Aug 23, 2022

Cannabis Ecosystem Market Update: Nascent State Markets Drive Growth for Traditional and Ancillary Businesses

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Cannabis Sector M&AIncreasing Consumer Acceptance Drives Cannabis Sector M&A

Capstone Partners released its August 2022 Cannabis Sector Update, reporting that despite macroeconomic challenges, the Cannabis sector is reaching an inflection point that will likely bring significant growth, establish profitable businesses, and facilitate an exuberant merger and acquisition (M&A) environment for decades to come. Increasing consumer acceptance and the loosening of state legislation are expected to drive sector expansion in the foreseeable future. Ancillary companies, which serve cannabis brands but are not directly involved in the processing or sale of cannabis products, are expected to grow in congruence with the sector.

Despite market volatility, M&A activity and investment in the Cannabis sector are projected to be strong in 2022, serving as a growth catalyst for multi-state operators and presenting an opportunity for strong brands that have been afflicted by inflation and market overcrowding. While traditional cannabis brands have comprised the majority of transaction volume, cannabis-derivative providers and ancillary businesses also continue to attract buyer attention, offering acquirers an avenue to benefit from the sector’s growth without directly investing in pure-play cannabis providers. Public strategic buyers continue to account for the lion’s share of M&A activity to-date as large companies consolidate smaller players in opportune markets. Improved balance sheets and cash flow have allowed large strategics to pay premiums for assets of scale that serve growing markets. While private equity remains hesitant to invest in the sector, Capstone expects traditional institutional investors to increasingly pursue ancillary businesses, capitalizing on the sector’s explosive growth as cannabis legalization continues to progress.

Also included in this report:

  • An exclusive Q&A discussing sector outlook and the California Storefront market with Nick Andre, Chief Operating Officer of Megan’s Organic Market.
  • An overview of ancillary segments that are expected to record strong growth alongside the broader Cannabis sector.
  • Drivers behind the proliferation of M&A activity that is reshaping the Cannabis landscape.
  • A venture capital investor highlight describing Casa Verde Capital’s investment criteria and footprint in the Cannabis space.
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