According to statistics from the Viridian Deal Tracker, private cannabis enterprises made up the majority of the financial market in the cannabis industry in 2018. However, in recent years, public debt financing has taken over that role. It’s a trend that is almost certain to continue as we make the slow (seemingly impossible) shift towards federal legalization.
History Of Cannabis Financing
The fourth financial quarter of 2018 marked the cannabis industry’s highest total capital raise on record, with private companies accounting for 86 percent of the cash.
The majority of the $1.3 billion that was raised can be accredited to four familiar cannabis businesses, prior to their reverse takeovers, and they are Curaleaf Holdings (CSE: CURA) with $400 million, Acreage Holdings (CSE: ACRG.A.U) with $315 million, Harvest Health & Recreation with $218 million, and Cresco Labs (CSE: CL) with $180 million.
In the cannabis industry’s infancy days, equity was practically the primary source of funding, accounting for 81 percent of total capital raised in 2018-19.
Given the infantile nature of the industry, the absence of significant public awareness of cannabis businesses, and the reality that most industry players had negative cash flow and few cash-flow resources to finance loans, this made sense.
However, the plummet of stock prices towards the end of 2019 changed the financial cannabis landscape in seemingly irreversible ways.
Changes In The Cannabis Market
Cannabis equity prices fell roughly 52 percent between the first and fourth quarters of 2019, which resulted in a dramatic drop in equity issuance. Consequently, public business equity issuance had largely been forced out of the market by the end of that year.
In 2020, debt accounted for 74.5 percent of total capital raised, the first time debt surpassed equity in capital raised in cannabis history, in a remarkably short time no less. In the same year, we saw the emergence of direct debt with no conversion features or warrants, a trend that continues today, that was pioneered by certain Curaleaf and Cresco issues.
With the transition from 2020 into 2021, newfound excitement about the possibility of federal cannabis legalization led to a 120 percent increase in cannabis stock prices, thus sparking the second big wave of cannabis equity issuance.
This was evident in the first quarter of 2021 when public companies raised $1.2 billion in stock, a new high. Very few companies thought to take on any more debt with prices so high. However, federal legalization was only a possibility; not a reality and it is still a dream we are working to achieve.
Current Cannabis Deal Financing
As the excitement and expectations surrounding cannabis legalization on a federal level faded, equity issuance dried up, and stock values plummeted once more. Debt accounted for 93 percent of overall funding from the third quarter of 2021 to the first quarter of 2022, with private enterprises raising a record 10% of that total.
That unfortunate trend is sadly, but not surprisingly, expected to continue through 2022, according to Viridian Capital Advisors. There are two main factors that we can attribute to the reluctance of public corporations to raise their capital. For one, prices are far lower than perceived intrinsic values and for the other, the cannabis market is frozen in anticipation of legalization that would allow for uplisting.
The shift from equity-heavy to debt-heavy financing in the cannabis industry was a quick one that can largely be chalked up to the stock drop in 2019 as well as the state’s failure to follow through with federal cannabis legalization.
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