While business fundamentals will – and absolutely should – continue to be critical factors in investments, more funds are adapting their models to include activities viewed as beneficial to the broader world, including:
- Social equity
The shift isn’t just in cannabis. More individual investors want to ensure their dollars are going to firms that include environmental, social and governmental (ESG) consideration in their investment choices. Newer, younger investors, in particular, are more active in social change, demanding that funds they participate in stop supporting industries such as fossil fuels.
When it comes to sustainability, the consideration isn’t just a do-gooder mentality. Investors expect sustainable businesses to have better returns in the long run. Nearly half (47%) of the limited partners who responded to a survey from Coller Capital, a global investor in the private equity secondary market, said they believe ESG policies will boost their investment returns; only 10% expect returns to be reduced.
Water and electricity use increase the costs of producing cannabis, so not considering how a company approaches these environmental impacts can have a negative effect on the bottom line – and ultimately your returns.
A PitchBook report on ESG investing trends notes that this factor – increased returns – has driven the idea of sustainable investing from “nice to have” to “need to have.”
But how to measure that remains a challenge.
The conversation around social equity has picked up steam as more states incorporate the concept into their legal cannabis programs. The “perfect” solution remains elusive, with one of the key factors being a lack of funding for social equity applicants who might have less organic access to support.
A recent report from The Initiative, an accelerator program for female-founded cannabis businesses, noted that 100% of stakeholders who participated in the survey said access to capital is the biggest barrier for entry.
And those who can get funding often find themselves losing control of their own operations if they’re not careful. (Check out the recent “Seed to CEO” podcast episode featuring Chris Ball of Ball Family Farms to hear his experience with seeking funding.)
This might be changing, however, as more funds pop up to support social equity participants. For example, TPCO Holding Co. in California launched a corporate venture fund specifically to back black-founded and -led cannabis companies. The fund made its second distribution – to The Peakz Co. – this week.
And more mainstream funds are looking to increase diversity in their own ranks to support that effort in disbursements.
PitchBook recently reported that three powerhouse private equity firms have launched partnerships with historically black colleges and universities to provide scholarships and mentoring for students interested in pursuing investing careers.
– Jenel Stelton-Holtmeier
Deal of the Week / In partnership with Viridian Capital Advisors
Columbia Care expands in four states through acquisition
On June 11, New York-based Columbia Care (CSE: CCHW; OTCQX: CCHWF) closed the acquisition of Green Leaf Medical, an integrated competitor with extensive operations in Maryland, Ohio, Pennsylvania and Virginia.
The purchase signals a continuation of the consolidation trend of MSOs buying other MSOs rather than just doing small fill-in acquisitions.
Here are some key elements of this deal:
- Maryland-headquartered Green Leaf’s 274,000-square-foot cultivation and processing facility in Pennsylvania (100,000 operational and 174,000 to be completed by year-end) integrates well with Columbia Care’s three existing dispensaries and positions the company for further revenue growth and margin expansion. Pennsylvania is expected to likely to legalize adult use soon, as well.
- Green Leaf’s 82,000-square-foot cultivation, processing and dispensary in Richmond, Virginia, makes it the largest cultivator in this high population new adult-use state. When added to Columbia Care’s 65,000-square-foot cultivation facility, it strengthens the company for upcoming recreational use growth.
- Total upfront consideration for the transaction was $240 million, consisting of $45 million in cash and $195 million in Columbia Care stock.
- The implied enterprise valuation of 2.1X annualized revenues and 4.8X projected 2021 EBITDA appears reasonable relative to the 3.3X annualized revenues and 4.25X consensus 2021 EBITDA multiples observed in the Viridian Value Tracker database for the nine U.S. cultivation and retail segment companies with analyst coverage and under $500 million of market cap.
- The transaction is estimated to be strongly accretive in terms of EBITDA per share. In the chart below, we calculated the pro forma impact of the acquisition. We took consensus 2021 EBITDA and added the estimated incremental EBITDA from the Green Leaf transaction (using the stated 4.8X EBITDA multiple and subtracting the additional interest expense, assumed at 2%, from the $45 million cash portion of the consideration). The acquisition will add approximately $0.10 of EBITDA per share, a 31% accretive impact.