Sundial Growers (NASDAQ:SNDL) delivered some exciting news on Dec. 2 that could affect SNDL stock in the future.
Sunstream Bancorp affiliate Sunstream IVXX Investment Corp. announced that it had filed confidentially with the Securities and Exchange Commission to raise funds from investors.
It plans to become a specialty finance company operating under the rules established by the Investment Company Act of 1940 for business development companies (BDCs).
The closed-end, non-diversified management investment company plans to invest in the debt of cannabis companies. The IPO ought to happen sometime in 2022’s first quarter.
On the surface, the news seems positive. However, it’s possible it won’t do much for SNDL stock. Here’s why.
SNDL Stock Stuck Under $1
The last time I wrote about Sundial in early November, I suggested that it was a decent buy if the company could pull together a compelling story about why investors should invest.
It was trading around 65 cents at the time. As I write this, SNDL stock trades at about 56 cents. Like Warren Buffett, Sundial will have to decide if it wants to be an operator or an investor. I don’t think it can be both and attract enough institutional investment.
For those unaware of BDCs, they were created to attract equity and debt investment in smaller companies. Similar in structure to real estate investment trusts (REITs), they are not required to pay corporate taxes federally if they distribute at least 90% of their net income to investors as dividends.
Kiplinger’s Charles Sizemore discussed BDCs earlier in 2021.
“Think of business development companies as private equity funds for the common man,” he wrote. “BDCs make debt and equity investments primarily in established companies, though most focus on “middle market” companies that are often a little too small for the big boys in private equity. This is as close to ‘Main Street’ as Wall Street gets.”
Sunstream IVXX Investment Corp. will assemble a portfolio of debt investments issued by cannabis companies. They will likely come with higher yields because of the added risk.
An example of a large specialty finance BDC is Sixth Street Specialty Lending (NYSE:TSLX). It lends to the middle market.
Its current portfolio is $2.41 billion spread across 67 companies. Sixth Street’s average investment was $36 million or 1.5% of the portfolio’s fair value at the end of September. The weighted average yield of these debt investments is a high 9.9%.
BDCs Aren’t a Slam Dunk
BDCs tend to be cyclical investments. If you look at the chart for Sixth Street since its formation in 2011, you will see lots of volatility. Most BDCs cut dividends from time to time as the economy softens and loans default or businesses go bankrupt. That’s the nature of the beast.
So, just because SunStream Bancorp, the company’s joint venture with Calgary-based private equity firm SAF Group, is establishing a BDC does not mean it will be successful. It will take several quarters before investors know what they got for their IPO commitments.
On the other hand, going to the public markets for capital to make debt investments, rather than SunStream Bancorp forking over more of its initial capital, means it will grow its asset base more quickly. If you think it ought to be the “Berkshire of Cannabis,” this latest piece of news is music to your ears.
A recent statistic from Goldman Sachs suggests that between 2021 and 2023, there will be $430 billion of new direct lending origination in the U.S. That’s on top of the $300 billion that exists today. That’s tremendous growth.
If Sunstream Bancorp doesn’t mess up, this could be a driver of fee revenue for the joint venture, which ultimately trickles down to SNDL shareholders.
Like my favorite team, the Toronto Maple Leafs, I remain cautiously optimistic about the BDC’s chances.
The Bottom Line
I continue to move ever so slowly from Sundial skeptic to believer. However, this latest announcement suggests that Sundial management is thinking about the bigger picture, laying the foundation for future growth.
With 50 cents seemingly the floor price at the moment, a buy under 60 cents wouldn’t be the worst investment in the world. But as I said in November, if you manage your expectations and stay realistic about Sundial’s plans, you might be pleasantly surprised in 3-5 years.
However, if you can’t afford to lose this money, or you are risk-averse, it’s probably best to stay away from SNDL for the time being. It’s better to wait until the rest of the story is revealed.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
