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How To Invest In Private Cannabis Companies

The cannabis industry has long been compared to alcohol, gambling, Chinese herbal medicine and the internet boom.

Benzinga · 08/25/2020 20:34

The cannabis industry has long been compared to alcohol, gambling, Chinese herbal medicine and the internet boom.

While there are parallels one can draw to each of these industries, many factors make the cannabis industry unique to its constituents – which include ~14,000 licensed businesses, nearly twice as many unlicensed or ancillary businesses, and hundreds of thousands of employees, consumers and investors.

An industry with ~40,000 businesses and over 240,000 employees has witnessed the lion’s share of capital and media attention going to the fewer than 400 public companies, leaving over 99% of the industry to innovate, compete and grow despite a plethora of capital and marketing restrictions.

There are many companies that have sensible, sustainable and scalable business models. These collectively represent the cannabis private equity opportunity.

We continue to believe that cannabis will be the best performing asset class over the next decade, and that there will be no sector untouched by this plant in the years ahead.

There is a growing list of reasons to be bullish on the cannabis sector.

Personal Wellness

The recent and ongoing shutdown has caused significant spikes in anxiety and insomnia. People are increasingly and justifiably concerned for their jobs, income and future.

In an environment where the words opioid and crisis are almost universally used together, cannabis has risen on the list of excellent ways to deal with stress and sleep issues.

Caution: Side effects may include increased appetite and enhanced enjoyment of movies and music.

Destigmatization

Two in three Americans support legalizing cannabis for adult use, and national support has shown record-breaking growth for the past three consecutive years.

On the medical side, support is even stronger. More than 90% of Americans are in favor of legalizing medical cannabis.

This makes medical cannabis perhaps the most popular policy proposal in America, with twelve initiatives appearing on state ballots in the last dozen years alone. In 2016, Florida’s medical cannabis initiative received two million more votes than either Donald Trump or Hillary Clinton in a strong example of bi-partisan support.

‘Essential’ Industry

Cannabis has been deemed ‘essential’ in most states where it is legal, and that designation has served as a positive tailwind for the industry . We continue to watch for statistically valid data on health outcomes in states that have legal cannabis markets relative to those that don’t.

Tax Shortfalls

The Center on Budget and Policy Priorities estimates U.S. State budget shortfalls at $615 billion. Thiss number does not include local and tribal governments.

While legalizing cannabis will certainly not fill this gap, it is an effective part of the solution as it also reduces the need for law enforcement while lowering prison populations.

Politics

Cannabis has been legalized in thirty-four states for medical use and in eleven states for adult use. The District of Columbia has both an adult and a medical use market.

Ballot measures are possible in seven states in the upcoming 2020 elections, and the increasing likelihood of a democratic sweep of the Senate and the White House contributes to cannabis legalization becoming a key issue in 2021.

Cannabis is politically popular, creates employment, generates tax revenue, lowers government spending and offers immense health benefits at a time they are sorely needed.

Black Lives Matter

People of color are nearly four times as likely to get arrested for a cannabis offence than their white counterparts.

The Black Lives Matter movement is shining a bright light on systemic racism, exposing the painful reality that there are people sitting in prisons as well as in boardrooms for making the identical decision to develop a commercial relationship with this plant. This is sheer hypocrisy that can’t be sustained, and we expect the industry to help drive the many reforms needed to level the playing field for our citizens.

Public Market Volatility

When you have public equity volatility, you begin to see money flow into private equity.

We saw this after the ’08-’09 recession, and we expect to see it again as public markets begin to reflect the underlying and extended pandemic-related economic malaise with greater volatility.  

Regulatory Guidelines

SEC/FINRA guidelines, put in place over the past twelve years, have helped further democratize the private equity markets.

These used to once primarily act as the capital playground of the privileged. But recent regulations have made it easier for larger numbers of investors to participate in private market growth.

Technology

Technology has advanced tremendously and allows investors around the world to conduct due diligence and place capital in safe, seamless and secure environments.

The MAZAKALI Digital Capital Platform is an example of a cannabis-focused investment marketplace, with curated offers and investment advice available to the pioneering investor. This flattens the global capital playing field, allowing savvy investors to find geographically diverse cannabis opportunities without ever leaving their homes.

Valuations

While off all-time lows, public cannabis equities have exhibited a 90% peak-trough decline.

We saw this in the first dot-com crash and consider it a natural part of market maturation (See: ‘Lessons From The Internet’). This has further exacerbated the capital supply-demand imbalance and helped rationalize cannabis valuations for the savvy investor who would find current prices quite attractive.

Ultimately, investing at depressed valuations in an essential, recession-resistant, low-correlation asset class with many sectors growing north of 30% is quite attractive.

More people consume more cannabis, in more ways, for more reasons, in more places every day. And national legalization is now simply an inevitability.

There remains an elevated level of perceived risk in the industry, and the space created by the low level of actual risk is precisely where outsized expected returns will reward the active, informed, diversified and patient cannabis investor.

Never Let Your Coping Mechanism Become Your Comfort Zone

Lead image by Ilona Szentivanyi. Copyright: Benzinga.