Interview: Cannabis 2.0

An interview with Guillaume Légaré, Head of the Toronto Stock Exchange and TSX Venture Exchange for South America, and Brady Fletcher, Managing Director and Head of TSX Venture Exchange.

Brady Fletcher joined TMX Group in October 2016 and is the Managing Director and Head of the TSX Venture Exchange. He is responsible for
not only optimizing the client experience for all issuers and investors,
but also developing and implementing a multi- faceted strategy to drive sustainable long-term growth in a key part of the world’s most successful capital formation continuum.

Guillaume Légaré joined TMX Group in January 2019 and is the Brazil- based Head of the Toronto Stock Exchange and TSX Venture Exchange for South America.

CCI: What are the most important aspects and advantages of listing on TSX?

GL: Canada has one of the soundest banking systems in the world, and this provides the foundation for our capital markets. We have the ability to attract capital for early-stage companies on our junior board, TSX Venture Exchange (TSXV), as well as larger, more mature companies on the senior board, Toronto Stock Exchange (TSX). This makes Canada’s two-tiered market unlike any in the world.

We have a presence on the ground in South America because we see the quality and diverse range of companies, not only in the cannabis sector but also in natural resources and technology. TSX is a global exchange, where Canada represents the fourth largest country in terms of equity market. Last year, our issuers raised CAD$41 billion – and if we look at the past five years, that figure is CAD$273 billion. We have seen the innovation sector grow at a rapid pace over the years, including cannabis companies, some of which are located or have operations in Colombia. Between our two exchanges, we have over 3,100 issuers. Canada also has a very strong institutional market, with large pension funds and other investment funds managing over CAD$5 trillion of combined assets. Another important fact – approximately 40% of daily trading comes from outside Canada and 25% of the member firms are headquartered outside Canada.

CCI: How would you describe the link between TSX and TSXV?

BF: Canada is a leading market for cannabis companies because of our unique two-tiered ecosystem. This ecosystem enables growth companies to list at an early stage on TSXV and access public venture capital, which is an alternative to private equity and traditional venture capital, predominantly supported by Canadian and international retail investors. As companies scale, grow and mature, they may graduate to TSX. In the past 20 years, we have had over 660 companies graduate from a diverse group of sectors including technology, cannabis, mining and energy. Today, 20% of the S&P/ TSX Composite Index is comprised of TSXV graduates, demonstrating the strength of our two-tiered market and our ability to grow and incubate growth companies.

CCI: Can you discuss the growth in the cannabis sector a little more, and why companies have been able to grow so quickly through the TSX and TSXV?

BF: I think it’s useful to look at a case study, like Canopy Growth Corp which is now the largest cannabis company, dual-listed between TSX and NYSE. Canopy Growth was the first cannabis company to list on TSXV with a reverse takeover in 2014.

When you look at Canopy’s growth, you can see that they effectively leveraged their publicly quoted share currency to finance quickly, and scale through acquisition. Canopy was able to go through 13 different financings in the last five years, and they made more than 20 acquisitions. Leveraging that public share currency to scale quickly is how many companies use our two tiered markets of the TSXV and TSX to become global leaders.

Today, most of the leading cannabis companies are listed between our two markets. We have 59 cannabis companies listed on both Exchanges, which represents over CAD$27 billion in valuation. In the last five years, we’ve done over 200 financings for this industry, which range between under CAD$1 million for early-stage companies that are applying for their first licenses, to the CAD$5 billion Constellation Brands did with Canopy Growth. In the last five years, it’s been CAD$12 billion worth of capital raised on TSX and TSXV.

CCI: How have Colombian companies been performing in the Canadian stock market?

BF: Colombia is not a new jurisdiction for us; we have history in the mining and energy space. Mechanisms like our Capital Pool Company program and our deep expertise across Canadian Capital Markets have helped to attract numerous resource companies from Colombia to list with us. In fact, roughly half of the world’s mining companies are listed between our two markets today. It’s exciting for us to see how new sectors, like cannabis, are leveraging the experiences of, and paths defined by, the resource industry to access capital through our markets.

CCI: Do you think there’s still appetite for more cannabis companies? Is the market saturated?

BF: This is natural in any new industry; it was similar to precious metals in the early 2000s. Retail investors get very excited about a new industry and a huge number of entrepreneurs start creating companies in that new industry. What we’ve seen is a euphoric phase where everybody was very excited for cannabis. Now, more than five years later, investors want to see revenue and the addressable markets in cannabis.

It’s a very healthy cycle to go through. With all these companies and LPs, small and big, we’ll see consolidation and a foundation for the industry to continue growing from. We will see new technologies and different brands emerge as we go into cannabis 2.0. Companies will start to demonstrate the science behind their medical products, or scale to be able to deliver to major consumer brands. There will be differentiation based on brands and technology. Those are all very specific trends, and we’re evolving into a new cycle for new valuations.

CCI: What other trends have you seen in the cannabis sector?

BF: As of October 31, 2019, we had 59 companies listed with us, and nine that were listed have since been acquired as the industry grew. As for the number of new cannabis issuers, last year we had 22 new companies list with us, and in the first 10 months of this year, we had another 13 listings.

This is a dynamic industry that keeps growing and evolving. We have seen regulatory environments in Colombia, Peru, and Mexico evolve, and as they do, we’re here to support those companies that are operating within those regulatory environments.

The total market capitalization of cannabis issuers is CAD$27 billion as of October 2019. Last year was a banner year, with almost CAD$7.4 billion equity capital raised in the cannabis industry and over CAD$3 billion so far this year.

This continues to reinforce that Canada is the best place for cannabis companies looking to raise capital. We believe South American companies will continue to grow with us. In fact, CAD$2.5 billion has been raised by TSX/TSXV companies with cannabis operations in South America so far. We had three companies with operations in South America list on TSX and TSXV in 2019, for a total of 10 TSX/TSXV cannabis companies active across the region.

CCI: How do you see the startup producer’s environment in Latin America?

BF: As Cannabis 2.0 continues to gain traction, we’re seeing a few trends emerge. The producers are having to either expand and be able to deliver product at scale, or differentiate based on craft brands. I don’t see that being any different in Latin America.

There are certain advantages to producing here, not least climate, and that arguably gives producers in Latin America a competitive edge. As this industry matures though, it will be increasingly difficult to attract investment to a startup producer without some differentiation on brand, technology, or science. In order to be able to deliver product internationally, and to major consumer companies, traceability of product will become an important dynamic.