Cannabis Conversations: I Get Asked By Institutional Investors…
“I just dropped in to see what condition my condition was in” First Edition…
Last week, I did my semi-regular roadshow with U.S. investors and bankers, discussing the latest developments in the cannabis space. Importantly, I look to gauge their sentiment on investing in our sector.
Consider the following a summary of their feedback:
> There is solid interest in our industry, although this is coupled with a significant lack of understanding of key players, sector dynamics and regulations.
Companies looking to raise money need to (re) educate potential equity investors, tailoring their investment thesis to the fund’s strategy.
> They believe that Rescheduling and SAFER will see “early adopter” institutional capital flowing into cannabis, although not necessarily by their funds. The trailblazers will be growth-seeking investors who are comfortable underwriting investments in risky, dynamic sectors. These investors will run the gamut from entrepreneurial VCs and family offices to growth-focused hedge funds.
> More conservative institutional capital will follow a “wait-and-see” approach given their lack of industry & regulatory knowledge, current MSO/LP share performance and plain old inertia. These funds also see New York’s legalization challenges as representative of the entire industry. Of course, this is wrong but it is what they believe.
> Despite the potential for once-in-a-generation returns, cannabis will still need to compete with other trendy sectors such as AI and clean energy.
Cannabis firms will need to work hard to attract equity capital.
> The broad equity markets continue to be shaped by psychology, not financials. Burned retail investors have been bludgeoned by underperforming shares, rate hikes, short squeezes, and SPAC failures. IPOs and sizable M&A exits have been non-existent.
> Potential equity investors are looking for a catalyst. This could be regulatory reform, a high-profile MSO or LP outperforming its peers, or a major cannabis sector M&A deal. For the most part, institutional capital is waiting for this shoe to drop. And yes, rate reductions will help.
While its darkest before dawn, don’t put the champagne on ice:
1. Early moving institutional capital will gravitate towards the best companies in terms of financials and strategy.
Your capital raising process, effort and investment story will be key.
2. There are real concerns about the industry’s lack of governance/transparency, adjusted-EBITDA games, professionalism, and management quality.
Many cannabis firms will need to tidy up before doing their roadshows.
3. Finally, there is the issue of liquidity. Up listing to a U.S. exchange will be essential for many companies.
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