Financing options for the cannabis industry are finally starting to expand, signalling an end to the limitations marijuana businesses had when starting up and scaling, and an overall maturation of the markets. Last week saw two big announcements on that front: Tidal Royalty Corporation - a provider of royalty financing for licensed US cannabis operators - started trading on the Canadian Securities Exchange under the ticker CSE: RLTY. And Aurora Cannabis closed a debt deal worth up to C$250 million ($188.6 million) with the Bank of Montreal (BMO), in what has been called as "the largest traditional debt facility in the cannabis industry to date."
Now, while traditional debt structures are fairly strange to the cannabis industry, they are very classic financing instruments. There's nothing too interesting in them. Tidal Royalty's model, instead, is pretty unique. I first noticed it last week, when reporting about the go-public transaction: albeit slightly different, Tidal Royalty's model looked a lot like a financing model called streaming, used in the mining industry.
Intrigued by this model as well as Tidal Royalty's recent C$31.8 million ($23.9 million) equity financing, its bulky bank account boasting almost C$40 million ($30.1 million) in capital ready to deploy, and the fact that the money raised in Canada will be invested in the US, I decided to reach out to the company's chairman and CEO Paul Rosen. I knew Rosen had co-founded and run the marijuana giant now known as Cronos Group as well as investment firm BreakWater Venture Capital. That means he has a proven track record of building and running successful businesses in the marijuana space.
As Paul explained, Tidal Royalty will offer non-dilutive financing solutions, cutting cannabis companies checks of C$10 million or more in exchange for a percentage of their revenue. Meanwhile, "investors get top-line exposure to diversified assets (…) to a portfolio that spans states, operators, and the value chain (cultivation, production, dispensary, etc.)," Rosen added.
While Tidal has raised C$40 million in capital so far, management has visibility through its deal pipeline to deploy $1 billion into the regulated cannabis industry over the next 2 to 3 years, they told me, pointing out that they are witnessing an increase of "smart money" cycling into the US, with other publicly traded companies like iAnthus Capital Management also raising money in Canada and deploying in the US.
"There is very little real institutional money being deployed in the US to date," Rosen continued. "And, the private equity and/or high net worth money that is there: (i) is generally a smaller quantum (meaning you need to put together party rounds); and, (ii) doesn't necessarily understand the cannabis industry, which means it will take longer to do deals and they might fall apart at the last minute as these guys ‘wake up' to deal when they actually start doing diligence."
Why Trump's America?
The last thing I wanted to know about Tidal Royalty's model was why they would be investing so much money in the US, where cannabis remains federally illegal and risks are higher than in Canada.
"Canada has had a great run, but many stocks are fully valued," Rosen said. "There will be money made in Canada, but it will be by picking winners and losers; the easy money of riding the huge wave is over—I should know firsthand because there are few, if any, other individuals who've surfed that wave as successfully as me.
"But, the US offers that same opportunity," he added. "I would emphasize the incredible parallels between Canada circa 2012 (when I started Cronos) and the US circa 2018. [These similarities] have informed my strategies on how and why I purpose-built a company, and a crack team, to take maximum advantage of everything I learned in Canada over the past 5 years, and apply that knowledge and experience directly into the US cannabis opportunity."
"The low-hanging, straight-up equity financing companies with no real assets for security in cannabis investing 101 are now being replaced by alternative finance, debt secured by cash flow, and other alternative financing mechanisms.
"Tidal Royalty is adopting proven winning strategies gleaned from more than six years of pioneering the financing of early stage Canadian cannabis companies, and has augmented that experience with insights gained from studying proven accretive royalty financing products that large cap. mining companies succeeded with," Rosen noted. "The reason that Tidal Royalty will work is that it provides 'real value' to the market."