The COVID-19 virus has affected Australian cannabis investment, but one corporate finance expert said there’s been an influx of money lately.
On Monday (June 22), during the first day of this year’s Prohibition Partners Live event, a panel of expert commentators discussed the adoption of cannabis stocks among investors and the larger marijuana business from an Australian perspective.
The panel consisted of Sean Kennedy, corporate finance director with PAC Partners, and Peter Crock, CEO of Cann Group (ASX:CAN,OTC Pink:CNGGF).
When asked about capital challenges caused by the effects of the novel coronavirus pandemic, Kennedy said companies on his radar saw extreme lows in March, but since then there’s been cash coming in from specific types of investors in Australia.
“There’s a lot of money in our pension market looking for alpha, looking for investment return,” Kennedy told listeners at the online event.
According to the investment executive, following the global lows at the end of March he noticed a sense of “desperation rising” as companies attempted to run solvent. Later on, this transformed into opportunistic deals in which pieces of companies became available at what Kennedy referred to as reasonable discounts.
“A lot of money has been raised in the Australian markets in the past two months,” he continued. “Investment bankers are very busy.”
Kennedy said currently Australian cannabis companies have options available when it comes to capital raises, but there are conditions attached. He explained that if an asset is struggling, there will be a steep discount attached to the raise, while if the deal is designed to take advantage of the difficult global landscape then a more humble discount will be in place.
PAC Partners is a Melbourne-based investment services firm and has participated in deal-launching movements for various Australian cannabis firms, including Cann Group.
Cann Group is a medical cannabis firm working to expand the access of medical patients in Australia. The firm has a cultivation license from the Australian government.
Given the construction of the Australian Securities Exchange (ASX) and its predominantly venture-size offerings, Australian investors are the perfect target for cannabis investments given their higher risk tolerance, according to Kennedy.
The investment executive went on to say there’s been a progression in the evaluation of cannabis names for Australian investors. At the beginning, the industry was closely watched for hype and tended to live on excitement rather than fundamentals.
The investment expert said these days investors are asking to see positive earnings before interest, taxes, depreciation and amortization (EBITDA), a staple metric for the industry.
According to Kennedy, investors are also looking for support for the cash flow plans attached to companies’ business models and opportunities.
For his part, Crock told the audience he has noticed an increase in debt investment from banks in particular for cannabis companies. This observation was supported by Kennedy.
When asked about the right timing for an Australian firm to go public on the ASX, Kennedy explained that at the launch of the marijuana market in Australia it was crucial for companies to have support from a Canadian cannabis counterpart as it showed tremendous validation for the Australian operation.
However, that is no longer the case — Kennedy explained that Canadians have become much more inverted when it comes to international exploration.
In fact, several Canadian names pulled back on international ventures and partnerships once it became apparent that their cash flow would not be able to meet the demands of an expansive international business, especially as losses for Canadian cannabis corporations continued to expand in the summer of 2019 leading into 2020.
“We probably don’t need them as much in Australia now as a validator to a quality company,” Kennedy told the audience at the event.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
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