ACG PRIVATE EQUITY: CANNABIS CONFERENCE: 5 things you missed

  1. Legal Marijuana is among the fastest-growing industries in the U.S, with multi-faceted segments: Huffington Post stated that the Marijuana Industry is the fastest growing industry in the United States. “20 or 30 years ago, 10% of the Americans supported the full legalization of recreational marijuana. have since crossed the 50% benchmark and medical marijuana polls at +80 %,” said Ari Hoffnung, the Chief Executive Officer of Vireo Health of New York. The Cannabis market space has several sectors, which include Biotech Pharma, Ag-tech, Real Estate, Software, Security and Retail.
  2. Political tailwinds continue to favor Cannabis Industry: The Drug Enforcement Administration (DEA) decided to reschedule marijuana from its status as a Schedule 1 drug in 2016, but later decided to not follow up. However, the DEA announced a major expansion of research by granting licenses to several universities to research Marijuana. “Our new President-elect has said he is 100% in favor of Medical Marijuana. He is not thrilled about recreational, but he apparently thinks it should be up to the states. But Jeff Sessions who is coming in as the Attorney General, if he is approved, has said good people don’t smoke Marijuana and it’s not the kind of thing that ought to be legalized”, said David Feldman, a partner in global law firm Duane Morris LLP.
  3. Learning the legal or regulatory climate is a necessity before investing in Cannabis as an asset class: “The legal background on this [Cannabis Industry], for the professional investor is critical,” said Scott Greiper, President and Founding Partner of Viridian Capital Advisors. Currently under the Controlled Substances Act, Marijuana is categorized as a Schedule 1 drug. In the United States, 28 states have legalized medical marijuana and seven states have legalized recreational use of marijuana. The Cannabis Industry is a state-wise business, as the laws and regulations differ from state to state. For example, certain states require a dispensary to be a grower and seller; for others, a grower, seller and processor; and for a few, two out of the three. There are several restrictions on where Marijuana dispensaries can be set up, making it difficult to find real estate necessary to set up a dispensary.
  4. Professional investment community is eyeing Cannabis Industry: Family offices were the first to invest in the industry and are still the major investors. PE and VCs have been reluctant to invest in this industry, primarily due to a strict regulatory environment, reputational risk and the LP or charter of the fund not allowing it. However, now PE and VCs are showing growing interest in the industry. “In 2014, about 8% of all of the investment capital that came in was VC/PE dollars. Last year, that number was about 18%, this year we haven’t calculated it yet, we are not at year-end, but it’s probably going to break 25%,” said Greiper. The total capital raised in 2015 was $800 million and is expected to be $900 million-$1 billion by the end of 2016.
  5. There is an increasing trend for Marijuana-based industries going public: Many companies in the Cannabis Industry are looking to go public as banks are hesitant to invest in this sector, owing to the regulatory environment. There are currently 250 public companies in the United States and 50 in Canada. 2012-13 saw a series of companies in this industry going public through a reverse merger. Recently, the first company, Innovative Industrial Properties, a Marijuana Industry focused REIT, was listed on the New York Stock Exchange (NYSE) and raised $80 million in an IPO, which was half of what they expected. Prior to this, Mass Roots listing was rejected by NASDAQ due to ethical reasons. “We’ve got some companies that nobody realizes are getting huge and there could be some serious IPOs not too long from now,” said Feldman.
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