Even in this tough economic climate, cannabis operators can secure deals if they’re able to illustrate to financiers that their new capital will be deployed efficiently towards growth expansion and they are willing to accept today’s market terms.
Case in point is the $35 million debt facility secured last month by Massachusetts-based multistate operator MariMed, which plans to allocate capital to building out its recently secured craft grow license in Illinois as well as a processing facility in Missouri. This particular transaction, according to the press release, included a floating rate based on bank prime rate plus 5.75% as well as 30% warrant coverage priced at a 20% premium.
“Capital has dried up and is harder to get than it’s ever been,” explained Steve Ernest, vice president of Chicago Atlantic which closed the loan for MariMed. “Therefore the supply and demand dictate the costs of capital and a much more challenging environment to even obtain that capital.”
While more equity and debt financiers consider deploying capital into cannabis companies while prices are depressed, funding will only flow to companies that understand their pro formas in excruciating detail while continually figuring out ways to reduce expenses.
One longtime investment banker who last year began raising money for a cannabis beverage company advises operators to keep their costs down for the foreseeable future.
Conserve cash and be patient. Eventually as interest rates do their mean reverting, they will come back down and we will eventually get to a place where capital will flow more freely. We are just not at that point in the cycle.Kerry Jordan, investment banker and cannabis entrepreneur
One investment banker with canna-curious clients concurs that sellers need to be creative to attract funding.
It is very much a buyer’s market on the investment side. The question is, where can you go on this. Most people are going to structure any sort of financing that they do as a debt instrument to look at equity-like returns to compensate for the risk today.Bob Dekker, Managing Director at Balmoral Advisors (focusing on food & beverage)
Now more than ever, cautions Chicago Atlantic’s Ernest, cash flow is king.
When I look at the regulatory landscape I don’t see any political will power or pathway for any significant change in the next 12-to-18 months. From an investment perspective, the only way you can have any visibility of a return is by saying you have actual cash flow from operations, and we can take that cash flow back and pay investors.Steve Ernest, Vice President at Chicago Atlantic