unless allowed extensions.
SPACs for up listings?&nbsp;Amid some shareholder approval meeting postponements, there have been no further de-SPACs since February 14. However, the seventh deal termination of the year (and probably not the last) was announced on February 24. ARYA Sciences Acquisition IV cancelled its merger transaction with Caritas Therapeutics, the gene therapy division of biotech firm Amicus (NASDAQ: FOLD). There are 109 SPACs still in the de-SPAC process. While de-SPAC completions may have stalled, one new de-SPAC deal is worthy of note. SPAC Brilliant Acquisition Corp (BRLI) announced on February 24 its intention to merge with OTC Pink Sheet payments and crypto firm Nukkleus (NUKK). Could this be the start of a new trend of using SPACs for capital raising for listed firms in addition to back-door IPOs for private companies?

SPAC STATISTICS


SPAC/DE-SPAC RETURNS


The pending Media &amp; Entertainment de-SPACs remain the best performers with the market’s love affair with DWAC and its Trump association continuing despite market concerns over the events in Eastern Europe. The appetite for DWAC was whetted further in the past week by the launch of Trump Media’s social media app Truth Media on February 21, 2022, notwithstanding apparent early teething problems with the app’s functionality.


There is only one outlier on the negative side. Supernova Partners Acquisition Co II (SNII), which has a pending merger with Rigetti Computing, a quantum computing company, saw its share price drop by 16% on February 23 following a business update by Rigetti, even though the update contained little to justify such negativity.
While two-thirds of the 109 pending de-SPACs are trading below the $10 threshold, except for SNII, they 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.



SPAC TALK FOCUS
The Importance of Underwriters in the SPAC’s Key Life Events
Having discussed last week how critically important the sponsor is to SPAC investment success, this week we pivot our focus to another important player in SPAC processes, the SPAC IPO underwriter. Typically, the traditional IPO underwriting role does not go much beyond the underwriter’s ability to determine an appropriate price at which the IPO can be successfully placed with the underwriter’s institutional client base. However, while the SPAC IPO process may be simpler from the regulatory perspective, the role of the SPAC IPO underwriter is much more involved. SPAC underwriters have two separate elements of the SPAC to consider—the IPO and the IBC—which means that the underwriter is required to have the capacity and ability to market and sell two different transactions to two different sets of investors. What do we mean by this?
As we have seen by the high redemption rates (currently running at &gt;90%) ahead of the completion of the de-SPAC process, it is quite apparent that a very large number of SPAC IPO investors do not actually care about the IBC. They are essentially in the SPAC IPO for the optionality of trading or exercising the warrant and exploiting the arbitrage opportunities that avail themselves, while at the same locking in a yield via the IPO shares. By contrast, de-SPAC investors who like the combination and the target sector are likely to be more fundamentally oriented. Thus, it is important for the SPAC underwriter, particularly the book runner, to have solid relationships across a diversified institutional investor base.
The SPAC underwriter has other important key functions to perform. In order to consummate an IBC transaction with an operating target, the SPAC will usually require equity capital in addition to the founders’ initial investment and the SPAC’s IPO proceeds. This additional capital is typically in the form of either a forward purchase arrangement or PIPE transaction. To this end, underwriters usually play an instrumental role in identifying and arranging for the sale of equity to investors to participate in this follow-on capital raise. Furthermore, not only are an underwriter’s relationships with a diversified institutional investor base of critical importance as described above, with more SPACs than there may be quality targets, underwriters’ connections with private companies can be just as important to SPAC sponsors. Investment banks are constantly building relationships with private companies to keep the door ajar to be selected for a future book runner role on an IPO, which by the same token provides a supply pipeline of potential targets for SPACs.
There are other differences between traditional IPO underwriters and SPAC underwriters. A key difference is the fee structure. In a traditional IPO, the underwriters typically receive a discount of around 6% to 7% of the gross proceeds, which is paid at the closing of the IPO. In a SPAC IPO, the underwriters will typically receive a discount of 5.5% of the gross proceeds, but only 2% of the discount is paid at the closing of the IPO. The balance of the discount is deposited in the SPAC’s trust account and is deferred and payable to the underwriters at the closing of the IBC. If a business combination is not consummated, the deferred 3.5% is not paid to the underwriters, but instead used with the rest of the funds in the SPAC’s trust account to redeem the public shares.
Now, it may seem that SPAC underwriters may be getting a worse deal than the traditional IPO underwriters, especially when considering the wider scope of the SPAC underwriter's role, but with redemption rates at very high levels, the actual total fees received by the underwriter(s) are likely to be significantly higher than 5.5% or even 7% of the net IPO proceeds post-redemption. Unlike non-consummated IBCs, there is no obligation for underwriters to waive their claim to the 3.5% deferred commission, although some do because it helps with goodwill and the potential for future business with the client. Back in September 2021, the Financial Times highlighted an extreme example in the then just-completed de-SPAC involving SPAC Locust Walk Acquisition Corp and biotech company eFFECTOR Therapeutics (EFRT), which saw a 50% redemption of IPO shares resulting in the underwriters (Cantor Fitzgerald was the lead investment bank) receiving total fees of 122% of the SPAC’s IPO proceeds net of redemptions. This was after the underwriters had waived half the deferred commissions due to them.
Who Are the Leading SPAC Underwriters?
About 15-20 years ago, SPAC underwriting was mainly the domain of smaller boutique investment banks, with the likes of Early Bird Capital, Morgan Joseph, and Maxim Group leading the charge.
Figure 1: League Table of SPAC Underwriters in 2007

Source: Early Bird Capital Investor Presentation 2007
However, as SPACs and de-SPACs have grown larger, the SPAC underwriting landscape has changed with the bigger investment banks taking charge. In 2021, the top 15 SPAC underwriting positions accounting for more than 80% of the SPAC deals were mostly occupied by global investment banks. with Citigroup the clear market leader holding 13.5% market share of the SPAC bookrunner volume as highlighted in Table 7. Table 8 shows the top three bookrunners by SPAC focus category in 2021.

Table 7: The SPAC Underwriters League Table in 2021

Source: SPAC Research
Table 8: League Table of Serial Sponsors Track Record

Source: WTR Research, SPAC 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: Why Underwriters Really Matter in SPAC Land