Cannabis funds aim high

This month, Seattle-based Privateer Capital is expected to close its third round of funding in a year on at least $50 million, chief executive officer and co-founder Brendan Kennedy tells Private Equity International.

Privateer is only four years old and has an unusual investment thesis. The firm invests in companies in the $45 billion recreational and medicinal cannabis industry – as long as they don’t identify themselves with green marijuana leaf logos.

“We’re looking to invest in global brands that don’t embrace the ubiquitous clichés and don’t follow the stereotypes; global brands that can [drive] change by ending prohibition and the harms caused by prohibition,” Kennedy says.

Privateer has to date acquired majority stakes in four companies, including web- and mobile-based Leafly, which connects patients and consumers to medical marijuana physicians, dispensaries and clinics.

Raising its initial $7 million round of capital took 18 months; Kennedy says it was the hardest fundraising process he has ever been involved with.

The firm’s investors tend to be ultra-high net worth individuals and family offices. “They come from the far left and the far right and they wouldn’t agree on any single political issue other than this one,” Kennedy says. “They’re looking for a financial return and a social return.”

A lot of Privateer’s investors have disorders or conditions like epilepsy and glaucoma, and have used cannabis to recover. Other investors are fighting for personal civil liberties or states’ rights, because they are angered by the number of African-Americans or Hispanics arrested each year for cannabis possession or distribution in the US, Kennedy says.

Today, 22 US states and the District of Columbia have marijuana legalisation or decriminalisation laws. Colorado and Washington are the only states where recreational use of the plant is legal. But more states are expected to come on board, according to Paul Enright, chief executive officer of United Cannabis Corporation, which researches and develops a cannabinoid therapy programme.

“There are definitely lots of people trying to get into the sector, and there is a lot of opportunity for equity to get through the door,” Enright says.

In February, federal regulators began allowing banks to provide financial services to legal cannabis businesses, if the business complies with state regulations and if the state is considered a regulated market, according to Leslie Bocskor, chairman of the Nevada Cannabis Industry and managing partner at hedge fund manager Electrum Partners.

“That was the first time we saw an actual rule established,” Bocskor says. “Previously, it wasn’t a rule, just guidance; and banks operated with their own discretion.”

Historically, opportunities to invest in the cannabis industry have been in ancillary companies – those that made indoor cultivation equipment or lighting, for example. Bocskor believes the new regulations will eventually lead to a broader range of investment opportunities. But that will take time. For now, he says: “It’s the smaller, more agile and entrepreneurial institutional investors and funds that will look at the industry.”

High Times Growth Fund is likely to be the next prominent example of this. The New York-based firm did not return a request for comment, but is reportedly trying to raise between $200 million and $300 million to invest in legal cannabis.

This is a young industry that is “dynamically changing on a day-to-day basis”, as Bocskor puts it. In particular, different investment opportunities should emerge as the industry matures and separates into recreational and medicinal streams. But opportunities do exist today – at least for those investors who can weed out the less serious players.