What's Your Cannabis Investment Strategy?

November 1, 2018

Like some family office fund managers I’ve spoken to, you might be weighing a cannabis industry investment strategy. Some believe there’s extraordinary money to be made, particularly in the burgeoning U.S. market. But exceptional returns come with substantial risk, and most wealthy individual and family office investors don’t have the background or belly to play in the current market.

The hype around cannabis makes me suspicious of a coming bubble. However, the root of the investment theory is sound: commercialization is replacing the multi-billion dollar black market with a multi-billion dollar legal industry, giving investors an unprecedented opportunity to gauge its size and certainty.

The risk comes from the legal status of marijuana in the U.S. While the states are trending toward legalization, marijuana is still illegal under federal law. Another issue is the black market itself, which is likely to continue for some time and compete with the legal enterprises that bear high regulatory costs, including license fees. Investors could easily find themselves afoul of federal law, and without proper due diligence, among business partners with black market ties. For a cautionary tale, read up on Harmony & Green, a Colorado-based grower that was raided by the DEA and alleged to have transported marijuana across state lines.

A Bifurcated Investment Opportunity

Rick Kimball, managing member of Samphire Capital Management, has made seven cannabis industry investments, including one that has already been sold. Mr. Kimball cautions that investors must do thorough research into the complexities of the law and the industry, and extra due diligence into the operations of potential investment targets. “If you have the resources to do the research and can stomach the risk, these are the fanciest returns we’ve seen in a long time,” he says.

According to Mr. Kimball, there’s a bifurcation in cannabis investment opportunities—those that do and don’t touch the plant. “If you have ERISA pension money or a charter that says you can’t invest in a company which is violating federal law, then you probably can’t invest in something that touches the plant,” he says. “Anything to do with growing, extracting or dispensing could have regulatory consequences.”

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