“You have to take the long-term view,” says Richard Tonthat on investing in the nascent European cannabis and cannabidiol (CBD) sectors.
“At the same time, you should never take things at face value. Stress testing assumptions also needs to be done.”
Tonthat, who took over as chief executive of Aquis Exchange-quoted Greencare Capital PLC (AQSE:GRE) in May, is speaking from personal experience.
In a former role, he helped execute the deal that saw British American Tobacco invest GBP130mln for a 19.9% stake in Canadian cannabis grower Organigram.
In his current position, he is focused on investment opportunities in the developing European medicinal cannabis and CBD sectors.
Greencare already has taken stakes in two businesses thus far.
It has ploughed GBP100,000 into Clearly Supplements via a convertible loan note with a 5% coupon, and it put the same amount into an equity fundraise of Voyager Life.
Both are focused on the consumer end of the CBD market, with the latter completing an IPO and admission to the Aquis Stock Exchange in June.
They are modest investments, and Tonthat agrees they were Greencare’s way of dipping its toe in the water.
For the next transaction, the company is looking at something altogether more ambitious.
While Tonthat is constrained by confidentiality agreements and market regulations on what he can say, he spoke in general terms on what a prototypical Greencare investment might look like when we chatted.
“We want to focus on really strong businesses with good fundamentals,” he explains.
Tonthat says that any investment that Greencare makes in the space will inevitably have a “German dimension”, given the country’s pre-eminence in the space.
The quality of opportunity Greencare is being presented with seems to be improving as the market evolves, he says.
“We have lost out on one or two things which we were quite keen on,” says Tonthat of the quest to find the next investment.
“But for us, there’s been no serious regrets. I think that the deals we’re looking at now probably trumps what we’ve seen before.”
It is fair to say the team is excited by the business dynamics of European medical cannabis.
Prohibition Partners, the sector’s market data specialists, estimates the market will be worth EUR403.4mln by the end of this year and will grow at a compound annual rate of 67% to reach EUR3.2bn by 2025.
One of the key drivers for this anticipated transformation will likely be the wholesale acceptance of cannabis as a bona fide medical treatment.
This in turn will require real-world and clinical data that convince regulators to amend decades’ old laws.
But crucially, it will also need wholesale acceptance and adoption by physicians who are then willing to prescribe cannabis-based products for pain relief in cancer care and conditions such as multiple sclerosis.
Germany at the vanguard
Germany, an early adopter of legislation, is at the vanguard of the European cannabis revolution; however, it is by no means on its own now.
Currently, there are 12 countries with established medical cannabis legislation and a further 16 that are at the earlier stages of adoption in Europe. This means there are only 15 countries on the continent where the drug is strictly illegal in any form.
With entrepreneurs and capital heading in the direction of the new green revolution, there is no end to the opportunities.
“We’re looking at all sorts of very interesting cannabis plays throughout Europe,” says Tonthat.
But the company can afford to be choosy: “Mainly we are looking at established, mature businesses with significant financial track records. Revenue growth and cash generation are important. That’s something which the industry is lacking.”
With around GBP1mln on the balance sheet as at June 30, the company is well-financed for the foreseeable future.
Whether this is enough to cover Greencare’s next move in the European cannabis and CBD space remains to be seen.
Keeping every avenue open
Certainly, Tonthat is keeping every avenue open while necessarily playing his cards close to his chest.
But change is coming. The Greencare chief executive reckons it is “almost certain” that the company will be a different beast in nine to twelve months than it currently is today.
He also cautions: “If you start sprinting before you can even crawl it is going to end badly.”
“So, I think it’s a question of finding the right investment, the right deal that creates value for our shareholders.”