Medical marijuana: a new investment niche

At least three investment firms are offering exposure to the herb as M&A volumes increase, according to PwC.

Medical marijuana has become an investment destination. At least three investment firms are offering exposure to the growing industry in the US and Canada and Tweed, a Canadian medical marijuana producer, listed on Canada’s TSX Ventures Exchange in April this year.

The US legal marijuana market, including medicinal, is estimated to be worth $2.6 billion by the end of this year by ArcView Market Research, an organisation that focuses on promoting the viability of investment into the marijuana market. And Canada’s medical marijuana market alone is on course to reach a value of C$1.3 billion by 2024.

Mergers and acquisitions volumes are also increasing, according to PricewaterhouseCoopers, which reported 30 transactions in the two countries already in 2014. And private investors have been very active, investing $45 million into a small number of medical marijuana companies according to PwC’s report.

A change in Canadian law last year institutionalised the herb’s production by creating a government-licensed and regulated indoor farming industry; previously, licensed individuals were permitted to grow marijuana at home for personal medical use.

This has created new opportunities for investors, as there are no restrictions on the number of facilities permitted across the country, or the pricing of products, according to PwC.

One of these legal Canadian facilities is already open for business: Tilray is a subsidiary of the Seattle-based investment firm Privateer Holdings. The firm opened its Vancouver marijuana factory earlier this year. The factory is licensed by Health Canada.

Privateer is a marijuana-focused investment firm and recently raised $18 million in a Series B round in July taking its total to $50 million of a $75 million target, according to a press release on the firm’s website. This includes both both debt and equity capital.

The firm has holdings in four marijuana companies, ranging from production to ancillary services such as information apps.

Another marijuana-dedicated investment firm is the High Times Growth Fund, a US-based offering founded by Michael Kennedy, the general counsel of the High Times magazine, which has lobbied for the legalization of marijuana nationwide. The Fund is targeting $200 million to $300 million to invest in the legal marijuana industry. He is joined by Ben Zaitz, a dairy farmer and agricultural investor who is a partner in the fund, and Jordan Lewis, also a partner in the Fund, and founder of the Silverpeak Apothercary in Colorado.

While the industry’s maturation process is happening quite rapidly, there is still some hesitation from investors concerned about the herb’s illegality at the national level, according to Michael Novielli, managing partner at Dutchess Capital, an investment firm that led the$475,000 investment into MassRoots, a social network for marijuana users earlier this year.

“From a legalisation standpoint, it’s still very early,” he told Agri Investor. “It all depends on the type of investor. While early stage investors such as Dutchess are becoming more active, many other institutional investors are taking a ‘wait and see’ approach.”

“In addition, most businesses don’t yet have sufficient scale to generate any material M&A interest. But I expect there will be more M&A pick up in the next 12 -18 months, when revenue growth rates begin to expand,” he added.

But there is reason to be optimistic. “Twenty-three US states have either decriminalised or legalised marijuana, and Florida has placed it on a referendum for later this year. At the federal level, the U.S. House of Representatives is also discussing legislation to address the industry’s banking issues, as well as possible medicinal legalisation,” said Novielli.