‘The sector turned on fire’

Those risks haven’t stopped the big banks from eyeing future opportunities, meeting with players and waiting to pounce once the legal recreational market is in place.

The market is set to grow as just two per cent of licensed producer applications have been approved, with more expected ahead of the coming recreational market, Maruoka said.

At least eight Canadian marijuana stocks had returns in the triple digits last year, sparking talk about a bubble. Maruoka said that talk is overblown. “When we look at the valuations across the board, it’s beginning to price in the rec market, undoubtedly the rec market opportunity is so huge and it certainly hasn’t priced in 100 per cent of that as of yet.”

While the medical market is quite small, currently about 100,000 patients, it has the potential to reach about 700,000, Maruoka said. That demand accounts for about 200,000 kilograms of marijuana production each year, he added. “But there’s 450,000 kilograms that’s smoked annually in an illicit recreational market and the existing public companies are capturing some portion of that value because investors are looking ahead and saying, ‘This is coming.’”

In the meantime, the independent investment companies, well-versed in doing deals for riskier entrepreneurs and small businesses, are content to be reaping the revenues from being the only bankers in the market.

“The sector turned on fire” last summer after the federal government announced legalization plans in June, Saunders said. In August alone, there were five big deals. Canaccord led a $23-million offering for Aurora Cannabis Inc., while GMP Securities and Dundee Capital Partners helped Canopy Growth Corp. raise $34.5 million. Clarus Securities led a financing for the same amount for Aphria Inc.

The November release of a long-anticipated task force report on legalization added fuel to the fire. One of the final deals of the year, the $60-million initial public offering of CanniMed on Dec. 29 led by AltaCorp Capital, was also one of the largest. CanniMed is now only the second marijuana company listed on the TSX main board. The other, Canopy, became the first pot company with a market value of more than $1 billion.

CanniMed CEO Brent Zettl said the company made the decision to go public as investor appetite improved and the reality of the recreational market became “galvanizingly clear” during the second half of the year. “The reality was that train was coming. We had to get bigger faster because we could just see that this was going to get bigger faster.”

Zettl had been in talks with our securities though because it makes them money.”

AltaCorp has raised private capital for Zettl’s company since it was named Prairie Plant Systems and was the government’s official marijuana provider under a previous medical marijuana program enacted in 2000.

“Everything about the operation was as a standard pharmaceutical company which gave us great comfort in the product it was selling and gave us great comfort in the market,” said Jeffrey Fallows, managing director of investment banking at AltaCorp. CanniMed is its first client in the marijuana space, but after gaining “institutional knowledge” of the sector from the deal, Fallows is ready to ramp up its presence.

At Canaccord, Saunders said the market for marijuana financings is a once-in-a-lifetime opportunity perhaps not seen since the post-Prohibition period.

“The opportunity is extremely large for entrepreneurs and businessmen to go after this huge sector that’s being created.”

Marijuana sector deals have taken up about 90 per cent of his time over the last year, he said. “And I don’t see that changing.”