More Reasons Why Equity Capital is Scarce in Cannabis
Weed is often shunned by Institutional Capital (IC) because of federal illegality, poor liquidity etc.
Yet, if this was the case, why has 10-20% of industry equity funding come from IC?
Something else is afoot.
We need to look at what’s happening in the broader IC world. This is a basket of equity investing containing venture, growth & mezzanine capital, distressed investing, and private equity.
Fact is, all is not rosy in the IC world even when we set aside the tariffs-induced market collapse.
IC challenges also explain why equity capital is avoiding cannabis.
--> From 10,000 feet
There is less dry powder - capital committed but not deployed - than has been assumed.
According to 2024 McKinsey research, global private equity dry powder fell 11% (to $2.1T) between the first half of 2023 and the first half of 2024.
This money has plenty of suitors. Approx. 37% of capital went to new, sexy industries like AI and fintech. Meanwhile, established sectors like healthcare, B2B, energy and B2C maintained their 60% share of total IC.
--> By capital source…
➕ Venture capital: hurting
This important source of cannabis seed & growth funding has fallen out of favour. 2024 fundraising saw a decline of 24% versus 2023 (which was down 12% versus 2023).
Importantly, VC fundraising has gotten longer (avg. almost 2 years) while exits are historically longer and harder to come by (e.g., IPOs are way down).
➕ Private equity: slowing down
2024 fundraising was tough, down 24% year over year for traditional commingled vehicles. This was the 3rd consecutive year of decline.
Investment returns were soft, especially compared with buoyant public markets.
Importantly, for the first time since 2015 sponsor distributions to limited partners exceeded capital contributions (and were the 3rd highest on record).
Deal counts and deal value remain way down (~35%) from their 2021 peaks.
While most cannabis plant & non-plant touching firms don’t have the earnings to attract PE, this should flip once consolidation accelerates, cost savings hit the bottom line and Rescheduling passes.
➕ Deal making shifts
Funding for deals (e.g., leveraged buyouts, M&A) is a good news/bad news story.
More M&A is being funded but the deals are favouring larger firms, pubcos and some asset classes i.e. not cannabis. Distressed capital fundraising could accelerate, given the travails in the cannabis space.
Finally, there’s the image problem. Cannabis is seen as a high-risk industry run by cowboys. It also doesn’t help that past 4-year returns suck and most cap tables are problematic.
Cannabis is not immune from global IC trends and market developments.
Leaders need to build these insights into their fundraising assumptions and strategies.
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