Pensions, endowments and SWFs examining cannabis

Insiders tell Agri Investor of growing LP interest in cannabis funds and whispers of a search for ways to invest in them outside the strictures of 'sin clauses'.


Institutional investors are increasingly interested in the nascent cannabis sector and some are investigating ways to gain access to it despite clauses preventing them from investing in ‘sin’ industries, according to market players.

Consumers in North America spent $6.7 billion on legal cannabis products last year, a 34 percent increase from 2015 driven largely by the development of markets in Colorado and Washington, according to a report published last month by Arcview Market Research. The firm predicted that annual sales would reach $22.6 billion by 2021.

Catching the train

Speaking to Agri Investor, Steve Nadel, a partner at alternatives-focused law firm Seward and Kissel, said growing curiosity among his firm’s clients was simply a continuation of the search for yield that has stretched from the first hedge funds to the enthusiasm observed of late for cryptocurrencies.

“We have definitely seen pensions and endowments, the big institutional players in the alternatives space, starting to look at this [cannabis],” Nadel said.

Their budding interest, he added, was part of efforts to diversify partially inspired by strategies developed by Yale’s chief investment officer David Swenson.

Seward and Kissel’s clients include unnamed private equity firms that have invested in cannabis, he said. Nadel also highlighted Constellation Brands’ $C245 million ($192 million; €165 million) purchase of a 9.9 percent stake in diversified cannabis company Canopy Growth Corporation last week as an example of how marijuana could gradually make its way into institutional portfolios.

“I have definitely had a conversation with at least one sovereign-wealth-type firm about this. A lot of the sovereign wealth funds have ‘sin’ or socially responsible investment clauses in their investment mandates. We were talking a little bit about theirs and how to draw a distinction between medicinal and recreational,” Nadel said.

He suggested pensions plans, endowments and sovereign wealth funds were probably also starting to compare notes on how to approach cannabis opportunities in light of such restrictions.

A market source told Agri Investor such investors would typically expect at least low double-digit returns from a cannabis investment.

“They are just running out of places to make money,” Nadel said. “There is a concern that the stock market is hitting its ceiling, and they think this is an area that is under-represented from an institutional investor standpoint. They want to jump on the bandwagon before it has fully left the station.”

New structures

Investors in cannabis thus far have largely been high-net-worth individuals and family offices attracted by the sector’s fast growth and low correlation to other assets, Michael Gruber, managing partner of venture capital firm Salveo Capital, told Agri Investor.

Salveo is currently seeking $25 million for its first fund, which will target 35 percent returns through a strategy using both equity and debt to invest in cannabis-related businesses in the US and Canada. Gruber said most of the deals will likely be earlier-stage companies in software and data, agricultural technologies, payments and services, licenses and branding.

“We’ve actually been contacted by some of the largest pensions and endowments, including state fireman and police funds, and some of the largest university endowments,” he said. “Last year, that wasn’t the case – or even earlier in the year. The trend’s picked up over the past three, four months.”

Gruber added that “some of the big names” are currently investigating ways to create carve-outs and separate vehicles to get access to the space despite clauses within investment charters prohibiting such exposures.

“For those that are aggressive enough, or progressive enough, there are partners within those large entities who see the value and are trying to find ways to tackle that. There’s lots of stuff happening to create these special vehicles to take part in it.”

Gruber said that the sub-sectors most likely to attract institutional investors will initially be those focused on the “picks and shovels” ancillary business-like services and related technology, rather than those that “touch the plant” and participate in actual cannabis production.

“A handful of companies are going to be the beneficiaries as this industry continues to get bigger and bigger,” Gruber said. “We have legalization in California for adult use in January and in July for Canada. All of these companies are going to do well and ultimately there’s going to be a bunch of acquisitions that are going to start to take place. Then people are going to start to expand where they want to invest.”

Less than two years away

MedMen co-chairman Chris Leavy, a former BlackRock managing director enticed out of retirement by the sector’s “undervalued assets” , told Agri Investor in June that he expected the firm to bring an institutional investor into their second fund, which is seeking $250 million, within two years.

Late last month, Leavy said that the level of interest he has seen in the time since June made him believe such a commitment could happen even sooner.

“Institutional investors are becoming increasingly interested in the space. They are more open than ever before about ways to gain access to this asset class,” he told Agri Investor.

Leavy declined to comment on whether he is aware of LPs that are considering creating other structures to get around sin clauses. He did observe, however, that not all LP investment charters necessarily preclude cannabis investments.

“There is a significant portion of institutional capital that does not need to do any special structures in order to invest in this industry. That is capital that can be a traditional LP in a fund like ours.”

He reckoned cannabis’s potential returns are so compelling that institutional groups are now more wiling to incur the extra time necessary to make a decision on whether and how to invest.

“Part of it is due to the growing contrast between cannabis and the rest of private equity,” Leavy said.

“There’s almost one-and-a-half trillion dollars of capital that’s been committed and not deployed. In everything outside of cannabis, that’s a lot of money trying to chase very few deals. Cannabis is the exact opposite […] There’s very few buyers because investors are still on the sidelines.”

Leavy added that his conversations with investors over the past six months have included fewer questions about federal policy. While he expected many investors to wait for federal legalization before making a jump, he also said significant capital may well come into cannabis beforehand.