Cannabis investors discuss strategies for 2021 amid consolidation and interstate commerce
2021 appears to be the year of cannabis, as its outlook and apparent societal acceptance have changed dramatically since the industry began. How do investors navigate this complex and ever-changing landscape as we stand on the brink of federal legalization?
A team of expert investors gathered to discuss their strategies at the Benzinga Virtual Cannabis Capital conference:
- Emily Paxhia, Executive Director of Poseidon Asset Management
- John T. Lykouretzos, CEO of FocusGrowth Asset Management
- Sean Stiefel CEO and Founder of Capital of the Navy
- Todd Harrison Founding Partner and Chief Investment Officer at CB1 Capital
What is bringing back investor interest in cannabis?
According to Viridian Capital Advisors, the first five months of 2021 saw more than $ 6.6 billion in transactions in the cannabis industry, compared to just $ 2.3 billion for the first five months of 2020.
Emily Paxhia, chief executive of Poseidon Asset Management, believes this upward trend is largely due to companies finally proving their business models.
“In the United States in particular, MSOs are showing incredible growth with excellent EBITDA margins. I think the business case is there, so institutional capital sees it more as a category of consumers, who, instead of their own little silo basket, are now part of a high-growth consumer space, ”he said. said Paxhia.
Sean Stiefel, CEO and founder of Navy Capital, said the shift in the political balance of power is another reason for the industry’s renewed enthusiasm.
According to him, the elections of November and the second round of the Senate of Georgia caused the reopening of the valves of the cannabis space.
“We’re in a favorable political landscape, theoretically, and that’s why the capital came in,” Stiefel said.
How will the current wave of mergers and acquisitions impact the cannabis industry?
The cannabis industry has seen a lot of mergers and acquisitions in recent months.
Tilray (NASDAQ: TLRY) and Aphria (NASDAQ: APHA) merged in March, Curaleaf (CSE: CURA) (OTCQX: CURLF) purchased EMMAC Life Sciences in April and Pharmaceutical Jazz (NASDAQ: JAZZ) acquired GW Pharma (NASDAQ: GWPH) in May. More recently, Really (OTCQX: TCNNF) announced the acquisition of Harvest Health & Leisure Inc. (OTCQX: HRVSF).
The Paxhia of Poseidon called this wave of consolidation different from the previous ones.
“This wave seems a little more strategic, it feels like companies are coming together with a real plan for the future, and it’s really happening at all scales.”
John T. Lykouretzos, CEO of FocusGrowth Asset Management, a company that mainly focuses on small private companies in the sector, gave advice to small businesses:
“Complexity is not your friend.”
He spoke of the green rush from late 2018 to early 2019.
“In the green rush we saw aggressive and dare I say reckless financings and the results were complicated Frankenstein-type capital structures,” Lykouretzos said.
For small businesses with limited access to capital, Lykouretzos also advised people to “keep a clear and simple balance sheet” in order to maximize value.
Stiefel of Navy Capital described the cannabis acquisitions in two segments.
“There’s purely geographic acquisition…” he said, which happens when a business wants to enter a new market, then it acquires a local business with existing operations there.
“… And then there’s strategic acquisition, where you look at some of these companies and they’re not operational, so they can go on and acquire someone who is,” continued Stiefel.
These are the clues his company examines to understand which companies are ripe for M&A action.
“Other than that, I think we’re going to start to see alcohol and tobacco take a dip, learn more about space, get your feet wet, find out who the players are, and then develop a longer term strategy.” , Stiefel concluded.
Does vertical integration make sense with interstate commerce?
When the industry began to flourish, companies in the cannabis sector were forced to integrate vertically in order to provide growing markets in legal states. With the emergence of a more mature industry and the relaxation of regulations, does it still make sense for cannabis operators to remain vertically integrated?
“I think a lot of people are trying to figure out what they want to be when they grow up,” said Todd Harrison, founding partner and chief investment officer at CB1 Capital. “They want to try and see what the landscape looks like on the other side of interstate commerce, for example.”
For Harrison and CB1 Capital, there is still a lot of information to be discovered. However, some things are starting to clear up, such as whether states will continue to regulate who will be allowed to grow, process or sell cannabis.
“Certainly if you see cannabis as an engine of tax revenue and employment growth, they have to feed this beast and the oligopoly’s existing infrastructure currently provides that product,” Harrison said. through, all these other artificial obstacles will disappear.
As far as Harrison is concerned, now will be the time to decide who the new winners are. But until then, it is more important to analyze and understand the current landscape than to speculate on future possibilities.