MSOs & LPs: Beware Activist Investors
Right now, the last thing many jaded cannabis leaders would expect to see are Activist Investors (AIs) buying into the space. Yet it’s probably going to happen.
Hear me out…
AIs are specialized hedge funds that buy significant minority stakes in publicly traded and privately-held companies in order to change how they are run. While approaches vary, the most common strategy is to put various forms of pressure on management to do things they believe will increase shareholder value, such repurchasing shares, paying dividends or shedding underperforming assets that aren't earning their cost of capital.
Activist investing is common and global. According to Goldman Sachs, ¼ of the 2023 S&P 500 has an activist investor. GS contends that for every 1 public company there are 2-3 private ones with AIs. Finally, the rise of passive index investing has in many ways reduced corporate accountability creating opportunities for activists. Not surprisingly, the number of AIs are increasing.
There are favourable conditions in cannabis for activists:
> Many ripe targets - low valuations persist but improving financials (e.g., cash on hand, balance sheet health) at big MSOs and LPs are setting the stage for share price increases.
> Odds are good that Rescheduling and/or SAFER will pass in 2024.
> The growing acceptance of weed by key capital markets enablers like asset servicing and wealth management
> A large supply of dry power (i.e. investable capital).
> The big upside of pursuing a contrarian investment thesis
In the AIs crosshairs...
In general, AIs like companies that are intrinsically undervalued by the market, operationally/financially underperforming or are no longer seen as growth plays.
Sound familiar, cannabis peeps? Cannabis is too big of an industry to ignore.
One scenario...
When a company has stalled revenue growth, ongoing low profitability or strategic confusion, growth-focused investors will look to sell because they aren’t getting the expected returns and have lost patience. However, value-based investors (who like cheap stocks) will still find these firms pricey and will be reluctant to jump in and purchase stock.
This gap makes the firm vulnerable to AIs who will buy up sizable minority stakes and nudge/force management to make the changes they believe will unlock more shareholder value.
Yes, many AIs will continue to ignore cannabis for good reasons such as a lack of regulatory clarity and liquidity (market & balance sheet). However, the largest activist investment funds have the means and patience to wait it out 4-6 years, not to mention lobbying heft to push for more liberal regulations. AIs will also have the financial muscle to secure less expensive debt or take the company private - wait for more propitious times.
#activistinvesting #capitalmarkets #activists #MSO #LPs