Investment Banks See Tremendous Potential in Cannabis Dealflow
August 5th, 2019
The cannabis industry is projected to reach $66.5 billion by 2025, according to Grand View Research, representing a 23.9% compound annual growth rate. In addition to Canada’s maturing industry, investors are becoming increasingly comfortable with the regulatory environment in the United States, despite the plant’s status as a Schedule I Controlled Substance on a federal level (alongside hard drugs like heroin).
Large banks have started to participate in the cannabis industry from a distance. For instance, Goldman Sachs and Bank of America participated in Constellation Brands’ (NYSE: STZ) investment in Canopy Growth (TSX: WEED) (NYSE: CGC). Many investment banks also started offering equity research on Canadian cannabis companies. However, Canadian banks like GMP Securities and Canaccord Genuity have dominated the market.
Many boutique firms have also built up a sizable presence in the industry. For instance, Viridian Capital told Bloomberg that it’s turning down about 95% of the calls that it gets from family offices, hedge funds and wealthy investors looking to invest in the U.S. cannabis industry. The demand for cannabis investment has surpassed the available supply from private placements and other capital raises outside of the public markets.
Young America Capital, a boutique firm operating in the cannabis space, has grown from three to 55 people over the past eight years with a focus on helping disruptive companies raise capital. By leveraging services like Capital IQ and Pitchbook, the firm effectively reaches and forms relationships with hundreds of fund managers. The company says that about 80% of its business consists of placing capital rather than selling companies.
“We’ve been working in the cannabis industry on a very cautious basis,” says Young America Capital Founder Peter Formanek. “There’s a tremendous demand for our services. It’s a huge industry that’s going to be very prevalent for the next 20-30 years both on the medicinal and recreational side. It’s a mix of consumer products, biotechnology and other recreational activities.”
Legal marijuans sales surged past $10 billion in the U.S. last year and there are now 11 states where recreational cannabis has been legalized. The market in California alone is projected to be larger than the entire Canadian market. A growing push to ease federal regulations could further support growth in the industry over the coming years.
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