Could Cannabis Valuations Fall Even Further?

What is down can still drop more, even with good business fundamentals

There are good reasons to think that share prices will bounce back in 2024.  But there are also reasons to worry. 

A newish but rapidly emerging capital markets player could be a 2024 spoiler.   

Whatcha talkin about Willis

The villain are secondary market funds & investors (SM).  The secondary market is the multi-billion dollar private buying & selling of investor shares.  SM’s feast on high-flying but hurting industries like tech, and worryingly cannabis.  

SMs will swoop in to make lowball share purchase offers to investors or employees eager to sell.  

Cannabis’ long drought of M&A exits, dividend payments, depressed share prices and initial public offerings may force early-stage investors (family offices, venture capitalists and high net worth angel investors) to offload their stock at a deep discount versus current share prices, not to mention previous highs.

This highly discounted selling inevitably drives down valuations.  

The most vulnerable (or lucky) are private & thinly-held public company investors and employees who have lost patience, need liquidity or are looking to recalibrate their investment portfolios.  For example, cannabis-investing VCs may want to deploy their remaining capital elsewhere.  Or they may need to return cash to their limited partners, many of whom are struggling themselves. 

Employees with large holdings may see the secondary market as a critical release valve when the stock has low trading volumes, their options are underwater or they see a dearth of M&A or IPO opportunities.  Firms eager to retain key employees may look to the SM to sell their stock.

The secondary market is not new.  Recently, a spate of new and existing funds have raised billions of dollars to capitalize on investor sell offs.  Any sector plagued by a shortage of risk capital, limited financial exits, depressed share prices and high interest rate will be in SM crosshairs.

Cannabis, anyone?

Sellers beware

Lower valuations is not a firm’s only concern. The SM can resemble a souk, is more lightly regulated, and is far less liquid than public markets.  And secondary markets are not immune to two big 2024 risks: continued high rates and new geo-political shocks.

I could be wrong.  Or, I can continue my forecasting winning streak where I predicted a quick rise to record high interest rates, the shift of risk capital to safer harbours and continued weakness in market caps despite growing profitability. 

For some investors & employees, the SM may be the only exit game in town. Cannabis firms need to understand the implications of this market while focusing on building great businesses.

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