In 2018, cannabis industry financing was the domain of private companies that acquired equity in cannabis companies in exchange for financing dollars. The fourth quarter of 2018 had the largest total investment capital the industry had seen to date, with private investors raising 86 percent of capital funding of $1.3 billion.
Major cannabis companies raised the bulk of 2018 investment dollars:
• Curaleaf Holdings $400 million
• Acreage Holdings $315 million
• Harvest Health and Recreation $218 million
• Cresco Labs $180 million
In the early days of medical marijuana and the beginnings of the recreational cannabis business, equity was the only reliable investment solution. In 2018 to 2019, fully 81 percent of total capital raised was through equity. The public lacked awareness of this brand-new industry, and the fact was that most cannabis companies had little cash flow, so equity was the preferred financing mechanism.
By the end of 2019, cannabis equity plunged in value by 52 percent, leading to a sharp drop in equity issuance. Many private company investors were squeezed out of the industry. In 2020, debt financing increased to 74.5 percent, with most of that being straight debt without special features such as conversion features or warrants.
Initially, the cannabis industry didn’t have adequate cash flow to support debt financing, so the major players relied on equity financing to generate investment capital. Since the cannabis industry is essentially a farming business, it requires hefty up-front investment dollars to cover the costs of each new crop, like all farmers. Upfront costs such as seeds, fertilizer, herbicides, and land costs – either rent or acquisition of more land to increase crop sizes – are all expensive but the cash flow from the crop is not available until the crop is harvested.
Cannabis investors were optimistic that federal legalization was imminent, which lead to a 120 percent increase in cannabis stock prices. That, in turn, stimulated equity financing and lead to $1.2 billion in equity-based financing in 2021. High prices ended up squeezing out debt, which didn’t make sense as an investment option.
However, from the third quarter of 2021 to the first quarter of 2022 debt financing accounted for 93% of cannabis industry financing, with private companies raising 10 percent of the total. The finance industry expects that debt financing to stay stable in 2022. The public companies financing the cannabis industry are reluctant to raise equity as long as prices are well below intrinsic value. The industry is still hopeful about federal legalization, but the issue is freezing the market, which could enable uplisting. Investors are reluctant to raise capital through the markets now and would prefer to do so later in the year.
Private debt and private equity will continue to grow due to the pricing mechanics in many of the issues. Public converts have caps and discounts that persuade investors to delay investments due to pricing issues. Discounts are priced off to a future investment, which may feature better-investing conditions. Multistate operators can raise debt at less than 10 percent, making it the cheapest source of investment capital, as compared to equity.
Investment analysts anticipate increased floating-rate issuance as institutional investors have increasing experience with the drama of cannabis companies raising rates.
Debt Deals Are Preferred to Equity Funding
Large cannabis operators increasingly prefer debt as a funding tool due to falling cannabis stock prices and investment terms that are more attractive than real estate sale-leaseback deals. Curaleaf, based in Massachusetts, raised $300 million – the largest amount of debt raised in the cannabis industry. Chicago’s Cresco Labs raised $200 million in recent weeks. New York-based Acreage Holdings hopes to raise at least $100 million in debt through a credit facility with an institutional investor.
Equity has become an unattractive source of funding for cannabis companies. Some companies are selling cultivation, processing, and storage facilities and then immediately leasing them back as a mechanism to secure tens of millions in investment capital. These investment ploys lock in the asset seller for a much longer period than straight debt deals. One drawback to these asset sales is that they increase expenses through the leasebacks.
Smaller Cannabis Companies Financing Partners
Several financing companies that are focused on smaller cannabis companies are now operating around the country. They feature flexible lending and payback terms that are attractive to smaller players. The financial side of the cannabis industry is still one of the most challenging management issues for these smaller companies. They have to determine how to raise capital through debt or equity funding as well as other complex strategic choices.
Small cannabis companies may want to remodel their dispensary, or open a new location, and the financing company helps them determine what is the preferred option for raising capital. Often equipment is needed to expand business prospects and to capitalize on market opportunities. These financing companies may have cannabis equipment manufacturer relationships that offer discounts and can save you thousands on equipment costs.
Strategic Investments that Smaller Cannabis Companies Could Make
Small-to-medium sized cannabits companies could make strategic investments to keep up in the industry, including:
Facilities need to be state of the art and meet all necessary regulations. Cannabis construction financing can be used to build out your facility, whether it be for growing, manufacturing, or dispensary.
Hire More Staff
Your business can address the need for hiring more staff during expansion. Apart from financing hiring, funds from a cannabis loan can be used for training costs and payroll.
Open A New Dispensary Location
Cannabis company financing can be used to buy new cannabis equipment. In addition, you can use equipment leasing and financing to purchase retail equipment to improve your customers’ retail experience.
Owners and managers of smaller cannabis companies have plenty of experience with their growing, packaging, and dispensary functions, but may not have expertise in raising capital for investing in their business. These cannabis company financing experts can become valuable partners that helps these companies find the best option for loans and financing knowledge.