OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
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Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Week ended 11/22/2024
Viridian Capital Chart of the Week: The Changing Composition of Plant-Touching Cannabis Capital Raises
- The black line on the graph shows that total YTD Capital Raises for the U.S. Cultivation and Retail sector (plant-touching companies) are up 141% to $972M from $403M for the same period in 2023, a significantly stronger rebound than the overall U.S. Industry (including all 12 sectors that Viridian Capital tracks), which was up 56%.
- Make no mistake, though, the capital crunch is still in full force. 2024 is shaping up to be the second worst capital raise year since 2018. Given the recent level of raises, it is a bit ominous to realize that the top 14 MSOs have a combined $2.3B of debt maturing in 2026, significantly more than was raised in any year except 2021.
- The bars on the graph show that the composition of capital raises has also changed markedly. Approximately 98% of all capital raises in 2024 have been debt (indicated by various shades of red corresponding to issue size). Approximately 75% of the debt raised has been the refinancing of existing debt. Three large debt raises (>$100M shown in dark red) account for more than half of all capital raised YTD. Meanwhile, there has not been a similar large equity deal since 2021.
- For all intents and purposes, the equity market is closed for plant-touching companies. Ironically, a large part of the reason for this is the overhang of positive catalysts like S3 and SAFER. On the supply side, no company wants to raise equity at prices they view to be substantially below intrinsic value (we agree). No CFO wants to be the guy who raised equity immediately before the market took off in response to one of the catalysts. On the demand side, there is no new capital in the market, and existing investors have been burned too many times. Also, as an investor, the natural inclination is to think that any company that wants to raise equity at these prices must be desperate.
- This is certainly not what we predicted the year would look like. We thought that as time marched on toward rescheduling, prices would begin to inch up, and companies would seize the opportunity to issue equity for balance sheet repair.
- What will it take to break this cycle? Unfortunately, we are dependent on ACTION in Washington instead of talk. Rescheduling is clearly a significant cash flow boost, even though quite a few big MSOs aren’t paying their 280e taxes even now. The Farm Bill may be a big help as it is clear that intoxicating hemp has siphoned away a serious amount of revenues from the industry. SAFER would likely top all of these, finally allowing an influx of new capital. With cannabis stock liquidity as low as it is, any combination of the above could easily result in a doubling or more of prices.
- Usually, we think the best thing that can happen in Washington, D.C., is nothing at all, but this time it’s different. For once, we need our representatives to do the right thing(s).
