Retail Flow and Float Rotation

By: SPAC Research

Email: bk@spacresearch.com

Published: June 15, 2020

There’s a lot of activity in SPAC world right now, but one topic deserves more discussion: the increased attention being paid to the space by retail investors. It’s not our intention to write about this every week. But we have to acknowledge the effect retail investors are having on the market.

There have been a number of pieces written recently on retail traders’ impact on the broader market. Bloomberg columnist Matt Levine, a SPAC Research staff favorite, has posited a boredom markets hypothesis, suggesting more people are sitting at home on their computers all day, buying stocks because they’re bored, which is increasing demand for niche securities and helping push various corners of the market higher.

While the SPAC market has seen strength from the institutional side lately, as measured by overwhelming demand for the largest SPAC IPOs, retail investors have flooded in on the back end. You can get a sense of what ticker symbols are experiencing the highest amount of retail activity by using the IOIA (Indications of Interest and Trade Adverts) function on Bloomberg to compare shares traded through traditional SPAC desks vs. those that went through Virtu Financial. Virtu has order flow arrangements with various retail brokerages, and volume traded through Virtu can be used as a proxy for retail participation.

Compare the last seven days of activity between the common stock of Forum Merger II (FMCI) and Collier Creek Holdings (CCH) below:

Institutions are fairly selective about which SPAC deals they participate in on the back end. Historically, about 20% of SPAC deals have traded material volume above cash in trust before their closing date. By contrast, here’s a look at every deal and LOI announcement over the past two months.

Do you notice anything in common?

All but one of this quarter’s deal announcements are trading at a premium to cash in trust.

Under normal circumstances, SPAC deals trade at a risk-arb type discount to the eventual cash in trust value. Of course, you can look at the broader market and observe that people are more actively seeking alternative investments at the moment. And there’s something inherently appealing about a security with principal-protected downside and equity upside.

But it’s impossible to avoid the fact that almost every recent announcement is trading above trust value. More than half of the list above hasn’t even disclosed transaction terms or the name of an acquisition target! Whether it’s retail investors chasing the hot item of the day, or traders anticipating and front-running that activity, this isn’t something we’ve seen before.

Historically, a vast amount of SPAC Arb inventory gets in the way of price appreciation on SPAC common equity. Many SPAC Arb funds don’t even have a mandate that allows them to hold significant exposure to SPAC common shares once the redemption put disappears. Those funds are usually content to earn an extra 1% on their entire position above cash in trust on most deals.

One could craft three possible explanations for the current moment in time: 1) Every single deal is amazing and deserves to trade above cash in trust, 2) SPAC Arb funds are backing up their offers to reflect market conditions, or 3) Inbound interest has overwhelmed the SPAC Arb inventory and started to run into float constraints.

To dive a bit deeper, we took each of the deals above and calculated how much of its public float has traded since deal or LOI announcement.

We should be careful not to assume a causal relationship between the percentage of the float that has traded and the SPAC’s stock price. After all, the most attractive deals generate the most buy-side interest which is usually the determinant of how many shares change hands before deal closing.

But there’s no denying the relationship between float rotation and premium or discount to trust value. We plotted the two on a chart below.

So what’s the point here? Smaller public share counts have an easier time moving out of the hands of SPAC Arb funds and into retail territory where normal conditions don’t necessarily apply anymore.

It’s probably a desirable outcome for any sponsor to move shares into the hands of retail holders. Under almost any circumstances, they are less likely to exercise redemption rights than institutional holders. Accessing corporate actions is already a bit obscure for a retail account at Schwab or Ameritrade — how many Robinhood holders are even capable of exercising redemption rights?

While ensuring a lower redemption count is desirable, retail traders are considerably more fickle than institutional holders. Which means we may be in for a bumpy ride with a handful of pending business combinations over the next few months. And with the median SPAC now yielding approximately 1.9%, we know SPAC Arb funds will be waiting if common shares trade back materially below trust.

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