Cannabis, vertical integration and happy hour

Greetings from New York!

While stateside this week, I’ve been in a number of conversations and thinking a lot about the wide range of issues and opportunities for US agri investors and fund managers to explore. Here’s a few thoughts on just two topics we expect to discuss over drinks this evening [Wednesday].

Reefer madness

One particularly niche area that keeps cropping up is cannabis. Until recently, most related investment has focused on the US’ medical marijuana market and been funded largely by angel investors.

But now that Colorado has become the first state to go beyond medical permissions and has legalised recreational pot use (which earned it an additional $44 million in tax revenue last year), other states like California are expected to follow suit in the next year or two.

Those shifting legal parameters have been fuelling a surge of interest in cannabis-related investment; recently, we’ve reported on Silicon Valley veterans, rap and reggae stars, aquaponic specialists and ex-investment bankers all starting to bring products and services to market.

The story that probably garnered the most attention, though, was from the start of the year when Founders Fund, a prominent VC firm led by billionaire tech investor Peter Thiel, participated in a funding round for Privateer Holdings, a cannabis-focused firm that’s reportedly raised around $82 million to date. What was striking was Founders Fund represented Privateer’s first institutional investor; previously it had only attracted capital from family offices and high net worth individuals.

There’s certainly no shortage of fascinating cannabis-related companies springing up that might catch the eye of early stage investors. For example, California start-up Flow Kana just launched a ‘farm-to-table’ service for medical marijuana dispensaries. It matches patients to farmers to give full transparency about how and where their herb was produced, marketing 100 percent organic and sun-grown strains from “happy farmers”.

But will cannabis products and services ever really shake off their obvious taboo? Could large institutional investors such as public pension funds, insurance companies and foundations ever really back fund managers active in the sector, or think about direct and co-investment? Or will it remain the purview of more risk-inclined venture capitalists along with the odd celebrity and entrepreneur?

Vertical integration

Vertical integration has also been a recurring topic at meetings in New York and Boston. As increasing numbers of agri investment firms discover ways of capturing value beyond the farm gate – Insight Investment, ACM Permanent Crops and Phoenix Africa, to name a few – I was surprised to hear that some US fund managers are not interested. They prefer to stay closer to the land and think that infrastructure-related investments, such as processing assets, are a venture capital play that could put agriculture at risk of correlating with other asset classes.

But for some of the more established names that have been acquiring agricultural assets for several decades, the opportunity for vertical integration must present itself very frequently. They may have been in a market for several years, know its infrastructure inefficiencies and key local players. So why not act opportunistically and earn a few extra percentage points of return?

And as the controversy surrounding institutional ownership of farmland both at home and abroad shows no signs of abating, surely the opportunity to create more local jobs through a business beyond the farm gate is appealing?

What do you think? Get in touch at louisa.b@peimedia.com.