In PE, hope and anxiety cloud legal cannabis market

This past November, when eight states voted to legalize recreational and medical marijuana, investors and proponents rejoiced.

That group — Arkansas, California, Florida, Maine, Massachusetts, Montana, Nevada and North Dakota — brought the tally of U.S. states plus Washington, D.C., where either form of cannabis is permissible to 28. (Advocates put the number at 29, including Louisiana, which legalized medical marijuana but hasn’t yet been operational with it, says Chris Walsh, editorial director of Marijuana Business Daily, a B2B trade publication.) 

The euphoria evaporated, however, after President-elect Donald Trump, who has said he supports medical marijuana and states’ rights to legalize, made a contrary move by nominating the vehemently anti-cannabis U.S. Senator Jeff Sessions (R-Alabama) as the next attorney general. And marijuana use remains illegal under federal law.

Sessions’s appointment to the cabinet is no slam-dunk, as his nomination 30 years ago to a federal judgeship was voted down by the Senate over charges of racism. Still, the nomination has quelled the ardor investors felt right after the election.

“There’s a real chill in the air,” said Kyle Kazan, a former Los Angeles police officer who is now an investor. He closed the inaugural AP Investment Fund LLC, a private equity microfund, at $12.6 million. The fund targets retail dispensaries for recreational consumers.

When Sessions was being floated as a possible cabinet appointee, Kazan was, ironically enough, attending a Las Vegas conference for cannabis-focused investors and startups. Kazan said that at the event, hosted by the marijuana investment and research firm ArcView Group, the atmosphere was like “pouring an ice bucket over a celebration.”

If Sessions is confirmed by the Senate and cracks down on the industry, the consequences across the political spectrum could be dire, exacting a punitive toll on the economy, Kazan said. “Colorado could lose over $100 million in taxes,” he said. “If he decides to shut down marijuana in California, I think you would have a revolution here.”

Support for marijuana legalization has been climbing. A Gallup poll from October found 60 percent of Americans supported legalizing the use of marijuana — the highest level of support in the 47 years Gallup has been polling on the issue. That’s five times the 12 percent who favored legalization in 1969, according to a statement from Gallup in November.

The preelection market projections are, well, high. According to ArcView data, the revenue for the legal cannabis market is estimated at $7.9 billion, with the firm predicting growth to $21 billion by 2020.

The potentially stratospheric numbers were a key reason that Brendan Kennedy, a former Silicon Valley Bank executive, co-founded Privateer Holdings, a Seattle PE firm that invests exclusively in the legal cannabis sector.

Since its inception in 2010, Privateer has racked up $122 million in overall funding and made several notable acquisitions, which include Leafly, a Yelp-like cannabis-review site, and cannabis brand Marley Natural, launched with the consent of the late reggae great Bob Marley’s family.

Having recently returned from a trip to Europe, Kennedy said that California, the first state in the U.S. to legalize medical marijuana (in 1996) and the latest one to legalize recreational use, seemed of keen interest for overseas investors.

“People come all over around the world to visit California,” he said. “So people will see recreational cannabis in California and in movies. This will sway opinions in other states and countries.”

The fact that marijuana remains federally illegal prompts many investors not to dip their toes into the space because they fear the legal and regulatory ramifications. That applies particularly in states such as Colorado and Washington, where both medical and recreational cannabis are legal.

Despite the potential political battle, Troy Dayton, CEO of San Francisco-based ArcView Group, takes an optimistic, wait-and-see view.

“We have no reason to believe that Trump would go back on a campaign promise,” he said. “This is a hugely popular issue. The demographics were not in our favor with this election. And cannabis seems to be the one thing bringing Americans together right now.”

Action Item: Reach Troy Dayton at troydayton@arcviewgroup.com; Kyle Kazan at +1 310-877-9243 and Privateer Holdings at +1 415-534-5541.

Cannabis grower Steve Dillon tends to his plants on his farm in Humboldt County, California, on Aug. 28, 2016.  Photo courtesy Reuters/Rory Carroll