As the industry struggles thanks to regulatory and economic headwinds, institutional investors are again staying clear of the industry. When will that change, and where?
There has been a brief and shining moment, so far, for the global cannabis industry when it comes to investment of the institutional kind. Namely, that fabulous two quarters or so, back in 2018 when Canada switched on its already delayed recreational market and the German cultivation bid hung in the balance. Alert the media (and they certainly did). All the major Canadian public cannabis companies, starting with Canopy Growth were doing the “normalization strut.”
How far the industry has continued to fall from those heady days, in a malaise that is far from over. And even then, however, it was clear that those who wanted to go public in Frankfurt on the Deutsche Borse rather in North America were sent packing by the powers that be – and still remain in the dog house. From a European institutional perspective, in other words, the cannabis industry has never been quite up to snuff.
From the vantage point of the world after Covid, the reality is that so far, this six month or so period in 2018 with spillage over into the next year has been the anomaly, not the rule when it comes to this kind of capital. The interim period, let’s just call it Covid plus the aftermath so far, has been a wild ride of unexpected surges in still highly ineffective and fragmented markets with, at least in Europe, a large dollop of fraud (the Juicy Fields scandal) and a lot of questionable funds coming from Russian oligarchs, even if indirectly. Indeed, in Europe, the only real money in the room since the world opened up post Covid was from essentially two major sources, both of them highly problematic. The implications of that alone are not only stunning, but are yet another answer as to why investment of the institutional kind is not at all enthused about what they have seen from this sector so far – and that starts with returns on investment.
When Will Institutional Investors Flock To The Industry?
This has been a perennial question. So far, the largest public companies (mostly Canadian) have struck out when it comes to convincing anyone that they are able to make a profit on emerging industry operational models. This also includes retail investors, who have been, in the absence of larger funds and fraudulent operations that have pumped a lot of money into the sector. Indeed this one sector of the investment universe, along with entrepreneurs, are still what drives the “juice” if not the excitement.
Furthermore, it is also clear that despite many predictions about the coming “recreational market” in Europe, starting with Germany, there is just no traction, yet, and even once there is, it will be several years in delayed development after any legislation, approved by the EU, passes domestic legislatures.
Anything can (and has) happened in the lag between here and then.
The Failure To Find Profitable Operational Models
One of the largest problems to date is that six years into the medical revolution in Europe and five into national Canadian recreational reform (not to mention all of the problems in the US with state reform but no federal progress), nobody is making money. Indeed, one of the most interesting hallmarks of the world post Covid last year was how many public companies wrote down assets, delisted or, in a hangover that has continued so far this year, walked away from earnings projections.
There is no reason this period is over, even in Europe, no matter how many cannabis companies on the hunt for capital have begun to explore going public in Frankfurt – especially given the again bearish pronouncements and expectations about the North American industry at least, that has again gotten them banned from the German exchanges.
The reality is that there is (at least) a third more cannabis imported into just the German market than is ending up with patients. Where this is going is also unclear – including whether it is being resold (including for re-export) or ending up in the minimal (to date) extraction business.
Better Benchmarks & Transparency Needed
Regardless, the general lack of clarity about even this part of the industry, no matter how many “new” patients or strains from exotic places enter the country, is what has also held the industry back. Even when such data becomes more easily available, however, it is clear that the medical market itself has more than a few issues that need to be worked out before profitability is attractive to even those expecting less than a 20% ROI on their cannabis investment.
Those issues are also far from being solved, anywhere, no matter the excitement that Spain is supposedly currently vastly expanding medical production.
Underdelivering and overpromising are, at heart, the way to repeatedly win “customers” – whether they are consuming your product or investing in one’s company. And so far, at least, while the industry has been excellent at finding ways to toot its own horn, as the industry matures along with new regulation, they have dramatically failed at the latter, in part because of the overabundance of (at least) confidence and the lack of delivery where it counts.