As private capital continues to pour into these companies, they have four possible destinies. Here’s what you need to know to ride the wave…
As the public cannabis markets endure a short-term swoon in concert with world equities, investors should be aware that in the background a private capital wave continues to boom.
Cannabis companies in Canada, the United States, and around the world are receiving funding at an incredible rate. CBD companies are also receiving massive funding to meet the coming boom in demand for CBD products.
I’ve previously written about some of this wave, including the emergence of the “Private Offices” of billionaires getting into the game.
But with private capital being raised at a record rate, it’s time for an update.
So far this year, 50 private cannabis companies have raised over $1.2 billion in equity. That’s nearly double the pace of last year. The money has been raised in just about every sector of the cannabis industry.
All of that money is going to lead to a flood of IPOs.
The Four Destinies of Private Companies
Some smart person realized that those private offices want to invest in cannabis but don’t know how. So now there is an exclusive set of conferences set up solely for the private offices of rich people to learn about cannabis investing.
Those 50 private companies, and the 173 that raised private money last year, have one of four destinies.
- They could fail. Some will, but the truth is that in the cannabis industry most will not fail – at least not initially.
- They could sell to a competitor. I’m sure some of those companies have looked at the massive cash hordes of Canopy Growth (NYSE: CGC) and Cronos (Nasdaq: CRON) and asked themselves how to build a company that would be attractive to one of those.
- They could remain private and independent, raising more private capital as needed.
- And they could go public – I believe that will be the destiny of many of these companies.
In fact, many of those private equity raises were specifically marketed to investors as a pre-IPO raise. The company is explicitly promising to go public. So this summer and fall will prove to have many interesting IPOs.
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Banks are pressuring issuers to forget their long-term plans and raise as much money as they can as soon as they can, so it will be important to do the work to separate great companies at bargain prices from mediocre companies charging too much for their shares.
But the best opportunities will be outstanding – better than the best IPOs of last year.
Taking Advantage of Big Money
And fortunately, there will be more money to absorb all of those IPOs, too. As I shared yesterday, big money is finally starting to enter the cannabis market in a serious way. So far, that institutional money is mostly staying in fully federally legal companies – Canadian and international operators and U.S. companies that do not “touch the leaf.”
But there are exceptions.
It turns out that a big hedge fund has amassed more than 3% of Acreage Holdings (CSE: ACRG, OTC: ACRGF). We only know that because the fund is objecting to the Canopy takeover, so we can infer that that fund and others that don’t have to report their holdings very often are also in U.S. cannabis companies.
It is inevitable that institutions will start to invest in U.S. stocks as federal regulations make it safer for them to do so. The top Canadian firms have seen their disclosed institutional ownership increase from under 2% to over 10% within the past 18 months or so. Big U.S. operators generally have disclosed institutional ownership of under 1%. And every institution knows that the U.S. opportunity is many times greater than the Canadian opportunity and that U.S. companies are underpriced relative to their Canadian counterparts.
Even Bigger Things in Store
Looking to the future, what seems like a flood now will feel like a trickle in just a short time. In fact, in one sense, that future is already here.
A single public investment – Altria’s (NYSE: MO) investment in Cronos – was larger than the total amount of private equity invested in the cannabis industry so far this year. Now that Canopy has created a pipeline from non-cannabis companies to U.S.-based cannabis companies through the “option merger” it has with Acreage, expect more strategic investors in Canadian companies, followed by partnerships with or acquisitions of U.S. multi-state operators.
That, in turn, will draw even more private equity into the sector – those private offices aren’t going to those conferences just to get away from the desk for a few days. Strategic investors, private investors, and institutional investors will start to leapfrog each other to put more money into the cannabis sector.
We’ve been talking about this trend for a while and reinforcing that you, as an individual investor, want to get in front of this wave of capital, not behind it.
The only thing that’s changed is the speed at which that wave is coming. What we used to think was a year or two off is starting to happen right now.
Executive Director, National Institute for Cannabis Investors
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11 responses to “The Capital Wave Behind the Coming IPO Flood”
May 14 2019