The emerging cannabis sector is destined to become one of the great growth stories (and investment opportunities) of this century. Readers who find this assertion far-fetched need to get with the times.
Cannabis is medicine. There have already been thousands of potential applications identified for medicinal cannabis. Several cannabis biopharma companies are currently advancing numerous cannabinoid drugs through the official clinical trials process. This is an industry where even a single licensed and approved drug can easily be worth $100’s of millions. Along with this, cannabis companies are producing thousands of “nutraceutical” and “cosmeceutical” products to promote health and well-being.
Cannabis is food. The cannabis plant (particularly the hemp sub-species) is loaded with nutrients. A number of cannabis companies are already producing superior cannabis-based food products and dietary supplements. The hemp seed itself contains more protein by weight than red meat.
Cannabis is also becoming a more civilized recreational drug option. Alcohol and tobacco are toxic. Cannabis isn’t. Alcohol and tobacco are addictive. Cannabis isn’t.
The global pharmaceutical industry is a $1+ trillion per year market. The dietary supplements market is expected to reach $220 billion in size by 2022.
Combined, the global alcohol and tobacco markets generate roughly $2 trillion per year in revenues. As a much less dangerous recreational option, cannabis has almost unlimited potential to claim market share here.
Then there is the food market, the largest market of all. As a mega-nutrient, cannabis will become a staple ingredient in many/most “healthy” food products.
Eventually, the cannabis industry could fund all of this growth through revenues. But this isn’t how things are done in our credit-based economies. To grow quickly and efficiently, the cannabis sector requires funding: billions and billions of dollars over the long term.
Most publicly-listed (Canadian) cannabis companies are presently able to raise funds fairly easily. But what about all of the private cannabis companies - that greatly outnumber the pub co’s?
It is much more difficult for these companies to raise capital to advance operations. This is one of the major incentives for these private companies to seek public listings as soon as possible. However, sometimes this is simply not a practical option for these companies at their current level of development.
One of the most important sources for funding such private companies is merchant banking: financial institutions who specialize in providing “seed capital” to start-up businesses. Merchant banking has long been in existence, but cannabis is a new sector - with unique dynamics.
Introducing CBi2. Presently Target Capital Inc. (TSX: V.TCI, CSE: TCI, OTCQB: TRGCF, Forum), the Company is in the process of updating its corporate name. This is a merchant bank that has chosen to specialize in cannabis funding. Here it is important to note that this isn’t some new company that simply intends to start funding cannabis operations.
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TCI is already active in merchant banking, with approximately $500,000 per year in existing revenues. Equally, this isn’t a Company that is just beginning its learning curve in the cannabis industry. The new management team of CBi2 have hands-on experience in the industry, specifically, direct involvement in the operations of two late-stage ACMPR applicants for cultivation licenses.
Unlike start-up entities, CBi2 did not have to go through the (more cumbersome) RTO or IPO route to obtain a public listing. Rather, it has been able to utilize the much more streamlined “recapitalization” process. The new principals in management have raised some capital (C$5 million), they have restructured the Company’s team, and now TCI is immediately ready to get down to business.
This initial capital is just the starting point for operations. Management’s plan is to use this capital to make deposits on “strategic LOI’s”. Once these initial deals are in place, the Company plans to use these LOI’s to leverage additional funding.
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Here investors will be looking for some specifics. How, why, and where will CBi2 be focusing its initial efforts in providing funding for cannabis companies - and generating strong returns for investors?
It all starts with the cultivators. In a conference call with Stockhouse Editorial, management stressed an elementary point: this is an entire industry focused around a single crop - cannabis. At the same time, a multitude of ancillary businesses have sprouted into existence to augment and support this crop-based industry.
While estimates vary, market analyst Deloitte is predicting that the cannabis industry in Canada alone will soon swell to over $20 billion per year. Meanwhile, a 2016 article noted that the The [U.S.] Tax Foundation has estimated that marijuana is already a $45 billion per year industry in the U.S., and could ultimately end up generating $28 billion per year in tax revenues alone if it were fully legalized.
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Whatever data one chooses, the numbers are huge - and growing. With such an immense growth curve, properly funding this industry will be a significant challenge. For TCI, that challenge spells “opportunity”.
Management’s near-term strategy is to complete 8 - 12 investments in the first year of operations. The initial strategy will prioritize investments as follows:
- Retail and distribution
- U.S. & global cannabis companies
- Refined products and delivery systems
- Western Canadian cultivators
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As a recreational market for cannabis now opens up (beginning in Canada, at a national level), not only will the revenue potential increase dramatically. The “recreational drug” market is typically a high-margin industry. This means that numerous strong investment opportunities will materialize in retail and distribution.
While Canada will have the first national recreational market, the medicinal cannabis market in the U.S. and internationally still dwarfs the Canadian market in size. TCI intends to pursue cannabis opportunities globally.
Many of these opportunities (in Canada and abroad) will occur via refined cannabis products, cannabinoid delivery systems, and cannabis accessories. Typically, these “niche” enterprises have even greater difficulty in attracting venture capital. CBi2 will be active here as well.
Last (but not least), CBi2 is closely following specifically Western Canada cultivation operations. Management sees these as offering the best cultivation investment opportunities at present. The Company is going to invest funding in these enterprises in order to generate returns for its shareholders.
In general terms, TCI is doing precisely the same thing that cannabis investors are doing as individuals. So why do cannabis investors need to seriously consider CBi2 as an addition to their own portfolios? There are two strong reasons.
 The universal reality in the realm of investing is that smaller companies generate much stronger returns (over time) than larger companies. It’s all in the numbers. It is simply much easier for a company with a market cap of $1 million to double in size than a company with a market cap of $1 billion.
Investors understand this. That’s why those investors with a higher degree of risk tolerance tend to focus on small-cap investing.
Clearly, if early-stage public companies significantly outperform large-cap investments over the longer term, then pre-IPO (and pre-RTO) companies can be expected to generate even higher returns - as an investment class. There are two major difficulties, however, for investors wanting to buy into private companies: lack of access and lack of information.
It’s harder for ordinary retail investors to find such companies, and harder still to do a level of due diligence that allows investing with confidence. Conversely, it is the business of TCI’s merchant bankers to evaluate such investment opportunities. The Company is estimating that 70 - 80% of its initial investments will be focused on private companies. CBi2 is a smarter way for retail investors to get exposure to such investments.
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In a conference call with Stockhouse Editorial, Sonny Mottahead, Chairman, President and CEO of CBi2, shared some insights on how TCI evaluates companies, and the criteria upon which management focuses.
- Jurisdiction: an initial preference to Canadian-based companies, broadening into the U.S. and Europe as those cannabis markets mature
- Stage of development: Focusing on early-stage companies with strong management as the best opportunities for disproportionate gains
- Scope: all cannabis sub-sectors
- Strategy: 80% private companies, 20% publicly listed companies
- Initial goal: 8 - 12 cannabis investments within first 12 months of operations
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Perhaps an even better reason to look to acquire a position in TCI today is timing. The (now) infamous and controversial edict from U.S. Attorney General Jeff Sessions has thrown most of the U.S. cannabis industry into limbo, and valuations have retreated. Even in Canada, there was a mild pullback in valuations, putting the sector on pause. Meanwhile, the Company has recently completed a unique “strategic investment”. On March 27, 2018; CBi2 announced $1.0 million in funding for Industrial Lifestyle Properties Real Estate Investment Trust (iLP). According to the news release, this REIT has a specific focus “on the acquisition, development, ownership and management of specialized cultivation facilities, industrial properties and real estate for the legal cannabis industry.”
CBi2 already has its own focus on acquiring interests in early-state cannabis companies via supplying these entities with funding. Acquiring an interest in iLP is a means to accelerate exposure to these entities for the Company’s shareholders.
The right sector. The right vehicle. The right time.
CBi2 provides investors with a unique opportunity to participate in the upside of (in particular) private cannabis companies. With valuations more attractive at present, this is an ideal window for entry.
Cannabis is the ultimate “growth story”. CBi2 is an investment vehicle to buy into the cannabis success stories of tomorrow - today. |