Cannabis trends in 2023 and the course that marijuana measures take at the federal level will be largely decided by the actions of the Democratically controlled Senate and Senate Minority Leader Mitch McConnell (R-Kentucky).
Congress failed yet again to pass the SAFE Banking Act – a bill to improve cannabis companies' access to finance – in 2022. For many observers, the signs for 2023 point to factors creating different market conditions across the industry. Cannabis news could be defined by a tale of two industries in the new year, with mature markets resetting after ongoing issues with a supply glut and new markets facing limitations set by state regulators, like in New York.
The failure to pass a form of the SAFE Banking Act will likely have a massive influence on cannabis news and investment activity throughout the industry. The last few years of inaction in Washington D.C. on federal cannabis reform has generally muted the interest of angel investors – a group that has supported the launch of the legal industry since 2015. Without banking reform and further federal protections, strategic acquirers have remained on the sidelines.
As it stands, the exits that many entrepreneurs and investors envisioned from mainstream strategics have not materialized. Without these exits and corresponding investor returns, many angels are expected to remain on the sidelines, leaving companies scrambling to complete financings from a dwindling pool of professionally managed funds. The future of the industry without SAFE is challenging to predict. The bill would have provided basic banking needs for smaller and ancillary cannabis businesses. It could have boosted capital flows and created the opportunity for several large multi-state operators (MSOs) to list on the major equities exchanges alongside other marijuana stocks.
For now, one can reasonably predict more of the same – an industry meeting the demands of consumers spending $26 billion annually on cannabis in 2022, while managing growth to $46 billion by 2026. If history has taught us anything about the legal cannabis industry, it's that where there's a will, there's a way. Cannabis founders will persevere. Investors with conviction will continue to invest, understanding this is a long-term opportunity and not a quick flip.
Flat, down, and more structured rounds will become the norm across private companies. Painfully, we will likely see more cannabis businesses fail. This culling will thin the competitive herd and hand more power to the established incumbents – increasingly MSOs – with their lower cost of capital and a growing footprint of assets and operations. We see this cycle finally coming to a head as the tight capital markets have persisted for so long, along with onerous cannabis taxes, deflationary cannabis prices, inflationary costs and a Congress unwilling to recognize cannabis as part of the American economy. This cycle was well on its way, and COVID interrupted it, like in many other industries. Smaller companies are going to see most of the stress.
On the upside, we foresee a healthy return of mergers and acquisitions for many areas of cannabis, such as operators, ancillary technologies, hydroponics, etc. This will be driven by companies continuing to seek operating efficiencies, scale, and stronger competitive footprints. This year was likely a trough year for M&A deals as many groups focused on their own footprints and digesting the previous transactions in 2020 and 2021. That inward digestion period is probable to run its course, and we will see companies getting back on offense. While not strictly M&A, we also wouldn't rule out activity with mainstream strategies, like alcohol, tobacco and consumer packaged goods.
A meaningful return of equity capital flows was looking likely after a long protracted bear market and could still come to fruition later in 2023. The capital flows will benefit the largest companies first as equity wades in slowly where they feel there is lower risk. There is room for those flows to expand to smaller companies showing good traction, likely starting more so in 2024.
Looking at the big picture, those within the industry know more now than ever before about running a successful legal cannabis company. There are more experienced operators than ever before, and the same goes for states where cannabis is legal. The missing component is capital. At Poseidon (opens in new tab), we intend to help fill this capital void to build a sustainable and fast-growing future for the cannabis industry.
Morgan Paxhia is Co-Founder of $PSDN ETF & Managing Director and Co-Founder of Poseidon Investment Management. With over 10 years experience in investing and finance, Morgan has developed a deep understanding of individual company analysis, portfolio construction, and risk mitigation. This content is not intended to provide any investment, financial, legal, regulatory, accounting, tax or similar advice, and nothing should be construed as a recommendation by Poseidon Investment Management, LLC, its affiliates, or any third party, to acquire or dispose of any investment or security, or to engage in any investment strategy or transaction. An investment in any strategy involves a high degree of risk and there is always the possibility of loss, including the loss of principal. This content should not be considered as an offer or solicitation to purchase or sell securities or other services. Any of the securities identified and described herein are for illustrative purposes only. Their selection was based upon nonperformance-based objective criteria. The content presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Past performance is not indicative of future results.
Can the Earned Income Tax Credit Help You? (Or Someone You Know)?
The IRS and community partners want to improve earned income tax credit awareness.
By Kelley R. Taylor • Published
Financial Wellness Is Self-Care: 3 Steps to Help Improve Your Financial Well-Being
Many people resolve in the new year to get healthier. Taking charge of your financial wellness can help improve your physical health by lowering your anxiety about money issues.
By Kara Duckworth, CFP®, CDFA® • Published