Investing in cannabis: clearer rules needed

The US market for legal cannabis products grew by up to 90 percent last year, but legal as well as reputational concerns continue to keep professional investors at bay.

When it comes to marijuana, the lines between its various uses – recreational or “adult”, medicinal, as a type of biofuel or a building material – are easily blurred. This week, Agri Investor reported on New Frontier’s research indicating that investment in cannabis grew by 90 percent last year, including the medical and recreational market. A case in point is a leaked Merrill Lynch report that came to light last month and which Agri Investor has cast its eyes over: “Medical cannabis has high POTential” was the headline.

Merrill’s report estimates the medical marijuana industry to be worth $2.9 billion and identifies significant growth potential. The fact that it was written at all shows that there is growing professional interest in investing in the sector. On the other hand, that it was intended to be privately circulated among clients and investors arguably highlights the reputational risks investors are still prone to perceiving. Marijuana remains a heavily stigmatised plant, and the distinction between, say, its medical and recreational uses can easily get lost.

Larry Schnurmacher is managing partner of Florida-based Phyto Partners, a venture capital firm that is aiming to capitalise on cannabis as “America’s next great industry”, according to its website. He says: “Adult use of cannabis is somewhat similar to tobacco and alcohol, and some investors may put cannabis investing in that light. Some companies’ products or services don’t differentiate [between recreational and other applications] while others clearly do.  It’s really company by company, product by product and service by service.”

In other words, it’s a complex landscape for PR-conscious investors to navigate, and it is easy therefore to imagine how a heavily scrutinised public pension plan would find reason to worry about having exposure to the sector. For Phyto and others like it, the hope must be that the soaring popularity of less harmful ways of ingesting cannabis, like edibles, as well as the rise of non-recreational applications, will change that image entirely.

Arguably the biggest hindrance to the sector attracting more capital in the US is the fact that the ongoing legalisation process is still incomplete. “[The drug] is still federally illegal. Until that changes most fiduciaries, insurance companies, pension funds, and banks will stay away,” Schnurmacher says.

Take the rules governing the testing of cannabis quality in medicine: they vary from state to state. One cannabis researcher at a large US university told me that she had her testing license taken away and given back several times within two years, because of unclear laws and political sensibilities around the issue.

Merrill Lynch estimates that the medical marijuana industry can “at least double” in value over the next few years, but asserts that this will require more stringent regulation, and better differentiation between the recreational and medical markets – both on a practical and legal basis. No institutional investor will ever rely on one cannabis-related company’s opinion that buying weed will one day be the same as picking up a paracetamol.

This year, which will see several states voting on whether or not to legalise cannabis, could be the next step towards making the sector more accessible for institutional capital. However, it seems that only when the federal government finally decides to change cannabis’ Schedule 1 status that things can fundamentally begin to change.