Don’t Count On Institutional Money to Fund Your Cannabis Business

“All human wisdom is summed up in two words; wait and hope.” Alexandre Dumas, Author & Playwright

Terrascend’s plan to uplist onto the TSX this summer will be watched by many MSOs and investors.  If the company is successful many believe it will unlock some of institutional capital (IC) that has been sitting on the sidelines of the cannabis industry (not to mention boost liquidity and valuations).  I am rooting for Jason Wild & Co.

Having said that, I am not sure moving to the TSX will herald a flood of new capital into the cannabis space.  More likely, it will be a trickle in 2023.   Before I explain why, lets define what we mean by IC.  ‘Institutional’ means different things to many people.  An institutional investor is an entity (e.g., pension fund, private equity firm) that makes investments on behalf of someone else.  IC comes in different sizes, structures and investment styles, with different perceptions of cannabis and how much money they deploy into alternative (i.e. high risk) investments.

Assuming there is no regulatory reform in the US, I don’t see widespread MSO uplistings leading to a large influx of funding this year. 

Here’s what some PE, VC and pension fund managers are concerned about:

1) Lack of industry understanding
Conventional wisdom in many circles is that cannabis is a ‘sad sack’ industry where its nigh impossible to make money. It doesn’t help that there are no 20+% IRR case studies or that the accounting in many firms leaves much to be desired.

2) Current economic climate
Rising rates, bank collapses and meltdowns in some new sectors (e.g., crypto) have tempered IC enthusiasm for alternative asset classes not to mention shortened investor time horizons.
 
3) Size
Simply put, most cannabis market caps are now too small to interest medium-to-large institutional funds.

4) Poor governance & hygiene
IC like clean, orderly businesses. Some firms have weak and convoluted business structures (e.g., dual class shares), undeveloped Boards and bad ESG performance.  It doesn’t help that MSOs & LPs often miss guidance or delay financial updates/earnings calls for lame reasons.

5) Ongoing stigma
Not surprisingly, many fund managers see the industry as a vice, ethically dodgy and frankly, kind of flaky. 

6) Regulatory opacity
Lots of IC will want regulatory clarity if not major liberalization before they commit funds.

Right now, only a handful of MSO and LPs would even qualify for non-distressed IC.  Some investments will get done but only the best firms will get funded with reasonable terms. The remainder will need to get their operations and financial statements in order if they want to appeal to the sophisticated and picky institutional investor.

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