Opportunities In Cannabis Nothing To Giggle About

On June 20, publicly-traded marijuana stocks in Canada picked up steam after the bill to legalize recreational marijuana passed the Canadian senate, the last major hurdle in Canadian parliament. That wasn’t the first time cannabis stocks have surged ­in the country; when Prime Minister Justin Trudeau won the Federal General Election in 2015, stocks rose as much as 20 per cent in early trading the day after the election.

And while opportunities in cannabis have been explored in the financial press in the last two-and-a-half years, very little about the sector has been covered in private capital investment.

Enter Green Acre Capital, a Toronto and Calgary-based VC fund that has been formally active in the sector since January 2017. Before then, Green Acre’s Managing Partners, Matt Shalhoub, Tyler Stuart and their partners had been active in the sector, mainly through a Toronto-based family office called York Plains. In late 2013 and early 2014, they had made sizeable investments in cannabis ventures gaining a deeper understanding of the industry.

Green Acre Capital officially launched in 2017 with the intention of raising CAD $20M, says Shalhoub. “[The fund received lead investments] from York Plains, and Brett Wilson out of Calgary and additional investments from others within our network. We set out to raise CAD $20M last year for the first fund and ended up raising CAD $25M before we stopped taking in money last August.”

Shalhoub says the fund’s vision has always been to focus largely on private investments with far better valuations than the public deals being done by the banks and to diversify in primarily three different buckets.

“One of which were investments we thought could perform well in a medical-only cannabis market. Some were investments that we thought really needed the recreational cannabis market to come online to be successful, and then some were investments that we thought could be successful regardless of cannabis regulation in Canada,” explains Shalhoub.

“An example of that would be a good investment we made in a company that distributes hardware and accessories, such as vaporizers and grinders. They have been in business for two decades and have been leading the market in Canada.”

Since August 2017, Green Acre has deployed about 80 per cent of their capital into 11 opportunities, with ten of those opportunities headquartered in Canada.

While the fund has a seven-year life, two of those opportunities beat expectations and exited years ahead of schedule.

“One of our earliest investments was in a company called Tokyo Smoke that was really trying to build out a cannabis brand,” Shalhoub points out. ​“We thought they were intelligent in how they were approaching it and had a couple year head-start on many of the producers. A large part of Green Acre’s thesis, as we got closer to the recreational market launching, would be to have producers looking to acquire and or build-out brands.

Tokyo Smoke merged in January with a publicly traded cannabis producer called DOJA out of British Columbia, creating a merged entity called Hiku (TSE: HIKU). In that exit, some of our stock had been locked up. As of July 10, Canopy Growth (TSE: WEED), the largest producer in the space, is acquiring Hiku in an all-stock deal. In the near future we expect to fully monetize our position.”

The second deal was through an investment into Anandia Labs in December 2017. Anandia is a cannabis testing lab focused on revolutionary plant genetics. Anandia is being acquired by Aurora Cannabis (TSE: ACB) in a deal that is expected to close in August.

Matt Shalhoub, Managing Director, Green Acre Capital & Alan Gertner, CEO, Hiku

The Opportunity For Patient Private Capital In Cannabis

There’s a ton of interest to invest in the cannabis industry which has been seen through the large amount of retail demand for public equities. But, there’s been a noticeable absence of ​“patient” private capital, according to Shalhoub.

“[The lack of patient private capital] was why we saw the opportunity and why we launched. We thought it was the best way to deploy our own capital and family office capital,” says Shalhoub. ​“I think that largely continues to remain the case in the 18 months (since the launch of the fund) — there’s still a ton of liquidity for the large publicly traded producers, but there’s very little patient private capital that’s available to some of the more ancillary or smaller private players in this space.”

Shalhoub says that there’s a void in the space and that Green Acre is thrilled to be able to fill that in some cases. However, admits that there is room for more capital than just theirs.

“There’s tons of retail investors that are throwing money into this space. You’re not really seeing institutional participation except for maybe an appeal of the largest multi-billion-dollar valued publicly traded producers. But it presents in my view, a very interesting opportunity in the middle for patient private capital.

Without a doubt, there are a lot of funds and LP agreements that are probably preventing them from participating in this space and/​or institutions who may not look to participate in the space. I think that will change over time and we’re looking forward to being the most established private fund in Canada with cannabis investment experience.”

2017 Canadian Private Capital Investment in Cannabis. *Originally published Feb 2018

What To Expect After October 17

As the country, provinces and territories gear up for full legalization on October 17, we can expect to see more talk about the investment opportunities in the space. However, according to Shalhoub, it may take some time for the more compelling cannabis ventures to move into the spotlight.

“It’ll take a lot of time for the markets to mature or for the investment community to mature and realize that the more interesting opportunities are likely not in the cultivation side of the space. I think that you’ll see plenty more opportunity on the ancillary side of this space. By nature, people like liquidity on some of their investments; because the cannabis capital markets have been so receptive to that, it’s been a pretty clear and easy path for people to raise capital.”

Canada isn’t the only place that Green Acre sees opportunities for future investment in cannabis. Some U.S. states have already legalized recreational cannabis, which, to some, is considered a signal of a more lenient attitude towards eventual national legalization.

“We’re going to be launching our second fund very soon and there’s certain sectors within the U.S. space I’d be comfortable owning and see long term value in them. It’s definitely not something I would rule out,” explains Shalhoub. ​“I think they’re probably a little bit further away from a change at the federal level with regards to cannabis than others may think, but I think it’s an inevitability.

We very much believe that Canada is at the forefront of a global shift towards legalizing cannabis and in 10 or 15 years from now I think the majority of developed countries will have done the same. Obviously, the U.S. being one of them.”

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