It is helpful to place the current tight conditions in the cannabis equity markets in a historical context.
Equity capital raises in cannabis by quarter and sector from 2019 to the present. The Q 2: 22 figures represent March 31, 2022 and May 20, 2022. The maroon line represents the price of the YOLOETF, a good indicator of cannabis equity prices.
We have commented on the steep decline in equity capital raises YTD compared to 2021. The graph shows that this comparison is a bit misleading. Equity financing in Q 1: 2022 and Q 2: 2022 to date is 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, the most significant sector in equity financing, accounted for only $14 M 1.6% of the equity raised YTD in 2022 compared to $1.9 B 52% in 2021. We expect this trend to continue for several reasons:
Equity is one of the primary needs of the MSOs for new capital and one of their primary needs is to use equity in acquisitions.
The MSOs of Tier 1 have strong cash positions and are expected to be free cash flow positive in 2022 and 2023, eliminating the need to issue equity in a down market.
Greater availability and better pricing of debt is a restraining factor.
Investment M&A, which is chiefly composed of SPAC IPOS, has fallen deeply out of favor. They made up only 9.9% of 2022 YTD compared to 16.1 in 2021 and they 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. This sector has accounted for 47.3% of the issuance of equity YTD in 2022, compared to only 7.6% for the same period in 2021, as a result of the trend towards greater use of debt capital. 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 taken a bigger piece of the financing pie, accounting for 22.0% of YTD raises compared to 7.1% in the previous year. We believe this trend will continue as MSOs try to improve the efficiency and compliance of newly built and acquired operations.
Agriculture Technology is down YTD but we think there will be a resurgence in demand as MSO expands operations in newly opened adult rec states.
The Viridian Capital Chart of the Week shows key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
The Viridian Cannabis Deal Tracker provides market intelligence that cannabis companies, investors, and acquirers use 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. The Tracker aggregates and analyzes all closed deals and segments each week 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 Deals by Location of Issuer Buyer Seller to Track the Flow of Capital and M&A Deals by State and Country Since it was founded 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.
The article was written by one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.