Cannabis Investors Discuss Strategies For 2021 In The Context Of Consolidation And Interstate Commerce

2021 seems to be the year of cannabis, as its prospects and apparent societal acceptance have dramatically changed since the industry’s early days. How are investors navigating this complex and ever-shifting landscape as we sit on the verge of federal legalization?

A team of expert investors gathered to discuss their strategies at the Benzinga Virtual Cannabis Capital Conference:

• Emily Paxhia, Managing Director at Poseidon Asset Management
• John T. Lykouretzos, CEO of FocusGrowth Asset Management
• Sean Stiefel CEO and founder of Navy Capital
• Todd Harrison founding partner and Chief Investment Officer at CB1 Capital

What Is Driving Investor Interest Back Into Cannabis?

According to Viridian Capital Advisors, the first five months of 2021 saw more than $6.6 billion in deals in the cannabis industry, versus just $2.3 billion for the first five months of 2020.

Emily Paxhia, managing director at Poseidon Asset Management, thinks this upward trend is due in large part to companies finally proving their business models.

“Specifically in the U.S., MSOs are demonstrating incredible growth with great EBITDA margins. I think the business case is there, so institutional capital is seeing it more as a consumer category, which instead of its own siloed little basket is now part of a high growth consumer space,” Paxhia said.

Sean Stiefel, CEO and founder of Navy Capital, said the shifting political power balance is another reason behind the industry’s new-found excitement.

The November election and Georgia Senate runoffs caused the flood gates to reopen for the cannabis space, in his view.

“We are in a favorable political landscape, theoretically, and that’s why the capital came in,” Stiefel said.

How Will The Current Wave Of M&A Impact the Cannabis Industry?

The cannabis industry has seen numerous mergers and acquisitions in recent months.

Tilray TLRY and Aphria APHA merged in March, Curaleaf CURA CURLF purchased EMMAC Life Sciences in April and Jazz Pharmaceuticals JAZZ acquired GW Pharma GWPH in May. More recently, Trulieve TCNNF announced the acquisition of Harvest Health & Recreation Inc. HRVSF.

Poseidon’s Paxhia called this wave of consolidation different from previous ones.

“This wave feels a little bit more strategic, it feels like companies are coming together with a real go-forward plan, and it’s really happening on every scale.” 

John T. Lykouretzos, CEO of FocusGrowth Asset Management, a firm that focuses largely on smaller private companies in the space, gave a piece of advice to smaller businesses:

“complexity is not your friend.”

He referred back to the green rush of late 2018 to early 2019.

“In the green rush we saw some aggressive and, dare I say, reckless financing and the results were complicated Frankenstein-type capital structures,” Lykouretzos said.

For smaller businesses with limited access to capital, Lykouretzos also advised people to “keep the balance sheet clean and simple,'' as a way of maximizing value.

Navy Capital’s Stiefel described acquisitions in the cannabis space in two segments.

“There’s the pure geographic acquisition...” he said, which happens when a company wants to enter a new market, so it acquires a local company with existing operations there.

“... and then there’s the strategic acquisition, where you look at some of these companies and they’re not operationally sound so they can go on and acquire somebody who is,” Stiefel continued. 

These are the clues that his firm looks at to understand which companies are ripe for M&A action. 

“Outside of that, I think we’re going to start seeing alcohol and tobacco dip their toe in, learn about the space, get their feet wet, figure 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 space were obliged to integrate vertically in order to provide for growing markets in legal states. With a more mature industry emerging and regulations loosening, 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 through to what the landscape looks like on the other side of interstate commerce, for instance.”

For Harrison and CB1 Capital, there is plenty of information yet to be discovered. However, some things are beginning to clear up, such as the fact that states are going to continue to regulate who will be allowed to grow, process or to sell cannabis.

“Certainly, if you’re looking at cannabis as tax revenue and jobs growth engine, they’ve got to feed that beast and the existing infrastructure in oligopoly is currently providing that product," Harrison said. "By the time interstate commerce actually comes through, all of these other artificial impediments are going to be gone.” 

As far as Harrison is concerned, that will be the time to decide who the new winners are. But until then, it’s more important to analyze and comprehend the current landscape than to speculate about future possibilities.