4Front Capital, a US cannabis industry focused investment company, has just completed its first round of capital raising which it will use to make strategic investments in assets ranging from cannabis production to dispensaries.
The company would not disclose the size of the capital raise but it intends to make between three and four investments of around $3 million to $12 million in size, according to Kris Kane, co-founder and managing partner of 4Front.
Investors were issued shares in the parent company, 4Front Ventures, as opposed to a dedicated fund. 4Front Ventures is the holding company of 4Front Capital and 4Front Advisors, a consultancy business which was formed in 2011 to help companies apply for licences to operate in the sector.
“This way investors can also see upside from other sides of the overall business such as the consultancy,” he said. “We have been advisors for four years and are doing well, so while that side of the business does not need any capital itself, we want to give investors the opportunity to share in the upside of both businesses, not just the new capital business.”
4Front Capital will still operate much like a fund however, he added.
The size and nature of the different investments will depend on the jurisdiction and state regulations surrounding the production and sale of cannabis. In Massachusetts, for example, there is just one licence to produce cannabis and sell it. So the license holder has to cultivate everything they sell, requiring the establishment of a vertically-integrated operation.
“This means we have to set up a cultivation facility, an extraction laboratory to produce cannabis products, and a dispensary store,” said Kane. “In some cases we are basically creating these businesses and finding local partners to work with, or we are helping put the pieces together for someone.”
Some states issue separate licences to cultivators and dispensaries. Others issue a very limited number of licences making it important for those operations with one to build out their production capacity as much as possible to reach demand. This provides another investment opportunity for 4Front.
4Front started its advisory business in Arizona and Massachusetts, and now works across Nevada, Illinois, Vermont and New Hampshire. It is also working on an application for a client in New York State which will soon start to issue a very small number of licences, according to Kane.
“The cannabis industry has seen its biggest growth in the last year or so and funds keep popping up,” he said. “Three to four years ago it was impossible to get access to capital – it’s still very difficult and most funds don’t have that much money yet – but there is definitely an evolution and some funds are deploying capital.”
But, he added, “there is a gaping need in the industry because it can’t access traditional sources of capital. There are no bank loans and it can’t go to institutional investors or the majority of venture capital firms because it’s still federally illegal and there are onerous restrictions on banking.”