Greg Chin is a partner at CohnReznick, one of the largest advisory and public accounting firms in the country. As a member of the firm’s national cannabis industry practice, he performs due diligence on cannabis deals throughout the U.S. on behalf of investors and leading multi-state operators (MSOs).
When Chin first joined the firm in 2016, the cannabis industry was in the midst of a growth period in both the public and private markets. It was during this time that investor money began pouring into cannabis, causing a wave of dealmaking among MSOs looking for money to scale their operations (Chin himself was involved in acquisitions on behalf of some of the largest MSOs in the sector).
But cannabis has cooled off significantly since then. With the public markets in full correction mode and capital on the private markets drying up, we caught up with Chin, who recently attended the Benzinga Cannabis Capital Conference in Chicago, to get a sense of what he’s expecting from cannabis in 2020.
Benzinga: As someone who works with companies across the cannabis space, what has the last year or so been like?
Chin: We were anticipating, I would say about a year and a half ago at this time, to see this wave [of dealmaking]. And it happened very quickly. From Q1 or Q2 of 2018 we had a solid year run where we were working on deals for a number of different clients who had just raised capital. And right through like Q2 [of 2019] we were pretty much working on these deals that had gotten announced and were in the pipeline.
And then when the capital crunch hit we saw a fairly abrupt slowdown in deal activity. The pace and size of these deals has slowed pretty dramatically for natural reasons. And so what we're seeing right now is a bit of a pause in the market. We’ve been seeing a little more rationalization around valuation. You're seeing and hearing about more distressed deal opportunities. When we talk to our clients, they're kind of in the same boat in terms of trying to be selective about where they're investing in terms of acquisitions or organic growth. But they're also seeing more distressed opportunities come across their desks. So for us, it seems like if you're an investor, there could be opportunities to pick up distressed assets if you have the capital.
Our practice has been kind of bracing for this wave of distress. So over the next year or so we think we're going to see more activity like that, more distressed deals. We think when the capital markets normalize a little bit and capital becomes a little more available, I think we'll start to see deals to pick up again.
Benzinga: Do you think investors have changed what they’re looking for in cannabis companies, in light of the fact that valuations were clearly very high in 2018?
Chin: I think the focus has shifted more towards underlying fundamentals. A year and a half or so ago when we were seeing the initial round of deals, the valuations were pretty rich and frothy. And if you try to look at them from a public and private company perspective as like a multiple of something, there wasn’t a consistent rationale. Outside of cannabis, if it's a consumer product business or a tech business, you know you have multiple ranges of revenue or EBITDA based on the space at their in. None of that had applied within cannabis.
And we had seen just some crazy valuations. Whether it's forward-looking revenue or historical revenues, or forward-looking EBITDA or historical EBITDA, it didn't make any sense. But that being said, as time went on, there has been much more focus on traditional financial and operational metrics. All the deals we look at are focused on verification of revenues and EBITDA, and understanding how these businesses are going to generate cash flow. So I think that the more focus on that now, and so I think there's been definitely a shift towards fundamentals so that there wasn't as much a year or so ago.
Benzinga: Is this pullback a natural healthy correction? Or is it a sign that the industry in the midst of a long-term downtrend.
Chin: I think it's natural. When I talked to people outside of cannabis about the industry, one of the consistent themes that was coming up was, this is an emerging industry. And if you look at what happened 20 years ago with dot com and the tech boom, I was talking to a VC who was watching this space and he said he was predicting that cannabis was going to do the same thing. There's going to be a lot of early entrants into the market, and some of those guys and gals that came in early were going to make money in spite of themselves because there was an emerging industry, but there was ultimately going to be some kind of correction.
And we're seeing that now. And then there would be people who had capital to come in and pick up the pieces and get bargains on distressed assets. That's just one opinion, but I think it’s likely indicative of how people are viewing the market and the opportunity now.
Benzinga: What kind of impact do you think the Presidential election will have on cannabis?
Chin: Based on the current political environment, I personally am not expecting anything to happen under this administration. If Trump doesn't get re-elected, or even if he gets re-elected, I think there may be an opportunity for the next administration, whether it's under the Democrats or Republicans, that something could happen. I think it'll create some movement or opportunity for a win on either side of the aisle, and that someone would like to claim that win.
Other than that, I don't see from a political perspective anything really changing very drastically. If the capital markets continue to remain this way, there's going to have to be some alternative forms of capital to kind of get these companies through the next 12-18 months. There's pretty ambitious growth and expansion plans out there to build out infrastructures, more stores, get into more markets, and that's got to be funded somehow.
To learn more about cannabis investing from Chin and other experts in the space, check out the upcoming Benzinga Cannabis Capital Conference.
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