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June 11, 2019

Pot of Gold: Why HNWIs are investing in cannabis

By Mishelle Thurai

As more and more countries legalise cannabis, the sector is seeing a windfall of investments from high net worth individuals. Mishelle Thurai finds out why so many are investing in a drug that’s still outlawed in most countries.

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Despite the freezing temperatures which graced Toronto, Canada, on the 1st April 2019, crowds gathered outside for the opening of Honey Pot cannabis dispensary to get their fill of legalised pot.

The store has four floors of cannabis and various associated products. But this is not the only store in Canada like this.

The craze for cannabis has hit the world’s markets, allowing companies like Honey Pot, as well as others up and down the supply chain, to raise capital from individual investors.

The North American Marijuana Index has more than doubled since Canada legalised use of the drug in October 2018.

Canada, along with Uruguay, are currently the only countries where marijuana is legal. In the US, legislations differ from state to state and so far a handful have legalised the drug.

The growing weed

“We have seen high net worth individuals and family offices investing in the industry for years but this is only increasing,” says Emily Paxhia, co-managing director of Poseidon Asset Management, which has been managing funds for cannabis investments since 2014.

This is due to cannabis being more widely accepted in society, says Tomas Garibaldi, vice president of Bel Air Investment Advisors, a US based wealth manager.

“We are experiencing the end of prohibition and the normalisation of cannabis consumption, for both recreational and medicinal use, opening the floodgates for capital to invest in farming, manufacturing, distribution, branding, etc.,” Garibaldi notes.

Investments in cannabis can be divided into two types: medical and recreational. Though supply chains and consumers normally differ between the two, HNWIs often invest in both.

“We don’t have any official funds on the platform that are investing in cannabis or hemp at the moment”, says Garibaldi. “However, most of my clients invest directly in cannabis-themed funds away from Bel Air, focusing mainly on the recreational aspect of marijuana as well as the overall supplemental aspect of Hemp derived CBD, about 50/50.”

The line between the two is similarly blurred at Poseidon, says Paxhia: “The fund invests in the legal markets and does not draw a firm line on recreational versus medicinal. Recreational-use markets open up larger addressable consumer bases, so this is obviously attractive from an investment perspective.”

But the rise in cannabis as an asset class is curtailed by the legislation surrounding various uses of the drug, Paxhia notes. “I would say there is not necessarily a sudden trend, but a building momentum on the trend of investing in cannabis. We have seen interest in the space growing and this started over the last six years that we have started investing in the sector. It is usually driven by policy/regulation events, new states or market openings, or new positions by lawmakers.

Putting money into the pot

Due to the myriad of legislation surrounding cannabis, many HNWIs are concerned about how they invest, says Garibaldi. “Deployment of capital from HNW portfolios is still cautious due to the lack of clarity regarding valuations and legality.

“Many investments are speculative, but there is no denying that there is definitely an appetite for more cannabis investment and more than enough cash sitting on the sidelines looking for potential returns.

Canada is the largest G7 country to have a fully federally legal program and this has resulted in the opening of a truly global market. Companies listed on the NASDAQ and NYSE make it possible for more investors to participate in the industry.

Last year, the MSCI found 100 publically traded companies with some sort of link to cannabis. This has given rise to cannabis linked ETFs, says Garibaldi. “ETFs are gaining popularity, such as ETFMG which tracks the Prime Alternative Index and includes some of the biggest names in cannabis on the public side.

“The reality is that there are many peripheral businesses that you can invest in that touch or support the plant marijuana or hemp in some way – i.e., growers, manufacturing/packaging, dispensaries, real estate, brands, pharmaceuticals, beverages, software and hardware companies, accounting firms, insurance, etc.”

Paxhia sees these as major growth stocks, which in an area of low returns might standout in an HNWI’s portfolio. “We believe high net worth individuals like adding cannabis as a piece of the growth portion to their portfolio. There are few sectors growing at this rate, so it can add an attractive potential return profile to their investment strategies.

She advises caution when making direct investments, however. “Direct investing is interesting but there are many diligence items that can be easily missed in this industry if someone does not have the experience to look around corners to see what issues might arise due to the nature of a fast-growing, newly emerging market with heavy regulatory influence”.

The concerns of cannabis

One thing that concerns investors about the cannabis industry is its volatility. “Cannabis is one of the fastest growing industries globally and it is key to have discipline and consider the right entry points of structures of the investments to fit the type of company,” says Paxhia.

Also at the top of many investors’ minds is the ethics of investing in cannabis. Although the stigma that was initially tied to cannabis seems to be slowly disappearing, HNWIs are increasingly taking ESG (environmental, social and governance) considerations into account when designing their portfolios. The question, ‘is cannabis ethical?’ is often raised, but less easily answered.

An ESG portfolio cannot be invested in an asset that is being sold illegally. Therefore, the ‘G’ in an ESG portfolio will crop up if a company is selling its cannabis beyond the countries and states where it is legal.

NEI Investments, a Canada-based provider of responsible investment solutions, takes a case-by-case approach to investing.

“For our funds that incorporate ESG evaluation, rather than screening out cannabis stocks we will assess cannabis-related companies based on their capacity and commitments to satisfy our expectations for managing the previously described material ESG risks,” NEI said in a proposition paper, ‘Investing Responsibly in Canadian Cannabis’.

The paper compares recreational cannabis to tobacco products, which are excluded from ESG funds. ESG indexes, such as the MSCI, exclude tobacco companies but not cannabis, though, meaning many ESG ETFs are unknowingly exposed to cannabis.

Arguably, investors who screen tobacco from their portfolios should do the same with recreational cannabis, considering the well-documented health risks. Even in the medical arena cannabis has side effects. The opioid epidemic in the US shows how addiction to painkillers can affect health and social welfare. It is estimated that around 10% of cannabis users become dependent on the drug.

However, Paxhia disagrees: “I don’t see an ethical reason to not invest in cannabis. Legalisation and regulation has been shown to have positive impacts, based on studies run by states like Colorado. Specifically, legal states/countries tend to see a drop in opioid addiction and drinking. Most states tend to see a decrease in illicit market activity.”

The future of cannabis investing

As cannabis investments is still an emerging investment area that has not found its footing in the global markets, it will be interesting to see what the future holds for the commodity.

This is not just a trend to watch in the Americas, Garibaldi notes: “Cannabis is consumed (illegally) almost everywhere in the western world. Attitudes in Asia will be interesting to watch. South Korea, a generally conservative country, recently legalised cannabis for medicinal use (although the terms of the legislation are still very strict relative to that of the US).

“The expectation for growth from marijuana and hemp demand is far exceeding the growth in wine and alcohol…It is called weed for a reason, it can grow anywhere and it grows quickly.”

Free Report
img

How attractive are current investment opportunities in Europe?

Europe has been identified as one of the most favorable regions for investors, seeing high investment activity in the past year. Most of these investments have been through Debt Offering, valued at close to $700 billion. The region has provided attractive investments in a diverse set of companies. Companies who tend to major themes such Digital Media, Cloud, Artificial Intelligence, E-commerce, and Big Data are recording the highest number of deals, with Digital Media recording close to 2,000 deals. However, GlobalData’s whitepaper offers a full view of the market, analyzing less successful or attractive points of investment as well, examining statistics on Equity Offering investments and PE/VC deals. Understand how government agencies for economies around the world use GlobalData Explorer to:  
  • Track the M&A and Capital Raising volumes into their target market
  • Identify the top sectors in the target market attracting the investments
  • For any investment segment, identify the top Investors inside and outside the target economy that are already investing in the Segment
  • Assess and showcase the growth potential for various Industries in the target economy
Don’t miss out on key market insights that can help optimize your next investment – read the report now.
by GlobalData
Enter your details here to receive your free Report.

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