Asher Troppe, CEO of Tress Capital, a strategic private equity firm investing in the cannabis sector, spoke to Agri Investor about his firm’s investment strategy as major changes sweep through the sector and create opportunities.
What investment options do you offer and why?
We operate a fund platform with a robust co-investment/direct deal access business and private client services. A mainstream institutional investor may have specific mandates, so we create custom vehicles for them. The cannabis space is under-penetrated and a lot of people are accessing the sector for the first time. Our goal is to accommodate those different needs for the right value-add investors.
From the ag investor standpoint, why choose cannabis over some other sub-sector?
It’s a natural extension of an ag investor’s portfolio, and this one happens to be sitting with a large captive market. Cannabis in America alone is an approximately $50 billion market but the legal market was only about $6.5 billion in 2016. Even without considering new growth areas — mainstreaming, new medical R&D and so on — the legal sector is increasingly supplanting the illegal sector, creating steep growth. So for ag investors to be able to leverage their expertise into this growth channel makes all the sense in the world. Outsized IRRs are available in the market, but so are the opportunities for loss, so understanding sector-specific risks and how to manage and mitigate that is crucial.
What areas of the marijuana industry are you targeting?
We invest opportunistically across the industry with a focus on what we consider infrastructure. For example, SC Labs, one of our portfolio companies, is a leader in cannabis lab testing and quality assurance. Independent testing is increasingly required by state law as a potency and safety checkpoint in the legal supply chain, so to us that’s a perfect example of an infrastructure play. The legal cannabis infrastructure, however, is being built out in real time and thus there are opportunities across the industry, so we promote a diversified approach.
In November several US states, including California, voted to approve the legalization of marijuana for legal use. What impact is that having?
It’s led to more institutional level conversations and less stigma as people let go of anachronistic views that have held down cannabis investment in the past. This will become more and more common. Many also feel that the industry has reached a critical [moment] with California behind it.
California is both a massive general and cannabis economy. As the state moves ahead with recreational use and a regulatory framework, this further catalyzes the normalization of the sector. More standardization and infrastructure development is how a market matures. It’s up to investors where they want to come in. If they come in early, valuations are lower, with less underside risk and more upside room.
A majority of the states have some form of legalization in place. What needs to happen at the federal level?
First, they need to make banking more accessible. The banks are currently worried about risks at the federal level. Second, simply put, marijuana needs forward movement at the federal level [towards legalization]. The banking part may occur first, perhaps through a bill that gives banks interim protections. The latter will take time, and we’re okay with that, outside of impeding faster access to medicine. But if you look at the end of alcohol prohibition [in 1933], what followed was a decade of very strong growth. We view cannabis as having recently begun a long-term secular uptrend.
What are the social impacts of legalization?
Many, including job creation, improved medical development and access, and strong tax revenue generation in states that in some cases are not in the best fiscal position. Colorado has recently generated more in taxes from marijuana than from alcohol. The public also gets safer and tested access to the product, whether for recreational or medical use. As medical cannabis becomes more widespread there will be a growing opportunity to effectively treat adults, children and veterans.