A Private Credit Primer for Cannabis

Private Credit (PC) is now one of the biggest sources of debt in North America. Though a bit late to the party, PC has become the chief source of new capital to big cannabis firms.

Large MSOs will continue to be big borrowers for the foreseeable future. Many face sizable debt maturities in 2025/26. Some also need growth capital at a time when the sector remains an equity capital desert.

On the supply side, PC is an attractive asset class. Solid returns at existing lenders, declining stigma, and a maturing industry could spark a rise in the number of lenders and capital deployed into the space over the next couple of years. Interestingly, the broad PC industry is now in a “Goldilocks zone,” where rates are high enough for lenders to make solid returns but not too high to trigger widespread problems at most borrowers.

All good but that doesn’t mean there are no watchouts.

Shrinking rate spreads can increase financial risk for PC funds and hinder the flow of capital into the asset class. Moreover, funders need to continue being responsible lenders. If they are struggling to find clients and must sacrifice quality to do deals, that could lead to more defaults and worse credit outcomes for everyone. Last but not least, Trump’s unpredictable policies are a wild card for the broader economy.

Cannabis borrowers must choose their PC lenders with care. They are not all created equal.

Of course, the cost of your capital and deal terms matters but so do ‘table stakes’ credentials like…

1. Extensive knowledge of the cannabis sector;

2. Deal experience across a variety of firms, situations and markets;

3. Careful management of risks embedded in their portfolio.

The best firms bring more to the party. Consider Chicago Atlantic. They are a leading PC lender to the cannabis space having deployed over $2B since 1998.

I asked Steven Ernest, VP Originations, about their secret sauce.

“Many things set us apart. We can scale lending to our operator partners to facilitate their growth. Few other lenders can say this with confidence. As an example, our credit facility with Verano has grown from $30M to $350M.

Secondly, we are true strategic partners to our borrowers, not just a supplier of funds. For example, we regularly walk supply contracts through their front door as well identify attractive acquisitions for their consideration.

Finally, we have paid our dues and learned from our mistakes. We have built out an internal analytics department that is almost as big as the investment team.

We have worked with our clients through the peaks and troughs of this industry. We know how to navigate operator distress and how to identify it before it’s too late, so as to protect our investor’s principal.”

Call me. I help businesses align their business and capital strategies to compete better and maximize their return on capital.

#funding #debt #MSOS #privatecredit #LPS