As marijuana becomes legalized in various parts of the country,
investors and asset managers are grappling with the best way to make some money off the trend.
The latest, and perhaps most aggressive, effort is a new private-equity fund from Salveo Capital that will invest along the entire marijuana supply-and-distribution chain, including the businesses that physically handle the product.
Even though a growing number of states have relaxed laws and legalized use, marijuana is still illegal at the federal level, which has prevented earlier private-equity funds from venturing into exposure to companies that grow and sell it.
“We're going to be investing in legal marijuana, whether it is for medical or recreational use,” said Alex Thiersch, Salveo managing principal.
“Growing, selling, researching and processing is all technically in violation of federal law, but the feds seem to be taking a hands-off approach,” he added, justifying his push of the limits beyond just ancillary businesses that sell growing lights and soil-testing equipment.
Medical-use laws are on the books in 15 states, and marijuana is legal for adult recreational use in Alaska, Colorado and Washington, with at least a dozen more states expected to pass similar laws over the next five years.
HARD TO RESIST
From an investment perspective, the trend is difficult for some to resist.
“The [Salveo] strategy is viable,” said Adam Bierman, co-founder of MedMen, a marijuana industry consulting firm.
“This is the next step of evolution of our industry, because access to capital is the single biggest issue, next to the lack of operational expertise,” he added. “Direct investment in the space is the first iteration of this.”
Skipping past, for now, the sticky issue of pot still being illegal at the federal level, Mr. Thiersch believes he is tapping into the ideal model with his Salveo Fund 1, which began raising assets two months ago.
“There are a lot of wealthy investors who want to get into this industry, but there are also a lot of poorly run companies that aren't well capitalized and are dealing with legal and regulatory issues,” he said.
The fund,
which requires a $250,000 minimum investment from accredited investors, is on track to have $10 million by the end of the month, and will be considered at full capacity when it raises $25 million, according to Mr. Thiersch.
It is structured like a typical PE fund, which means there's a 2% management fee, 20% performance fee, and a 10-year investment commitment.
BEST WAY TO ACCESS INDUSTRY
While the fees and long lock-up period might deter some financial advisers, the PE model could represent the best way to access what is still a fledgling industry.
The fragmented marijuana industry is still made up mostly of small, mom-and-pop businesses. But the
few that have gone public have produced some wildly volatile stock-price performances.
Green Technologies Inc. (GRNH), which makes vertical growing systems, has a three-year annualized return of 47%, but is down 79% over the past 12 months and is down 50% since the start of the year.
The company's total market capitalization is just $10.6 million.
The S&P 500 Index a three-year annualized gain of 19.4%, a one-year gain of 15.8% and is up 3.9% from the start of the year.
GrowLife Inc. (PHOT), a maker of horticulture products related to marijuana growing, has given investors a similarly white-knuckle ride.
The $20.3 million company has a three-year annualized decline of 22.6%, a one-year decline of 79.6% and a 15.5% gain from the start of the year.
For a sense of the ride investors are getting, GrowLife was up 114% in 2011, down 75% in 2012, up 308% in 2013, and down 86% last year.
Mr. Thiersch is planning to smooth that kind of volatility by investing across the spectrum, including ancillary businesses that provide testing tools and paraphernalia, medical research businesses, as well as growers and sellers of marijuana.
“The companies we're looking at have an established market share, and are expanding as the laws allow,” he said. “When you think about the growth and size of alcohol or tobacco, or any pharmaceutical, imagine a market where you've got 10% to 20% of population consuming cannabis, particularly if federal regulations loosen and we get interstate commerce. It's not unrealistic to think of some massive companies being created through consolidation.”
CUTTING EDGE
In the meantime, it is a fund and a category for those comfortable dancing on the cutting edge.
If nothing else, funds like Salveo will test the powers and limits of regulatory oversight, and federal laws versus state laws.
“It's certainly pushing the envelope on what the states are deeming legal while it is still illegal, federally,” said Paul Schatz, president of Heritage Capital.
“When you get into raising money for an investment, you could bring in the SEC, which is federal oversight, so it's going to be fascinating to see how it shakes out,” he added. “I don't delve into the illiquid investments, but I'm going to watch this really closely, because it will create all kinds of unintended consequences or unintended opportunities.”
