Meet the banks that are leading the flourishing deal market for pot stocks

Amid the recent volatility in pot stocks, there is one group that appears to be capitalizing on the cannabis industry: the banks advising on a flourishing deal market for these companies.

About $582 million has been raised for cannabis companies through initial public offerings to date, while nearly $8 billion in mergers and acquisitions have been inked, according to data provided by Dealogic. An even greater number of deals have been done through less-traditional methods, such as reverse mergers and private placements.

That has been a boon to Canadian banks, in particular. Firms from Canada don't typically appear at the top of the so-called league tables — the quarterly and annual rankings of investment banks based on the amount of fees they generate from deals — as those spots are typically taken by large U.S. banks like Goldman Sachs and J.P. Morgan.

But when it comes to the cannabis industry, Canadian banks like Canaccord Genuity and BMO Capital Markets hold the highest rank, according to Dealogic.

Cannabis M&A

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Source: Dealogic

Part of that has to do with the size of the deals — they're still relatively small and don't always capture the attention of the larger American banks. But even the bigger deals tend to be managed by Canadian firms, thanks to the lack of regulatory risk those firms face.

While it's not illegal for U.S. firms to participate in these deals, the fact that pot is legal on a federal level in Canada makes it easier for Canadian banks to participate, according to Harrison Phillips, vice president at Viridian Capital Advisors.

"The rules as they stand play in the favor of Canadian operators and institutions, investment banks included," said Phillips of Viridian, a financial advisory firm that focuses on the cannabis market. "So rather than operators and investors trying to price the risk of federal illegality, they've moved to the capital markets that are more favorable to the space."

A list of M&A advisers in the cannabis sector provided by Dealogic shows that the top eight firms are all Canada-based. The ninth is Greenhill, an American investment bank. On the IPO side, there are a few more American investment banks, including Cowen, which is tied with BMO Capital Markets for first place,thanks solely to its work for medical marijuana producer, Tilray, which went public in July.

Cannabis IPOs

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Source: Dealogic

As financial institutions become more comfortable with the rules and regulations on a federal level, they'll be more inclined to work with cannabis providers. The number of regional banks and credit unions serving the industry has grown almost 30 percent, to 411, between October 2016 and March of 2018, according to Frontier Financial Group.

Of course, one thing that could change the game for American investment banks is legalization on a federal level. A recent report by Canaccord Genuity said the looming midterm elections could be a catalyst.

"Conventional thinking holds that a Democratic-controlled House would be positive for federal legalization efforts," Canaccord analysts wrote in the report.

But in the meantime, and despite the potential market opportunity that cannabis may have in the U.S., large investment banks are likely to remain on the sidelines.

"Investment banks want to make sure they're not aiding and abetting and violating U.S. law," said Phillips of Viridian. "I believe it just comes down to risk versus reward."

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