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  1. Home
  2. / Investing
  3. / Cannabis

Capital Raising in Cannabis Falls 67%

Only five companies went public during the first half of 2020 versus 13 in the first half of 2019.
By DEBRA BORCHARDT
Sep 17, 2020 | 07:30 AM EDT
Stocks quotes in this article: CURLF, CRLBF, IIPR, MEDIF

Is cannabis capital raising burning out?

Raising capital in the cannabis industry has declined by 67% in 2020, according to the most recent data from Viridian Capital Advisors. The company tracks capital raising within the industry -- both public and private. For the first six months ending in June, Viridian found that there were 166 capital raises for $2.6 billion, a big drop from 2019's first six months raise of $5.5 billion and 230 transactions.

The largest deals that happened during the first half of 2020 included the Curaleaf/Select (CURLF) acquisition and the Cresco/Origin House (CRLBF) . Curaleaf did a debt deal valued at $300 million and Innovative Industrial Properties (IIPR) was second on the list with an equity raise of $250 million. Public companies accounted for 89.2% of the capital raises and 67.5% of the total capital raised.

Just 32 private companies managed to raise money in the first half of 2020. This pales in comparison to 2019 when 109 private companies raised capital.

Falling Stock Prices Cause Decline

Viridian believes the decline in activity is closely related to the drop in the underlying values of stocks. "The drop in M&A activity directly relates to the dramatic decline in cannabis stock prices as most industry transactions are predominantly stock-based," read the report.

Only five companies went public during the first half of 2020 versus 13 in the first half of 2019. The report said the change was largely attributed to the disappearance of Reverse Takeover Offerings (RTOs) and the drop in SPAC (Special Purpose Acquisition Company) capital raising. The SPACs were big news in the second half of 2019 with two companies bringing in $925 million.

Cultivation Is Where It's At

So, where is the capital going?

Despite dropping in the amount of money raised, cultivation and retail remain the most active sectors. Real estate is also king with capital in this sector jumping by 53% over 2019 and representing 18% of the capital raised versus just 4% in 2019. "The main impetus for this increase is the rise of real estate SPACs and REITs both offering advantageous sales-leaseback financing," said the report. While Ag tech saw no raises in the category for the first half of 2020, the picture is looking brighter for the second half.

Biotech experienced a 92.3% increase in 2020 capital as MediPharm Labs (MEDIF) raised $27.9 million and PharmHouse raised $10 million. Although, PharmHouse just filed for restructuring so it seems that money has gone to waste.

Hemp capital dropped by 78% as hemp growing caused an oversupply and conversely a plunge a raw CBD prices. Combine that with some hemp processors filing Chapter 11 and it's no wonder investors stayed away from hemp.

California and New York are the leading states for capital raises, but newly legal Illinois and Massachusetts aren't far behind. New Jersey and Pennsylvania could also be climbing the charts as these states get closer to legalizing adult-use cannabis.

Looking Ahead

Since Viridian has tied stock prices to capital raising, it looks like the back half of 2020 is shaping up to be better. Prices seem to have stabilized after bouncing off year lows. Increasing growth in the industry means companies still need capital to grow. Consolidation continues to happen and that requires capital.

Budget shortfalls due to the pandemic are sure to push some states to legalize adult use in order to fill in the gaps. It's also possible that Democratic wins could lead to changes in the legislative picture.

Viridian also thinks that the SPACs that were formed in 2019 may be announcing deals and closing transactions. Companies that were unsuccessful in raising capital will begin to look for M&A exits. If that doesn't happen, expect fire sales as distressed assets get sold off in pieces. The bulk of the capital raising is expected to continue to happen in the U.S. versus Canada.

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At the time of publication, Borchardt had no positions in any securities mentioned.

TAGS: IPOs | Mergers and Acquisitions | Investing | Financial Services | Cannabis

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