Top cannabis investors share their best 2021 predictions, including a slew of major deals, more cash flowing into the industry, and fresh states legalizing marijuana
- We asked 17 of the top cannabis-industry investors for their 2021 predictions.
- They said they expect more states to legalize marijuana, a boom in dealmaking, and the return of investor confidence in the industry.
- Visit Business Insider’s homepage for more stories.
If 2020 was the year when cannabis companies cleaned up their balance sheets and frontrunners separated themselves from the pack, then 2021 will be a year of consolidation, capital influx, and legislative wins, cannabis investors say.
Insider asked top investment firms in the US cannabis industry for their predictions for this year. Though their answers varied, many told us they expect that more states will legalize cannabis, companies will strike deals with rivals, and cash will flow back into the industry. Federal cannabis legislation may see further movement as well.
Already, Tilray and Aphria, two of the biggest Canadian cannabis firms, announced a $4 billion merger in December. US players are making smaller deals to enter states where cannabis is newly legal, such as Arizona and New Jersey.
The momentum of five states legalizing cannabis for adult-use or for medical purposes in November is expected to pressure other states to legalize, investors say, especially those facing financial woes.
Last year also saw a handful of bigger private funding rounds for cannabis-tech startups like Dutchie and LeafLink. Investors say that they expect even more capital to flow into the space to fund similar deals.
We should expect more states to pass both recreational and medical cannabis reform
Investors expect more states to pass laws allowing recreational marijuana, chiefly New York, Pennsylvania, and Connecticut, following the successful ballot measure in New Jersey to legalize cannabis.
“We believe that the positive regulatory momentum will continue, with more states legalizing recreational and medical cannabis,” said Jason Adler, a managing partner at the Santa Monica-based Gotham Green Partners. “With increasing bipartisan support and a clear need for state and local tax revenues, it will be hard to ignore the pace of change and the progress of these programs.”
Adler said that the early success of new recreational-cannabis markets like Illinois and Michigan, as well as the introduction of legal adult-use cannabis in Arizona and New Jersey, should create momentum for other states to adopt recreational programs in order to generate tax revenue to shore up depleted budgets following the pandemic.
Steve Schuman, the managing director of HALLEY Venture Partners, echoed Adler, saying that many states will look to cannabis tax revenue to “bolster pandemic-depleted tax coffers.”
The Biden Administration has not indicated that it would support marijuana legalization outright, though some Democrats have maintained that decriminalization should be a top priority. Many investors say they expect the Biden Administration to be friendlier to the industry than former President Donald Trump, though they don’t expect Biden to advocate for cannabis legalization or decriminalization himself.
The cannabis industry will see a boom in dealmaking
Investors say they expect to see a boom in dealmaking in the cannabis industry, especially since stock prices rebounded late last year, buoyed by Biden’s win and the passage of state cannabis reform.
Plus, the battle to dominate the rapidly expanding marijuana map in the US will mean that companies will look for mergers in a bid for scale.
“The cannabis industry will see further acceleration of M&A activity as players across the spectrum seek to add mass and scale,” Jeb Spencer, managing partner at TVC Capital, told Business Insider.
In states with mature markets like Colorado, AFI Capital Partners managing director Nico Richardson said he expects to see smaller operators consolidate as a way to grow, since they lack access to growth capital, and are pressured by a tax rule called 280E, which raises their cost of doing business.
Other investors, including Rose Capital CEO Andrew Schweibold and Silverleaf Venture Partners managing director Andre M. Haroche said they expect to see struggling cannabis companies get scooped up by their stronger peers
“Following the collapse of the equity cannabis markets in late-2019, early-2020, alongside the introduction of COVID, the legal cannabis sector landscape is littered with sub-scale assets poised for consolidation,” Schweibold said.
Haroche, for his part, said the plethora of distressed assets is an opportunity for the best operators to “acquire businesses who are poorly run or financially challenged.”
Capital will flow into the cannabis space
Investor confidence in the cannabis industry is slowly and steadily returning.
Kyle Lui, a partner at the Silicon Valley fund DCM Ventures, said he expects funding for cannabis startups to “pick up materially” this year as more states launch recreational and medical cannabis programs.
Panther Opportunity Fund principal Jordan Tritt said “macro trends” are favorable for the cannabis industry, pointing to record legal cannabis sales during the pandemic and the rush of new state markets opening up.
He added that he expects lots of growth capital to come into cannabis next year as investors recognize growing support for cannabis legalization.
But a rising cannabis tide does not lift all boats, according to Phyto Partner’s Larry Schnurmacher. In his view, capital will shift away from publicly-traded Canadian cannabis companies like Canopy Growth and toward US cannabis companies like Green Thumb Industries.
Wall Street analysts like Cowen’s Vivien Azer have picked Green Thumb Industries as the top name in cannabis for 2021.
But the increased investor interest comes with risks. Many cannabis companies have turned to SPACs, or special purpose acquisition companies, as a way to go public and access deeper-pocketed investors since the traditional IPO route is still off-limits in the US.
Silverleaf’s Haroche expects many of these SPACs to fold, or look for deals outside of cannabis, he told Business Insider.
Legislation on the federal level will have another, better, shot at passing Congress
With Democrats now in control, investors say federal cannabis reform initiatives may have a better shot. Some investors expect banking reform like the SAFE Banking Act, a narrow bill that would protect banks that choose to work with state-legal cannabis companies. If passed, it could spur Wall Street’s full-scale entry into the sector — providing much-needed cash for cannabis companies.
“We believe we will start to see banking reform and the introduction of institutional capital into the sector. This is good timing, as the industry has reached a new level of maturity, with strong operators leading the charge,” Morgan and Emily Paxhia, founders of Poseidon Asset Management, told Business Insider in an email.
Though the SAFE Banking Act is far from a sure thing — and, according to Business Insider’s reporting, it’s unclear if it would provide enough of a framework for the biggest institutional investors and investment banks to work with plant-touching companies — investors say it’s clear momentum is heading in the right direction.
Salveo Capital managing partner Michael Gruber said increasing public support for legalization, increasing de-stigmatization, and ongoing usage and demand for cannabis products will provide strong tailwinds for legislative change and industry growth.
Phyto’s Schnurmacher echoed that point.
“We expect the positive momentum to continue including potential for federal legislation that will normalize banking for the industry,” he told Business Insider.
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