Cannabis investment banking has become a hot topic as the legal cannabis industry expands rapidly across North America and around the world. With more countries legalizing cannabis for medical and recreational use, the cannabis market is projected to grow to over $70 billion by 2028. This presents lucrative investment opportunities for banking institutions and investors. However, the complex regulations surrounding cannabis business financing and investment make it a uniquely challenging sector. This article provides an overview of cannabis investment banking, including current trends, risks and opportunities.
Appetite for cannabis investment growing despite risks
While cannabis remains illegal at the federal level in the U.S., limited legalization has led many banks and investors to warm up to the sector. Major banks like Bank of America and Goldman Sachs have started cannabis investment banking services and research coverage. Venture capital and private equity firms are also increasingly willing to invest in cannabis. This appetite for cannabis investment comes despite ongoing risks like muddy regulations, volatility, and stigma.
Debt financing options more viable than equity
Debt financing options like senior secured debt, mezzanine debt, and convertible notes are more viable for cannabis companies than equity financing. Because cannabis is still federally illegal, public equity markets like stock exchanges remain off limits. Private equity financing has its challenges too due to difficulty exiting investments. Debt financing allows cannabis companies to fund expansions while avoiding dilution.
Ancillary cannabis companies lower risk entry points
Companies that provide ancillary products and services to the cannabis industry like packaging, testing labs, and software provide lower risk opportunities compared to plant-touching companies. Banking institutions can more comfortably work with ancillary cannabis companies without directly handling the plant. Major ancillary cannabis companies also have stronger balance sheets and operating histories for investors to analyze.
MSOs well positioned to capitalize on US legalization
Multi-state operators (MSOs) with cannabis operations in multiple legal US states are expected to be winners in US legalization. MSOs like Curaleaf, Trulieve and Cresco Labs have built operational scale and gained first-mover advantage. They trade publicly in Canada and represent potential takeover targets at steep premiums if US exchanges open up.
While cannabis investment banking and financing remains complex, the industry’s strong growth makes it an appealing sector for institutional investors. Debt financing and ancillary companies offer safer entry points. MSOs are poised to capitalize on eventual US federal legalization.