Among Key Trends in ’21: Increasing Use of Debt and Rising Deal Sizes

By Kacey Morrissey, Senior Director, Industry Analytics

According to New Frontier Data’s latest modeling, cannabis consumers in 2020 globally spent an estimated $25 billion in legal markets, but total demand in both legal and illicit markets was closer to $400 billion. The wide gulf between the current legal market and the 20x larger total addressable market illustrates the growth potential as more countries establish regulated markets. While much of the industry’s operational and capital activity in has focused on the North American markets, the growing list of countries softening their position on cannabis has affirmed the mid- and long-term growth opportunities for companies establishing themselves in legal regulated markets.

New Frontier Data’s latest report, Cultivating Capital: Cannabis Finance & Investment, provides in-depth analysis of emerging trends in cannabis finance and investment, and anticipates key challenges and opportunities during a period of phenomenal growth. On Thursday (Dec. 16) at 3 p.m. EST, a webinar titled Cannabis Capital: Trends in 2021 and Opportunities Ahead, features experts from FTI Consulting joining New Frontier Data experts in reflecting on topics including: private capital limitations and industry operationalization; industry fragmentation and deal flow; intellectual property as a competitive differentiator; and strategic positioning for global expansion, among other subjects. Register here for the free event.

The industry’s strong tailwinds have driven unprecedented capital flow into the industry as investors fund the next stage of industry growth. The first half of 2021 saw a spate of record cannabis deals in virtually every industry sector, companies raced to enter new markets, expand operational capacities, and acquire novel intellectual property in the wake of the rapidly growing industry.

The use of debt as a source of funding has increased steadily in recent years, as equity markets have shown their limitations and debt has been considerably cheaper than in recent years, specifically for the largest and best-performing companies. An advantage of the method is that — unlike equity financing — debt financing affords complete control to the business owner, who is not obligated to answer to investors. Tax deductions – unlike private loans, interest fees and charges on a business loan are tax-deductible.

While debt accounted for 18% of capital raises in 2018, debt’s share rose to nearly 40% YTD ’21, and average debt raises more than doubled to an average of $47.4 million per deal, up from $20.2 million in 2018.

The year 2021 marked the first that any major listed U.S. cannabis company secured a debt deal at with coupons below 10% – the U.S. cannabis multistate operators (MSOs) Green Thumb Industries secured a three-year loan at 7.1% (9.1% after factoring warrants), and Trulieve Cannabis Corp. managed a $350 million raise by issuing a five-year secured bond callable after two years with an 8% coupon.

In general, larger MSOs are enjoying lower interest rates on debt this year because of stronger balance sheets, improved liquidity, and expectations that federal cannabis reforms (either with decriminalization or more incremental changes to address banking and taxation issues) will catalyze overnight profitability and explosive growth for the best-resourced companies.

Dutchie, a technology company that powers e-commerce and point-of-sale solutions for cannabis retailers, is among a growing list of companies raising large rounds in 2021. The company’s $350 million Series D in October was the largest of the year to date, and follows its $200 million round from March (Dutchie having raised $603 million to date).

Jane Technologies, another retail sales technology platform, raised a $100 million Series C in August while Kadenwood, a CBD consumer products company, closed a $50 million Series B. Other companies turning to post-IPO equity include MedMen, the multistate operator, which raised $100 million from a private placement investment. Meantime, Weedmaps, the storied B2C retail platform, drew a $325 million investment alongside its SPAC.

The post Among Key Trends in ’21: Increasing Use of Debt and Rising Deal Sizes appeared first on New Frontier Data.

from New Frontier Data https://newfrontierdata.com/cannabis-insights/among-key-trends-in-21-increasing-use-of-debt-and-rising-deal-sizes/

source https://ozlemhermsen.tumblr.com/post/670522852567613440