Chart: Which Cannabis Subsectors Are Still Attracting Equity Capital?

• It is helpful to place the current tight conditions in the cannabis equity markets in a historical context.

• The graph shows equity capital raises in cannabis by quarter and sector from 2019 to the present. The Q2:22 figures represent March 31, 2022 – May 20, 2022. The maroon line represents the price of the YOLO ETF, a good indicator of cannabis equity prices.

• We have commented on the steep decline in equity capital raises YTD compared to 2021. However, the graph clarifies that this comparison is a bit misleading. Equity financing in Q1: 2022 and Q2:2022 to date are not as low as it was in the depths of the  “capital crunch” of 2020, and it is actually the first quarter of 2021 that stands out as an outlier.

• Cultivation & Retail, historically the most significant sector for equity financing, accounted for only $14M (1.6%) of equity raised YTD in 2022 compared to $1.9B (52%) in 2021. We expect this trend to continue for several reasons: 

  • The MSOs have been able to use equity in acquisitions, one of their primary needs for new capital.

  • The Tier 1 MSOs have strong cash positions and are expected to be free cash flow positive in 2022 and 2023, eliminating any pressing need to issue equity in a down market.

  • Greater availability and better pricing of debt is a further restraining factor.

• Investment/M&A, which is chiefly composed of SPAC IPOS, have also fallen deeply out of favor. They made up only 9.9% of 2022 YTD compared to 16.1 % in 2021 and are likely to represent a lower percentage in future periods due to Increased SEC scrutiny and poor performance of de-SPAC’d stocks.

• The Real Estate Sector, which is composed of cannabis lenders and sales leaseback providers,  has been a beneficiary of the sector rotation in 2022. Riding the trend towards greater use of debt capital, this sector has accounted for 47.3% of 2022 equity issuance YTD compared to only 7.6% for the comparable period in 2021. Given our expectations that meaningful legalization will remain elusive and stock prices will have difficulty rebounding in the overall market downturn, we think this sector will continue to benefit.

• Software/Media companies have also taken a bigger piece of the financing pie, accounting for 22.0% of YTD raises vs 7.1% in the previous year.  We believe this trend is likely to continue as MSOs look to improve the efficiency and compliance of newly built and acquired operations.

• Agriculture Technology is down YTD but we forsee a resurgence in demand as MSO’s build out operations in newly opened adult rec states.

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

Photo by Javier Hasse.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.