Finance experts mixed on prospects of marijuana capital infusion

Reaching consensus on hotly debated issues is rare in the cannabis space, especially when it comes to potential ramifications of marijuana rescheduling.

Some industry experts, such as cannabis hedge fund manager Patrick Rea, are optimistic that a wall of capital will flow into the sector, given the right catalyst.

Others, including banker Peter Su, remain skeptical of any sea change related to investments, given the federal government’s prohibition on marijuana.

MJBizDaily interviewed several finance experts to learn their perspectives about the likelihood a tsunami of capital will hit the industry if and when rescheduling occurs.

Rescheduling marijuana

Rea believes investor sentiment will change if both rescheduling and the elimination of tax burden Section 280E occur, because operator profitability will increase significantly.

Section 280E of the Internal Revenue Code prohibits marijuana companies classified under Schedules 1 or 2 of the Controlled Substances Act from deducting ordinary business expenses.

“With profitability, investor interest should drive capital into the cannabis industry,” said Rea, managing director of the Poseidon Garden Fund, which recently backed two equity deals in the New Jersey market.

“I think it’s a boon for the industry, if it does occur. Absolutely.”

Rescheduling would likely ease banking restrictions, paving the way for institutional investors, private equity firms and other funding sources that have been cautious because of the federal illegality of marijuana and restrictive tax policies, according to Deepak Anand, principal of ASDA Consultancy Services in Surrey, British Columbia.

Improved cash flow and profitability could attract an influx of domestic and international capital eager to tap into the U.S. marijuana market’s vast potential, he added.

“This might involve contributions from major tobacco, alcohol and pharmaceutical companies, which have largely stayed away from the U.S. cannabis market due to its current federal classification,” Anand told MJBizDaily via email.

“The surge of capital resulting from rescheduling and the repeal of 280E could mark a transformative milestone for the U.S. cannabis industry, potentially driving its evolution from a niche, state-regulated market to a fully mainstream sector.”

Cannabis investor sentiment

Rea said cannabis investor sentiment is leaning negative, driven by significant barriers to entry due to financial institution restrictions.

Perceptions can change investor sentiment, according to Dai Truong, managing director of Arlington Capital Advisors in Birmingham, Alabama.

Investors are looking for positive catalysts, such as rescheduling and the removal of 280E, to enter the fray.

These major policy shifts would improve operator cash flow, corporate balance sheets and, ultimately, companies’ underlying fundamentals, Truong contends.

“We need a reason for investors to get excited again about the industry, and removal of 280E would be enough to move the needle,” he said.

Operating efficiently

New York-based cannabis accountant Kelly Fairbanks acknowledged the potential “wall of capital” that could flow into the industry if rescheduling were to happen, but she emphasized that operational efficiency is an important factor.

“It matters how the businesses are running effectively without it,” Fairbanks told MJBizDaily during MJBizCon 2024.

“For some of them, you can take 280E away, and they’re still not profitable.”

Debt deals dominant

Banker Su and financier Adam Stettner are among the contrarians.

Su, the director of specialty banking at Hanover Bank in New York, expects debt deals to dominate the financing landscape if and when rescheduling occurs.

That’s because debt financing is generating double-digit returns for lenders, and marijuana will remain federally illegal even if it’s moved to Schedule 3.

“The debt game is so good right now, I really don’t see the catalyst making a change anytime in the near future,” said Su, who leads Hanover’s cannabis banking program.

“In fact, debt will probably get much easier, in a way,” he added.

“If a bank is unwilling to finance you at Schedule 1, I don’t see how they would be OK financing now that you’re a Schedule 3 – you’re still violating the same exact law.”

Finance expert Stettner, founder and CEO of FundCanna, also is skeptical that rescheduling will spark an immediate flood of capital.

The San Diego-based firm has underwritten 2,500-plus clients and financed more than $275 million in the cannabis space.

“There is no panacea,” he told MJBizDaily during MJBizCon 2024.

“Investors are not going to come rushing in because laws change,” he added.

“They’ll come in gradually over time, as the industry evolves; it won’t be a wall.”

Investor psychology

Mitchell Osak, president of Toronto-headquartered Quanta Consulting and author of the Cannabis Management Review blog, underscored the impact of investor psychology on short-term share prices and capital inflows.

“I believe the cannabis space is being overly punished on the downside and has a compelling investor thesis,” he said.

Share prices are down 80% to 90% from their peak – despite dissipating social stigmas, U.S. and international market growth, and a separation among top operators, Osak added.

“If cannabis is irrationally overly punished on the downside, it stands to reason it can also rationally or irrationally benefit on the upside, especially suddenly,” he suggested.

“Often, all it takes in a market is a positive catalyst like rescheduling to unlock a wave of capital entering the cannabis sector.

“Moreover, when share prices start to take off, it could trigger the entry of additional momentum-driven investors into the weed space.”

Chris Casacchia can be reached at chris.casacchia@mjbizdaily.com.