On April 17, 2018 Viridian Capital Advisors and the Association for Corporate Growth (ACG) hosted a panel discussion titled “Cannabis- the New Investing Frontier.” ACG is a networking platform for the smaller to mid-sized business deal-making community. Viridian Capital is an investment bank and advisory company focusing on the emerging cannabis sector. The panel included a private equity investor, a venture capitalist, a general counsel and an investment banker all specializing in advising and investing in the cannabis sector. The panel addressed the current state of the industry including regulation, legalization, sectors for investments and challenges.
Growth Industry and Total Addressable Market
The cannabis industry is in the very early stages of growth in what could become a lucrative business. Cannabis could generate $75 billion in sales in the U.S. for recreational use by 2030, if federally legalized, according to Cowen Research. Medical applications for cannabis expand the potential US market size by another $55 billion or more as early as 2025. Globally, the total addressable market size could be big as well. Cowen forecasts the Canadian market alone as a $12 billion opportunity by 2025. Some of cannabis’s potential therapeutic values are suppression of vomiting and nausea, pain relief, and appetite stimulation. In addition, research indicates that marijuana is effective in providing relief to the patient suffering from HIV/AIDS, glaucoma, cancer, and multiple sclerosis. The growing number of therapeutic applications of the drug is one of the key factors that is propelling the market over the next 20-30 years.
Regulation and Legalization
The potential growth of this industry hinges on federal legalization. A Gallup poll shows increasing support by the American public for legalization. In 2016, 60% of Americans favored legalization — a number that rose to 64% in October 2017. Cannabis is legal for recreational and medical use in nine states and is legal solely for medical use in an additional 19 states:
Source: Business Insider
Further, multiple countries have approved cannabis for medical use and others are considering deregulation. In Canada, the federal Liberals have set July 2018 as the deadline to legalize recreational marijuana. Sales of pot will be restricted to people age 18 and older, although provinces will be able to set their own minimum age requirements. Provinces are also tasked with figuring out how to sell and regulate marijuana.
On April 13th, President Trump endorsed letting states decide how to regulate marijuana. This is a major boost for the legal pot industry. The administration is abandoning a Justice Department threat to crack down on recreational marijuana in states where it its legal, a move that could enable cannabis companies in states that have legalized cannabis to operate without fear of federal raids and prosecution. John Boehner, former speaker of the House of Representatives, reversed a long-held stance against cannabis, joining the Acreage Holdings advisory board, along with former Massachusetts governor William Weld. Acreage Holdings is a cannabis corporation that operates in 11 states. In a statement, Boehner said, “the time has come for serious consideration of a shift in federal marijuana policy.” The conference panel opined that the hold-up in regulating cannabis on a federal level is mainly due to the number of people who have been arrested for possessing or selling the drug, including the thousands currently incarcerated for such offenses. Regulators are in a bit of quandary about how to deal with people who have an arrest record or are in jail related to these infractions. The proposed Marijuana Justice Act, sponsored by New Jersey Senator Cory Booker and New York Senator Kirstin Gillibrand, who are working to gain support for the legislation, would legalize marijuana at the federal level, provide incentives for states to revise outdated marijuana laws, and expunge convictions pertaining to use or possession.
Market Capital Raised
In 2014, $148 million in capital was raised for the industry, including $59 million for public companies and $89 million for private companies. In contrast, more than $3.5 billion was raised in 2017, including $2.9 billion for public companies and $575 million for private companies. In the first quarter of 2018 alone, an additional $2.3 billion was raised, including $1.8 billion for public companies and $553 million for private companies. A large proportion of the money raised in 2016 through Q1’18 was for cultivation and retail (over $3.5 billion). The next largest sub-sector attracting capital was biotech/pharma, which raised over $1.3 billion in capital. Investments and mergers and acquisitions attracted much of the remaining capital ($1 billion), while other sectors such as extracts, software/media and real estate attracted smaller amounts of investments.
The number of transactions in the industry has grown as well. Viridian estimates there were 32 transactions in 2014. This number grew to 151 transactions in 2017 and an additional 61 in the 1Q’18 alone. Viridian notes that alcohol companies have been investing to offset cannibalization of alcohol sales. Viridian said that AllianceOne, a tobacco leaf merchant, is also investing in the sector by purchasing two Canadian Cannabis companies. Phillip Morris invested in a medical device company related to cannabis.
Potential Investment Opportunities
The cannabis industry may offer a good long-term investment opportunity. Venture capitalist Jeff Finkle, a former IT executive and internet investor stated he sees opportunities similar to those in the internet space of the late 1990s. However, given the regulatory challenges and nascent nature of the industry, members of the panel emphasized that investors must be extremely diligent in their analysis before investing in this rapidly growing and risky sector.
Heidi Bush, CFA is a Director, Global Research with Cornerstone Capital Group.