On this week’s episode of Trade to Black podcast, we welcome Rob Sechrist, the Co-Founding President of Pelorus Equity Group, a provider of real estate debt financing solutions and specialty-use cannabis mortgage REIT Fund. Rob gives his perspective on a variety of topics affecting cannabis participants—from the financing environment for operators to the mistakes equity investors are making by failing to fully understand the dynamics of early-stage markets.
Regarding the latter, Rob Sechrist reminds us that while the U.S. cannabis sector has been around in a handful of states for years, it should still be regarded as an emerging market sector. As such, it is hard for investors to value the equity because earnings predictability and operating history are not fully developed.
"This (U.S. cannabis) is an emerging sector, and each new state is gestating. And so, none of the modalities of understanding of things of business—what would be a consensus for how things should operate can be applied yet because there is not enough historical history in any of these one states. And so you cannot use those models in that school of thinking. So that’s the first place where people have gone wrong."
An emerging industry is defined as a group of companies formed around a new product or idea that is in the early stages of development. This fits the bill with cannabis, which is fighting to establish a stronghold in the traditional consumer package goods space despite several disadvantages in terms of heavy regulation and advertising. As well, adult-use cannabis is still only legal in 21 U.S. states, or just over 40% of states in the Union.
Rob also believes that the prevailing thought that 2023 will be an active years for mergers & acquisitions might be misguided. He believes that the “dynamics and reasons why you might want to merge with somebody might be quickly changing.” The reason: less operating visibility due to federal regulatory gridlock and industry challenges such as margin compression may make organic growth preferable over acquired growth, which is expensive and capital intensive.
Indeed, after a record-breaking year for mergers and acquisitions in 2021, the pace of M&A declined drastically in 2022, as revenue growth stalled-out, margins compressed and equity prices crumbled—making the use of share capital to acquire less attractive.
This article was originally published on The Dales Report and appears here with permission.
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