Capital Markets Are Down but Not Quite Dead

October 26, 2023 · MG Magazine

A potent concoction of slowing capital markets and inactivity in Washington D.C. bears the majority of blame for the industry’s lackluster fundraising performance in 2023, but poor growth and contracting margins are what’s really been keeping investors away.

According to the cannabis deal tracker provided by Viridian Capital Advisors, worldwide cannabis capital raises are expected to hit a multi-year low by the end of December. The $1.72 billion closed through the first 41 weeks of the year is 50 percent short of last year’s figures. Public companies account for 73 percent of the total capital raised in 2023, down slightly from the volume raised in 2022 and lower than any other period since 2019. Making matters more difficult in the months to come, debt represents 61 percent of the total capital raised, significantly higher than any comparable period since 2018.

“The low activity level in both capital raises and [mergers and acquisitions] activity owes a lot to the inactivity in Washington D.C. with regard to any sort of meaningful cannabis legislative reform and certainly movements in those areas such as the SAFER Banking Act,” said Frank Colombo, a chartered financial analyst and the director of data analytics at Viridian Capital Advisors. “The potential rescheduling to [Schedule III] will have strong positive impacts on capital raising and [mergers and acquisitions].

“However, the capital markets slowdown and lack of legislative reform are only the obvious points that are easy to point to,” he continued. “Less discussed but equally important is the downturn in the industry’s economics. Cannabis is always mentioned as a growth industry, but consensus estimates of the 2023 revenues for the ten largest [multistate operators] show a growth of only about 1 percent from 2022.”

According to Colombo, disappointing rollouts in markets like New York, the pernicious impact of wholesale price contraction across the country, and inflationary cost increases created a perfect storm to hinder the industry’s profitability and attractiveness to growth-seeking investors.

“The same ten [largest] MSOs are projected to have aggregate EBITDA margins of only 24 percent in 2023, down from 25 percent in 2022,” said Colombo. “And mind you, this is for the crème de la crème of the industry. Many smaller players with less access to capital have been facing greater downturns, especially in markets like California that have suffered greater price contractions.”

But much like carefully stressing cannabis plants encourages them to focus their limited resources on producing better buds, schwazzing could have its place in forcing companies to strengthen the weakest parts of their operations and focus on what matters most.

To survive in 2023, many companies have been forced to lay off workers, exit difficult markets, contract working capital, eliminate poorly performing SKUs, and apply far greater scrutiny when exploring mergers and acquisitions. While none of these steps are attractive when things are going well, no industry of significance can skip its painful transformation into a lean, mean, publicly-traded revenue stream worthy of fresh investment dollars.

“The good news is that the industry is likely to be stronger coming out of this period,” said Colombo. “We have at least three major population states which are potential new adult recreational states: Pennsylvania, Ohio, and Florida. The opening of rec markets in these states will demand capital, which will need to be raised. Alternatively, companies may choose to expand through acquisition. Either way, new states equals upticks in capital markets activities.” (Full Story)

In category:Business
Next Post

Most Michigan Cannabis Owners Have No Intention to Sell Their Businesses

Despite the challenges in the Michigan market, cannabis operators are preparing to expand. The 2023 Michigan Cannabis CFO Outlook found that a quarter of cannabis companies in the state were actively seeking capital for expansion at this time, while nearly half said…
Read
Previous Post

Ranks of women, minority cannabis execs rebound to pre-pandemic levels

The percentage of women and members of minority groups holding executive positions in the cannabis industry has returned to pre-pandemic levels after a significant drop during the past three years, according to a new report from MJBizDaily. In 2019, MJBizDaily estimated that more than…
Read
Random Post

New York Officials Shut Down Illegal Dispensary As Licensed Stores Begin to Open

New York Gov. Kathy Hochul (D), Attorney General Letitia James, and the Office of Cannabis Management (OCM) on Monday announced the forced closure of Big Chief Smoke Shop, an unlicensed cannabis retailer in Brooklyn. The closure came just one day…
Read
Random Post

NewLake Capital Reports Increasing Revenue With Solid Tenants

After the markets closed on Wednesday, NewLake Capital Partners, Inc. (OCTQX: NLCP) announced its financial results for the second quarter ended June 30, 2023. The real estate lender reported that the second quarter revenue increased 8.2% to $11.4 million. NewLake also reported that its quarterly…
Read
Random Post

The End of Big Alcohol Is Coming? - Cannabis Use vs. Alcohol Use Is Almost Dead Even Now in the 18 to 25 Year-Old Demographic

A recent analysis by TD Cowen's analyst, Vivien Azer, sheds light on a shift in consumer behavior, highlighting the competition between legal cannabis and alcohol sales. Over the past five years, alcohol sales in states where cannabis is legal have lagged behind…
Read
Random Post

Cannabis Reforms Worldwide: A Global Overview Of Recent Changes

South Africa to Introduce New Cannabis Laws – What You Need to Know The South African Portfolio Committee on Justice and Correctional Services has opened the proposed amendments to the Cannabis for Private Purposes Bill for public comments. Interested stakeholders…
Read