Cannabis seems to be resilient during these times, says Hershel Gerson of ELLO Capital
April 8, 2020
Erin Roche, Candy & Flowers
What’s your mission at ELLO Capital?
ELLO Capital is one of the first boutique investment banks focused on serving cannabis, hemp/CBD and impacted industries. In addition to supporting cannabis and hemp/CBD companies as they raise capital and conduct M&A transactions, we also support companies in the beverage, consumer package goods and other industries that are interested in engaging with the cannabis and hemp/CBD sector.
What do you look for in a cannabis investment? The market dynamics of cannabis and hemp have reached a stage where strong business fundamentals distinguish current and future market leaders. In such a heavily regulated space, possessing operational licenses in desirable markets will always be an important factor. But strong finances and operations are the most important traits we look for when evaluating opportunities. Companies must show a strong balance sheet, a healthy adjusted EBITDA, and if not already, a viable path to near-term profitability. In addition, the industry is proving to be resilient in times of economic disruption as Cannabis sales have accelerated in the face of the COVID-19 shutdown. Has COVID-19 changed your outlook on the industry? With COVID-19, we are seeing a very alarming unemployment rate. In context, at the height of the last recession there were ten million out of work and now we’re seeing more than triple that. These are unprecedented times. We all agree that there’s no way out of a recession so we can try to draw some parallels with what happened in 2008. Investors were looking for yield, and where possible, growth. Coming out of a recession, we know that state coffers will be very low due to increased unemployment claims and they will be looking for any type of new revenue streams. We saw the proliferation of Federal gaming after the 2008 recession, and I’m looking at cannabis in a similar light. For states where it’s legal, cannabis will be a solid avenue to get those revenues. Cannabis and the legislation around it is even better for states than gaming was because of the medicinal properties and the industry’s focus on social justice and sustainability. We’ll have growth and provide yield to people in a pretty safe and somewhat proven dynamic. Cannabis seems to be resilient during these times and as we see the luxury market get crushed, I think cannabis will be viewed along with other consumer essentials. If we look at the market landscape, will we see cannabis sales improve during a recession? I’m not sure, but I believe growth will come from new people entering the market and new states adopting cannabis programs and adult use. What advice do you have for cannabis companies looking for funding during this time? If you’re a good operating management team with a plan to profitability, there’s capital still available to you, revenue is holding up. The debt guys are continuing to print paper so if you are a license holder, there is debt financing available to you. REITs are also still open for business and are available to the extent you have some hard assets. For those who have not been good stewards of capital – have large excise tax bills or were doing nefarious things – those guys will go by the wayside or go into receivership. It will be a challenging time for them. Is it the same for the CBD/hemp market? They are seeing upticks in sale as well. In some ways they are worse off than cannabis in that the FDA is holding up food and beverage consumption and it’s harder and harder to find shelf space. The big box retailers have been a little reluctant. People are skeptical it will ever happen but we’re seeing more sales and velocity in specialty channels like department stores for topicals and beauty where someone can explain to you the benefits. We’re even seeing it in physician’s offices. Direct to consumer (DTC) companies may see growth in this time of COVID-19 as people are using CBD to help cope with anxiety and stress. So, we may start seeing similar trends in CBD to what we are seeing in cannabis. Hemp/CBD is a good starting point for people to enter cannabis industry, but we need full spectrum and good, specialty extraction and continue to look for CBD extractors who are doing it right. Before this all happened, the house introduced the bill allowing CBD to move into supplement framework within the FDA. We thought it would go through in Q2/Q3 and then we would have viable consumption guidelines from the FDA by the end of the year. COVID-19 may push that timing out even further. What happens to Ello Capital when Federal Prohibition ends and big banks and financial institutions enter the fray? We will celebrate the end of federal prohibition like the rest of the cannabis industry. Access to banking services and capital from financial institutions will be a major step forward for the cannabis industry, and likely herald a new era of profitability and growth. Consistent with any industry, companies and investors will reward experienced industry advisors that have a track record of providing sound advice. ELLO Capital will have years more experience navigating financial, regulatory and business issues, making it well positioned to continue to be leaders in providing guidance to cannabis and hemp companies, and other players in other industries looking to participate. What are the main things you want investors and entrepreneurs to know about ELLO Capital? The cannabis industry is on its way to becoming a multi-billion dollar global industry. Early-movers will have a significant advantage once federal and regulatory restrictions are lifted and the industry comes to full fruition. ELLO Capital provides a unique combination of industry experience and traditional financial expertise. We are helping build strong, profitable businesses that can endure hard times and are optimally positioned to grow many years. With MGO as a partner, we are clearly differentiated in the market by our ability to provide a broad, wholistic financial service offering and ecosystem to our clients that is unmatched in the industry.
The Cannabis Private Investment Summit Series showcases the best and brightest cannabis entrepreneurs and is the premiere summit for institutional investors, family offices, and ultra high net worth investors. For additional information, please email us at firstname.lastname@example.org.