Private equity (PE) firms in the United States are primarily known for making financial investments in private companies that need a long holding period for funds. This is often done for new technologies, making acquisitions or to expand a balance sheet. However, as policy and legal shifts in the U.S. occur in the health and technology spaces, investors are beginning to take risks in areas that have never been possible for PE investors before. One sector garnering a lot of attention in light of recent election results is marijuana.
Risks for this sector are unique because they include a complete lack of clarity on the regulatory future of medical and recreational marijuana. Rulemaking, happening simultaneously in all 50 states, can change at any time. Moreover, the individuals who know the most about what that future may hold could easily have understanding of the sector due to current or previous illegal operations.
Undeterred, one Seattle-based group willing to take that risk due to the enormous potential in future earnings is Privateer Holdings, a firm whose mission is be a private equity firm, “shaping the future of the legal cannabis industry.” The firm has even launched a joint venture with the Marley family – Marley Natural – to unveil a cannabis brand based on Bob’s life and legacy.
When asked about the risk it is taking by funding a marijuana-based company and investing in others, CEO Brendan Kennedy said, “Our investors include ranchers in Texas, farmers in Kansas and finance professionals in New York,” proving it has spread the risk among stakeholders in the space. Privateer Holdings even raised $7 million in Series A capital in 2013, leading it to officially launch its Series B raising with a goal of $50 million.
These numbers are quite remarkable for a fairly unknown firm, especially in an industry that is illegal in most states. For other reasons, including the lack of executive expertise due to the newness of the sector, financing through traditional channels could continue to be difficult.
Despite that, Kennedy believes that the American market alone will eventually be worth $50 billion a year. This is consistent with an assessment by Washington State’s Office of Financial Management who found that a “fully functioning marijuana market” could result in state gross sales of $1 billion a year. Extrapolated across the U.S., the result is on target with Kennedy’s prediction.
Although the original goal for Privateer Holdings was to create a marijuana-focused VC fund, legal liabilities made partnerships a more realistic outcome for Kennedy.
The three partners of Privateer Holdings made their first investment in a website, Leafly.com, which reviews everything from marijuana dispensaries to varieties, or strains, of marijuana. From there, the group claims it has received more than 200 pitches from startup companies seeking funding in a matter of months, in addition to their work in Marley Natural.
The outpouring of inquiries from startup companies, existing brands and other investors gives Privateer Holdings the confidence that it is carving out an entirely new sector for investment. As more and more states prepare to see legalization of medical and recreational marijuana on 2016 ballots, it is safe to assume PE investors will begin to look at new entrants like Privateer Holdings, and make future investments as the space becomes less and less risky, and more and more profitable.