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Private Equity and Pot: A Smokin’ Deal?

Can private equity fund the quickly evolving and increasingly legalized marijuana industry?

Private equity can do what it wants, really, which makes this alternative investment vehicle such a popular one. Should private equity fund pot? That depends on who you talk to. For Brendan Kennedy, CEO of Seattle-based PE firm Privateer Holdings Inc., finding PE investors to fund marijuana-based ventures hasn’t been an issue at all. As he noted, “This is the easiest it has ever been for us to land investors.”

A report from The Deal Pipeline takes a look at how private equity is helping to fund the medical marijuana industry, which is on the verge of booming, as, 22 states and the District of Columbia now have laws in place making medical marijuana legal within their own jurisdictions and Colorado and Washington State have legalized the recreational use of marijuana. (Additionally, legislation permitting recreational use is pending in New York, Florida, Ohio and Pennsylvania.)

potRight, wrong, or indifferent, the article is worth reading because as hundreds of millions of dollars are pouring into the business of marijuana, a Schedule I drug under the Controlled Substances Act, the federal government isn’t standing by doing nothing while the country goes to pot. It’s a clear emerging investment trend that isn’t as controversial to most of America as you may have thought.

In fact, as the article’s author Bill Meagher points out, “Recent polling by the National Organization for the Reform of Marijuana Laws shows that 80% of Americans favor the medical use of marijuana while 75% supports no jail time for recreational users and 58% approve of legalizing pot.”  Then, again, it would be understandable if one were skeptical about the objectivity of a poll about reforming marijuana laws conducted by an organization devoted to reforming marijuana laws.

Financial Poise believes that the prohibition against marijuana will eventually be history, just as the prohibition against alcohol is today. However, until the federal government follows the lead of states like Colorado and Washington, we think that investing money into the space is just too risky because it is too early.

Jonathan Friedland, publisher of Financial Poise and a corporate attorney who represents private equity funds and the companies they own, explained it this way back in April:

The Justice Department and Treasury Department issued guidance back in February that was intended to give banks comfort that they can accept deposits from sellers of marijuana who are operating legally. However, the American Bankers Association responded quickly, taking the position that that guidance would not have the desired effect because banks will nonetheless face the risk of prosecution and assorted sanctions until possession and distribution of marijuana no longer violates federal law. Not having a place to deposit cash is a pretty significant problem and is just one example of the sorts of challenges that are likely to keep most PE clients I represent out of the space until the law is changed.

Some states are trying to come up with workarounds. For example, John Sepulvado wrote on the Marketplace website on July 3rd about a plan in Colorado to create a co-op that would function much like a bank, thought that workaround would still require approval from the federal government.

Regardless, according to Friedland, “One should not lose sight of the fact that while they may blaze new trails, many early entrants into new industries don’t succeed. If you’re my age you may recall the Commodore 64; that company went bankrupt in 1994. The fact of the matter is that if and when marijuana is legalized by the feds, the tobacco industry is well positioned to jump in.  If anything, I would suggest that investing in this space today is more appropriately viewed as a VC, rather than a PE play.”

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