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U.S. funds with US$100B explore loans to Canadian pot firms

Large U.S. funds are exploring lending to Canadian cannabis companies as a way to gain expertise in the burgeoning market ahead of potential U.S. legalization, according to an investment banker who’s been holding weekly calls with the firms.

Funds with US$100 billion or more in assets under management are considering issuing loans to mid-tier marijuana producers, said Alfred Avanessy, managing director at Toronto-based brokerage Cormark Securities Inc., which offers cannabis investment banking, advisory and research. At least three other people at other financial services firms have been approached by the funds regarding cannabis lending. All declined to name the potential investors as the talks are preliminary.

The funds are “realizing it will become fully legal at some point in the U.S. and when it does, they need to be ready to invest,” Avanessy said in an interview at Bloomberg’s Toronto office. “As part of their learning curve, they’re going to spend the next couple years with Canadian players, using Canada as a testing ground.”

Firms with assets of more than US$100 billion that do direct lending include Carlyle Group LP, KKR & Co. Inc., and Oaktree Capital Group LLC. KKR declined to comment while the others didn’t return telephone and email requests for comment.

First Lien

Pot companies have yet to issue a straight bond but are increasingly offering convertible debt, including about $1.3 billion from the three largest firms since last June. The cannabis industry is exploding in North America with spending on legal marijuana expected to reach about US$28 billion by 2022, according to Arcview Market Research and BDS Analytics.

The investors don’t have the appetite to speculate in pot stocks which are notoriously volatile and often richly valued. Instead, they are comfortable with providing credit based on the firms’ enterprise values, Avanessy said.

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