Bengal Capital Archives - Green Market Report

Debra BorchardtFebruary 13, 2023


The author of a year-end letter to cannabis investors expects smaller cannabis companies to have an easier path than multistate operators going forward.

The letter came from the Bengal Catalyst Fund run by Bengal Capital, which outperformed the cannabis ETF MSOS by more than 2,100 basis points in 2022 and 2,500 basis points since inception – confirming its bona fide to comment on the industry.

Bengal questions the long-term performance of the large MSOs, noting, “Large MSOs often did not become large by being great cannabis growers, processors, and/or sellers, but instead good raisers of money and license applicants – which made sense for early cannabis.”

The authors said that the cost for these MSOs to package and distribute cannabis is more than $1,000 per pound, while smaller, more efficient operators can do the same for $500 a pound. The letter also points out that when faced with strategic decisions, MSOs tended to opt for the immediacy of more production and more sales versus trying to cut costs.

That strategy worked while prices stayed high in emerging market states, especially since MSOs tended to have that early market advantage. However, these markets have matured and many have expanded their licenses adding to more competition. Add falling prices to that equation, and the advantage evaporates.

Mistakes Made

“Many MSOs were not built to turn a profit when pricing becomes even mildly competitive, and the problem has only been exacerbated with their balance sheet choices,” Bengal Capital wrote.

The report highlighted the decision to use REIT financing, where companies sell real estate assets and then agree to lease the property back with rapidly rising rents. One example in the report explains that if a company borrowed $50 million from Innovative Industrial Properties (NYSE: IIPR) at 15% interest, it would need a profit of $7.5 million to pay back IIPR – and that’s before rent payments. This was easy in the salad days, but as the prices fall and the rent rises, watch out.

The report goes on to suggest that these large cultivation facilities built by MSOs don’t necessarily result in lower costs and that quality is harder to control in a large facility.

Bengal Capital also questioned how the large MSOs have spent money on acquisitions. It pointed to Curaleaf (OTC: CURLF) likely having spent $100 million on its West Coast businesses only to shut them all down. The company was essentially spending $2 for every $1 dollar that was coming in and suggesting that was just how the market dynamics were working.

At the same time, Bengal Capital points out that Grown Rogue in Oregon doesn’t seem to be facing the same problems Curaleaf cites.

“We see investors running for the door and large MSOs running into significant business issues. We see unloved, high-quality cannabis companies that are grinding away almost completely ignored,” Bengal wrote.

Small Cap Focus

The company points to the beer industry as a comparison. Craft beer accounts for only 13% of industry volume, but it makes up 26% of the revenue. The letter made it clear that these aren’t stock recommendations and calls the group its “Scrappy Operator Club.” They include:

  • Grown Rogue (OTC: GRUSF), craft cannabis in Oregon
  • Urban-Gro Inc. (Nasdaq: UGRO), cannabis facility operator
  • XS Financial (OTC: XSLF), cannabis specialty finance focused on equipment leasing
  • Body & Mind (OTC: BMMJ) cannabis operations in Arkansas, California, Nevada, and Ohio.

Bengal disclosed that it put together a special purpose vehicle investment of $3 million convertible debt in Body & Mind, with just over $1 million from a side pocket of the fund.

Bengal said that it once believed in the large MSO story. The company now believes it will see better returns by focusing on high-quality, smaller, and overlooked companies. While some MSOs will do well, Bengal thinks it will be harder to reliably predict their performance.

StaffMay 21, 2021


Editors Note: This was republished with permission from Bengal Capital.

Last week we looked at cannabis as an emergent consumer staple – something that a significant portion of the population regularly purchases regardless of economic conditions. But cannabis is currently an outlier among consumer staples for two reasons, both of which are potentially significant to investors: growth of state-legal cannabis outpaces even the fastest-growing consumer staples, and the stocks of cannabis companies are much more volatile and are valued differently, than other consumer staples companies.

Most staples tend to have stable, regular demand but also not have very high growth rates – usually, growth rates are not too far off of GDP growth (as people get richer, they might eat more expensive food but are unlikely to suddenly start having three dinners) or population growth (for fairly obvious reasons). But, state-legal cannabis sales are growing much faster currently, and estimated to grow at 19% per year for the next five years straight.

As a multiple of forward earnings, consumer staples companies tend to trade roughly on par with the S&P 500, but at a much higher relative multiple when you factor in the estimated forward growth rate of earnings (the PEG Ratio below, an imperfect measure we are not endorsing but just using as quick shorthand for this article) – investors pay up for the certainty of earnings vs. growth of earnings. Plus, with the stable underlying demand, they tend to be less volatile than other sectors.

Source: Yardeni Research,
Alcoholic beverage companies are one of the hottest subsectors of consumer staples because its projected growth is higher than most others. But it still isn’t in the same league as cannabis: some optimistic estimates put total alcohol revenues growing 7% to 2022, with a 14% bump in EBITDA, implying a 2022 EBITDA multiple of 16x while major U.S. cannabis companies trade for under 13x.
Source: Stoic Advisory 4/16/21 update, NYU Stern industry multiples compilation, and Bengal research
And cannabis stocks are much more volatile. Below is a graph showing the relative price moves of MSOS (blue line, a decent proxy for U.S. MSO cannabis stocks), and XLP (orange line, a popular consumer staples ETF), and XLY (turquoise line, a popular consumer discretionary ETF). Despite the surging underlying demand, cannabis stocks are significantly more volatile than staples, and even put consumer discretionary stocks to shame.

So, cannabis companies sell a staple that’s growing faster than any other, and they trade at a discount to companies that sell slower-growing staples while having more volatility.

Make no mistake: there are many reasons that cannabis would trade differently from other consumer staples or be valued differently. But when you see the magnitude of negative difference in valuation/volatility matched with the magnitude of positive difference in underlying growth, we think it’s a good idea to take a step back and take a broader look.

StaffMay 21, 2021


Editors Note: This is being republished with permission from Bengal Capital.

Green Thumb Industries (GTI) gave everyone yet another reason to become familiar with its name (looking at you Jim Cramer) recently by finalizing a $217m senior debt financing on April 30 – $105m to pay back other debt, the balance for expansion, and an additional $33m that could be drawn over the next twelve months. Larger amounts have been raised in cannabis before, but a few things stand out about this particular raise that investors should notice: the interest rate is 7% (likely the lowest of any U.S. MSO capital raise of this magnitude), the warrant coverage is modest, and the raise was non-brokered so GTI did not have to engage an investment bank to source the majority of the money.

GTI’s raise also shows the widening gap in the cost of capital between the bigger players and the smaller ones, potentially spurring even greater levels of consolidation. Comparing the debt GTI is paying off with the debt it is now incurring quickly shows how far and fast its cost of capital has fallen:

What investors charged GTI for capital effectively halved over two years and has come down to absolute levels that not many would have predicted back in 2019 – 7% is a moderate interest rate in many industries. Compared to smaller public cannabis companies, GTI is also significantly ahead of the curve: Cansortium, a much smaller public cannabis company, just raised $71m at an effective rate of 14%+ with similar warrant coverage. The gap is typically even wider for private companies, although some have been slow to realize it as they anchor on the press releases of much larger public companies as a guide for what their capital should cost. A lower cost of capital is a significant advantage to a business: it allows the business to invest in more potential projects which generate a return above that cost of capital.

If investors lend me money at 13%, I better be getting more than 13% out of whatever I put it into. 7% is obviously easier to make than 13%, leaving some combination of more return for the equity owners of the business, greater amounts of capital to invest in high-returning projects, and an ability to share the savings with customers and employees, helping to build greater market share and engagement.

And in simple terms, as the cost of capital advantage deepens, it becomes much more logical for smaller companies to join up with GTI rather than fight against them – if GTI is so good at raising capital, why not just become a part of GTI and then raise the money together vs. trying to raise it all on your own and getting diluted as investors demand much higher rates? And it can make sense for GTI to be more acquisitive because, if the market is rewarding size with a lower cost of capital, it pays to be bigger. Rinse, repeat. At the time of this writing, the raise is still fresh and it’s unclear whether it will have any effect… just kidding, GTI announced an acquisition in Virginia four days after the raise.

Source: Bengal Capital market research

StaffMay 20, 2021

Editors Note: This was published with permission from Bengal Capital.
In what should have probably been predictable in hindsight, the U.S. cannabis industry thrived during the COVID pandemic (where it was able to stay open thanks to “essential” designations), recording significant sales growth even in “mature” adult-use markets like Washington and Oregon.
Not many people would have predicted that over a year into a pandemic cannabis sales would be up 30-60%. Maybe that’s because people are focused on looking at what’s new and different about cannabis (and there’s a lot) instead of first looking at how much cannabis behaves like products we know well, we budget for, and buy regularly – consumer staples.

Alcohol, long acknowledged as a consumer staple, saw a very similar pattern to cannabis sales during the pandemic but had the added advantage of being able to sell interstate online:

Consumer staples are widely regarded as recession-resistant – consumers cut discretionary spending first and staples last. Paradoxically, sometimes consumers spend more on consumer staples during a recession by buying more costly products. Marijuana Business Daily research shows this as well – a significant shift in adult-use markets towards more premium-priced dried cannabis.
Again, this looks a lot like consumption patterns in alcohol during the pandemic. The Financial Times research showed that premium and prestige brand alcohol spending was up in multiple categories over the last year, often overtaking standard brands’ growth.


Again: cannabis is new and different in many critical ways, but it doesn’t seem to be very different on a fundamental level from other products that consumers make a regular part of their lives (as opposed to a fad or style which comes and goes – I’m looking at you Snuggie).

Video StaffFebruary 23, 2021


Bengal Capital’s Sanjay Tolia points out the disconnect between Canadian cannabis company valuations and U.S.-based cannabis companies. Tolia points out a way to overcome this unfair advantage in the U.S. stock markets. Thank you for watching the Green Market Report! Be sure to subscribe to stay up to date with marijuana money. The Green Market Report focuses on the financial news of the rapidly growing cannabis industry.

Get the latest cannabis news delivered right to your inbox

The Morning Rise

Unpack the industry with the daily cannabis newsletter for business leaders.

 Sign up

About Us

The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


Recent Tweets

Get the latest cannabis news delivered right to your inbox

The Morning Rise

Unpack the industry with the daily cannabis newsletter for business leaders.