Out of the Shadows | An Investor Summit RecapBlog Post
Banking Developments; Further Validation of the Cannabis Industry
After a COVID hiatus of more than 2 years, I rejoined the institutional cannabis investment speaker circuit, offering the closing remarks at the Kahner Global Cannabis Private Investment Summit in Coral Gables, Florida. My remarks addressed how banking developments are increasingly impacting cannabis investment, operating and financial strategies and decisions, for both plant touching and the growing array of ancillary businesses serving the industry. A bit more about that later.
While the presentations at the Summit were uniformly excellent and informative, from a 50,000-foot perspective (and with the objective of both reporting on and anticipating the evolution of the cannabis industry), the speakers and audience at the Summit were as important as what was presented and discussed. Those who have followed our articles and prior blogs know that the common threads in both are “follow the money” and “out of the shadows and into the mainstream.” These themes are both reflected in and substantiated by (i) the uniformly high quality and track records of the speakers, the relevance and timeliness of their remarks and, perhaps most importantly, their documented achievements in the industry, and (ii) the mix and sophistication of the attendees.
Clearly indicative of the real $ impact of moving into the mainstream, speakers included Chris Walsh, CEO and Founding Editor of MJBiz Daily, the recent sale of which for more than $100 million speaks volumes about how far the industry has come. More than $100 million!!!! Another speaker, Tony Cappell, a founding partner of the Chicago Atlantic Group, which has almost a billion $ of cannabis loans under management and just registered a cannabis REIT, spoke about investing in private loans to the cannabis industry. A billion $ loan portfolio—almost unimaginable just a few years ago.
Directed at family offices, their representation among the attendees, and the extent to which they have already invested in cannabis related assets, is likewise reflective of the industry’s trajectory.
On topic, while federal banking legislation remains stalled--the perfect continuing to be the enemy of the good—and the mega banks remain on the sidelines, the number and size of banks entering the market, and particularly their appetite for loans, continues to grow.
As previously noted in our articles and blogs, whether or not any of the pending federal legislation is enacted, bank lending to the cannabis industry will continue to accelerate, driven by a unique convergence of interests between the banking and cannabis industries. Banks are awash in liquidity with limited attractive alternatives for profitable deployment, while the cannabis industry (plant touching and ancillary), which is progressively becoming more “bankable,” has acute and continuously increasing needs for access to more and cheaper capital. Follow the money.
As more and larger banks enter the market and expand services, still others will be drawn in. As I believe one of the presenters framed it, “C’mon into the pool, the water’s fine.” Out of the shadows. Moreover, as the range and nature of ancillary services the cannabis industry consumes surges, a number of banks will be “backdoored” when good existing clients begin to develop relationships with cannabis business. For banking purposes, this could cause those clients to be categorized as “marijuana related businesses”, triggering enhanced due diligence responsibilities for their banks.
This emerging source of cheaper funding is also relevant to investors because it has a force multiplier effect, having already begun to drive down the cost to the cannabis industry of private debt. This, in turn, is requiring savvy debt fund managers to begin developing strategies to enable them to continue to provide attractive returns without unduly compromising asset quality and debt investors to address and factor these considerations into their investment decisions.
Of equal, or perhaps greater significance to the industry than the direct impact on increased access and cheaper money on the operating results, are the intangible, “out of the shadows” implications of these trends in the ongoing process of validating and legitimizing the industry and propelling it “into the mainstream,” the potential significance of which likely extends far beyond banking.
The prospects for the SAFE Banking Act, which was recently reintroduced in Congress for the 6th time, remain uncertain. Will it, or the more expansive legislation that some want, pass? Sure. When? Who knows? But when it does, it might not only open the floodgates for banks, but could also provide enough wiggle room to launch what could be the next major milestone—acquisitions of cannabis businesses by public non-cannabis companies (think Altria). It has long been conventional wisdom that the most obvious and profitable liquidity event exits would be through the tobacco, alcoholic beverage and pharma industries, and that thus far potential acquirers from those (and possibly other) industries have been deterred by concerns over the impact on their established banking relations and public securities exchange policies and requirements. With banking issues eliminated, and language buried in the SAFE Act that almost seems to be decriminalizing the revenues of state legal cannabis businesses….