Silicon Valley Bank Failure Is Just The Tip Of Financial Iceberg, Could Affect Unexpected Industries

Last week the US economy got clobbered by the biggest banking collapse since 2008 when the parent of Silicon Valley Bank, SVB Financial Group SIVB failed to raise enough capital to continue. It's now being shopped around by bankers. The news came on the heels of SVB’s attempt to sell $1.25 billion in common shares and another $500 million of convertible preferred shares.

Shortly after, US regulators tried to take matters into their own hands and protect the nation’s banking system by closing down New York-based Signature Bank SBNY, which was the third financial institution to shut down in the recent period, following Silicon Valley Bank and Silvergate Capital Corp SI.

How are these financial storms affecting the cannabis industry?

At the first glance, many would assume not significantly given that the industry does not have access to capital via financial institutions such as banks due to marijuana’s status as a Schedule 1 substance.

But, is it really that simple?

Some cannabis finance experts say it's not, and that indeed the industry will be affected. Morgan Paxhia, who co-founded along with his sister Emily Paxhia the Poseidon Investment Management in 2013, said that even though SVB is not known for funding cannabis companies, it has provided services to ancillary businesses, writes Green Market Report.

The Tip Of A Financial Iceberg 

Paxhia says the SVB failure is the tip of a financial iceberg and its effects on various industries, including cannabis, are yet to be seen.

“My takeaway is there are macro issues here. We’ve been dealing with a two-year bear market, recessionary kind of situation in our industry, but it feels like the rest of the world is starting to wake up,” Paxhia told Green Market. “Think about what’s happened over the last few weeks: We’ve seen personal credit card balances hit new all-time highs, we’ve seen auto loan defaults picking up, we’ve seen commercial loans defaulting. You’re starting to see weakness in the system.”

On the positive side, small credit unions, which are the main sources of financial services across the cannabis industry, look stable, Paxhia noted.

Bryan Miller, executive investment director at Florida-based Rair Capita says small cannabis operators like mom-and-pop pot shops will face the biggest challenges while large corporations have better shot at dealing with the financial turmoil.

“The companies that sit at the top in the venture-backed ecosystem, they’re probably going to be OK, but the ones near the bottom, they’re going to struggle more,” Miller told the outlet. “At the end of the day, a company can seek capital and a company can lend capital; it’s just a question of the cost of that capital. Capital is also becoming more and more expensive right now.”

Some publicly traded cannabis companies are likely worried that the banking collapse is going to affect their stock. For example, Zynerba Pharmaceuticals, Inc. ZYNE producer of innovative pharmaceutically-manufactured cannabinoid therapies for orphan neuropsychiatric disorders, issued a statement Monday confirming that it does not hold cash deposits or securities at Silicon Valley Bank.

Although Poseidon was among the first companies to recognize the potential and invest in some of the now largest companies in the space, Paxhia is concerned in general though less so for the cannabis industry.

Here's a look at how Poseidon led the way: Marijuana operator Aphira, which was acquired by Tilray Brands TLRY; cannabinoid drug company GW Pharmaceuticals, which produced Epidiolex, the only FDA‑approved prescription CBD treatment for epileptic seizures. GW Pharma was acquired by Jazz Pharmaceuticals JAZZ in 2021. Then there's Headset, FlowHub, Ascend Wellness Holdings AAWH, FlowCanna and Pax to name a few more of the key players.

In one decade since its launch, Poseidon has three running funds that are closed to new investors, and their New York Stock Exchange traded ETF - AdvisorShares Poseidon Dynamic Cannabis ETF PSDN.

Benzinga Cannabis Capital Conference

Emily Paxhia is bringing her vast industry expertise to the Benzinga Cannabis Capital Conference as the Honorary Chair of the event this coming April 11-12 in Miami Beach. 

Photo: Cybrain on Shutterstock