Cannabis companies looking for a cash injection will probably have a tougher time in coming months than in previous years, as the investor pool shrinks and financing options have narrowed, several experts told attendees during a finance forum this week in Las Vegas.
During Cannavest at MJBizCon this week, a number of financial professionals agreed that money is becoming increasingly expensive and hard to come by for those in the marijuana trade, but emphasized that “the capital is there, for stronger operators,” as Valay Shah of C3 Industries said.
But, Shah noted, “It’s really tough right now. It’s hard to find new pathways” to actually landing capital investments, due to several factors ranging from the overall economy to the poor returns on investment that many financial backers experienced over the past few years, as marijuana stocks have been in a lengthy slump.
“New capital sources are coming to the space, but the cloud to that silver lining is capital is also leaving the space,” said John Lykouretzos, CEO of Focus Growth Asset Management, who added that more “banks are starting to kick the tires” in parts of the industry.
But many financing options that do exist tend to come with double-digit interest rates, warned Upwise Capital Managing Partner Joe Lustberg.
Lustberg said even the largest multistate operators are taking on capital with interest rates of 12-15%.
“When operators come to us and say 12% is too expensive, we move on,” Lustberg said, regarding potential investments his firm looks at. “There does come a cost with being a cannabis operator. Until SAFE Banking passes and federal legalization comes, the cost is going to be that for a while.”
Several panelists also advised against delaying tax payments as a way to finance operations, a strategy being employed by some MSOs.
“You see all the MSOs now have huge IRS debt and liabilities, and the reason is because the IRS is the cheapest lender out there,” Lustberg said, referring to a Green Market Report story from September.
David Kirshenbaum, an advisor at Meadeco, said that kind of approach isn’t sustainable.
“I’ve dealt with a number of clients that try to play arbitrage with Uncle Sam on their tax payments,” Kirshenbaum said. “That turns out to be a losing strategy in those cases, where they’re basically using that aspect of their financing to in effect finance themselves. They wake up with a big bill, and then eventually audits, and we have to turn to (attorneys) to unwind the situation.”
Instead, what does work best for cannabis companies is getting loans by putting up real estate as collateral, several experts agreed.
“Real estate is probably the biggest pool of debt capital available,” said Peter Sack, managing director at Chicago Atlantic Real Estate Finance, adding that that’s the easiest way for many cannabis operators to qualify for business loans.
President Joe Biden’s push to legalize marijuana has also brought a renewed wave of investor interest in the space, said Mina Mishrikey of Merida Capital Partners.
Several experts have suggested publicly that the Biden administration will push to have a decision on rescheduling or descheduling cannabis before the 2024 election, which could lead to a seismic shift in the industry landscape within the next two years.
“With the Biden announcement a few weeks ago … we’re getting a lot more inbounds from institutional investors, who are like, ‘We want to get in before capital floods into the space,'” Mishrikey said.
“At some point, it’s going to become so easy,” Mishrikey mused, about investor interest renewing and a possible financial rebound of the entire cannabis sector. “You probably want to be investing now and selling into it when it’s so easy.”