Cannabis-infused beer? How about Cannabis Gummy Bears? With more states legalizing marijuana for medical and recreational use, the opportunities for investing in cannabis are now endless.
Recently, Senate Majority Leader Charles Schumer (D-NY) proposed legislation to end the federal prohibition of marijuana, stating that he will make legalization a priority. At a press conference, Schumer presented a draft of the Cannabis Administration and Opportunity Act that would end prohibition and give state-compliant cannabis companies access to financial and banking services.
While America waits for Congress to get on board, this volatile industry still creates legal and business-related obstacles—and opportunities—for investors. To understand an insider’s perspective of the industry, Financial Poise spoke to Michael Gruber, Managing Partner of Salveo Capital, an investment firm focused squarely in cannabis.
Are more traditional investors ready to chase the high? Gruber believes the future looks promising.
Over the past few years, medical marijuana legalization has boomed. Currently, 37 states have legalized marijuana for medical use, while 18 states and the District of Columbia have jumped on the recreational cannabis bandwagon. In 2014, only 22 states and D.C. had laws in place to legalize the drug within their own jurisdictions.
Cannabis investment firms have popped up across the country, from Green Growth Investments in San Diego, to Canopy Boulder in Boulder, Colorado, to Merida Capital Partners in Bethesda, MD. This includes Gruber’s firm, Salveo Capital, in Chicago.
In reference to investors’ roles over the past several years, Gruber says: “In the last 3 or 4 years, the entire industry has been predominantly funded by private equity,” he states. Investors were mostly high-net-worth individuals and families. There were not as many high-quality teams, because people were still trying to understand the industry itself and its regulatory environment. Fewer people were willing to take the risk.
The investment game, however, is changing. Investors are playing a different role. A bigger role. “The public markets have opened up. Large license producers in Canada have gone public,” Gruber says. Cannabis has also gained traction across the globe with large growth in New Zealand and Australia, where investors have been committing millions of dollars in capital for the past five years.
But it’s happening at home as well. Cannabis ETFs like ETFMG Alternative Harvest has provided a YTD return of 45%, and though Amplify Seymour Cannabis ETF was only born in 2019, it still provides yearly returns of 233%.
“Just recently, you’re starting to see the US Market open up for companies,” continues Gruber, “There’s a number of ETFs and other funds that have come up in marijuana. These businesses have grown a lot in these few years. Traditional larger hedge funds, like Tiger Global, have been very active in the space. They’ve been known to be very good investors in the technology space.” In 2021, Dutchie, a cannabis tech platform that provides safe and easy access to cannabis, raised $200 million in its Series C funding round and was valued at $1.7 billion. The platform is famously backed by Tiger Global and has since gained more cannabis investors.
What about more cautious investors? Due diligence is key. The cannabis industry is still young, and there are plenty of inexperienced actors and companies. And, regulations are frequently changing and vary by state.
Solutions to old legal obstacles could also render some sectors of the cannabis industry obsolete, states Matt Hawkins, Managing Partner at Entourage Effect Capital. He writes in an article for Kiplinger, “Areas such as alternative banking for the industry will no longer be needed once federal banking reform passes—which could come in the next few months to years, if forecasts prove accurate.”
Then there’s CBD. The cousin to marijuana, it is now infused in anything from gummy bears to pizza sauce. CBD, or Cannabidiol, is an ingredient found in Cannabis obtained from both cannabis and hemp plants. It lacks the psychoactive properties in marijuana and has few side effects. Health claims surrounding CBD oil, including FDA approval of its use for severe, pediatric seizures, have made it wildly popular with consumers and investors alike.
“CBD is already a multibillion-dollar industry as-is. With increasing the general trend for legalization for marijuana, the stigma is going away for marijuana, and that makes it even easier for CBD. We’re big believers in it,” Gruber states.
The legality of CBD oil is still not clear-cut. While all 50 states have legalized it at some level, the federal government has not. However, this may change as hemp was federally legalized in 2018. The next step is to legalize CBD derived from the cannabis plant.
And yet, the CBD industry has been found to be messy and unregulated, and some companies have come under fire for false health claims and dangerous ingredients. Gruber believes that the industry will trend towards more clinical trials and studies. “I think we’ll find increasing enforcement against the claims,” he states.
What does the future look like for marijuana? Will marijuana be legalized in the next few years? Nobody truly knows, but Gruber has a guess: within the next two years.
In the long run, the federal legalization of CBD and marijuana seem inevitable, and investors will have to seriously consider these industries as they find their roots in the soil.
©All Rights Reserved. July, 2021. DailyDACTM, LLC d/b/a/ Financial PoiseTM
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