Newsletter 004: A landmark year for the cannabis industry

Despite COVID induced headwinds, the cannabis industry has thrived in 2020 while many other industries have struggled. Financial, structural and regulatory drivers have continued to thrust the sector forward. As we enter 2021, the listed cannabis stocks have now delivered nine months of positive share price growth and, driven by a number of positive tail winds in 2020, the sector is primed for further growth this year. The medical cannabis sector is already a viable alternative asset class that investors should be seeking exposure to via Verdite Capital. Underpinned by our $75m cornerstone family office investor, we expect to hit our first close target of $100m by the end of Q1 2021 and to start deploying into a number of extremely exciting investment opportunities we have already identified shortly thereafter. For those interested in hearing more, please contact the investment team here.

2020 CANNABIS SECTOR HIGHLIGHTS

1. Multiple progressive regulatory advancements in North America and Europe

   • UN reclassification of cannabis given medical benefits

   • FCA clarifies the UK listing requirements for medical cannabis and CBD companies

   • EU Court of Justice declares that CBD should not be considered a narcotic

   • US House of Representatives passed the ‘MORE Act’ to legalise cannabis

   • 5 US states voted to legalise cannabis in 2020; medical cannabis is now legal in 35 US states and available to over two thirds of the population

2. Capital raising has fallen 70% from 2018 peak

3. M&A activity starting to pick up again

4. Global legal cannabis industry grows 38% in 2020 reaching almost $20bn

5. Public cannabis stocks bottomed out in March and ETFs have risen 55-170% since

1. Progressive legislative and regulatory changes are rapidly transforming the global industry

Global demand for cannabis products is estimated at c.$344bn annually. The ability to convert existing sales from the illegal to legal channels is primarily being driven by regulatory changes which will accelerate that switch over the next decade. The last quarter of 2020 was a phenomenal period for progressive regulatory changes, providing greater freedom and access to cannabis and helping further position the global industry towards a fully legal framework. Below we review a few of the key legislative changes:

UN cannabis reclassification:

What happened? In December 2020 the UN Commission on Narcotic Drugs, on recommendation from the World Health Organisation, agreed to remove cannabis from Schedule IV, a categorisation reserved for drugs with no medical benefits.

What does it mean? For the first time the UN has publicly recognised the therapeutic and medical benefits of cannabis. The removal of this structural barrier will now provide countries around the world with greater freedom to implement regulatory reform in relation to cannabis, in particular when it comes to medical cannabis. The change is a substantial development and will be a significant boost to the rapidly growing industry. Every new country that implements a legal medical programme immediately opens up a multi-billion $ market opportunity that companies can now legally address for the first time in over 80 years.

UK Financial Conduct Authority (FCA) listing clarification:

What happened? In October 2020, the FCA provided long awaited clarification for the UK listing requirements for companies involved in the cannabis sector. In short, medical, pharmaceutical and wellness companies are now able to consider listing on the London Stock Exchange opening up yet another global financial market to the industry.

What does it mean? We now expect to see several healthcare focused cannabis companies listing on both the LSE Main Market and AIM in 2021. While the US and Canadian exchanges have been the primary locations for cannabis companies going public, we will now start to see such companies listing in London for both primary and secondary capital access. We also anticipate other exchanges around the world following suit in 2021.

EU CBD ruling

What happened? Following a case between a CBD vape manufacturer and the French state, in November 2020 the EU Court of Justice ruled that CBD should not be considered a narcotic.

What does it mean? The landmark case provides clarity around the legal status of CBD in the EU. The ruling applies to the whole customs union and effectively allows the cultivation, formulation and supply of CBD as wellness products to now develop in countries all across Europe boosting the cannabinoid industry and opening up new markets, new products and will help drive significant sector revenues.

Passing of the MORE Act in the US:

What happened? In November 2020 the US House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act).

What does it mean? If passed into law at the Senate, the Act would remove cannabis from the US schedule of Controlled Substances bringing an end to the contradiction between current state and federal cannabis policy. This would be a major boost to the industry and would open up the capital markets to the sector. US companies would be able to list on the major US exchanges, and trigger a wave of institutional investment into the industry. The senate will vote on the bill in 2021. The MORE Act would be expected to generate substantial income for the US treasury, as well as reducing the pressures on the federal prison system. According to a non-partisan report by the Congressional Budget Office (CBO), the MORE Act would likely generate $13.7bn in taxes and cut nearly $1bn in federal prison spending over the next decade.

Passing of the SAFE Act in the US:

What happened? In May 2020 the US House of Representatives passed The Secure and Fair Enforcement Act (the ‘SAFE Act’).

What does it mean? If passed into law by the Senate, the SAFE Act would allow US cannabis companies to access banking services for the first time, removing one of the biggest hurdles for the growth of the industry in America. The industry would be able to move away from the predominantly existing cash-only system and be able to secure debt finance to grow.

Five US States passed legalisation:

What happened? During the November 2020 US elections, all 5 states in which cannabis regulations were on the ballot voted to legalise (New Jersey, Arizona, Mississippi, South Dakota and Montana).

What does it mean? This brings the total tally of states with legal medical cannabis to 35 and with legal adult-use cannabis to 15. This equates to over two thirds of the country’s population with access to medical cannabis and one third with access to adult-use. New Frontier Data estimate that these five states alone will add $9bn of incremental legal revenues between 2022-2025.

2. Growth capital remains scarce creating a unique opportunity

What happened? Following the ‘Green Rush’ of 2018, during which almost $14bn was invested into the sector, access to growth capital has reduced considerably. In 2019 $11.3bn was raised, a figure somewhat inflated by a handful of major raises that occurred in Q1 of that year. 2020 saw an even more substantive fall, with just under $4bn being raised. Simultaneously, the average size of capital raises has dropped from a peak of $23m per transaction in 2018 to $14m this year.

What does it mean? Despite the significant growth being exhibited by the industry, access to growth capital supply, even for the fastest growing and best run businesses, remains challenging. However, for sophisticated investors, this current imbalance provides the opportunity to deploy growth capital tickets into some of the best opportunities in the sector on highly attractive terms. Private equity investors in the sector now how significantly more purchasing power than they did 12 or 24 months ago.

3. M&A transaction decrease in total but major transactions are on the rise

What happened? Completed M&A activity decreased 71% YoY, but the number of deals over $750m has risen resulting in a decrease of just 47% in total capital consideration through the year. Major transactions by Curaleaf, Cresco and Aphria have dominated the M&A landscape and activity appears to be accelerating going into 2021.  Viridian has tracked a total backlog of nearly $2bn in announced but unclosed deals, not including the $4bn reverse takeover of Tilray by Aphria.

What does it mean? The activity provides further evidence that the industry is continuing to move from extreme fragmentation towards organisation which is typically consistent with value creation. There are now 9 multi-state operators (MSOs) with market caps above $1bn and more are expected to list in Q1 2021. The major players are starting to consolidate and the merging of Tilray and Aphria will form the world’s largest cannabis company, with a combined legal revenues of around $685m. Significant SPAC (Special Purpose Acquisition Company) transactions have also been announced for 2021 and with almost $3bn raised into cannabis SPACS in the last 3 years, there will be more to come next year. Strong industry activity is a positive signal for investors and we have yet to really see the arrival of blue chip companies from other large consumer sectors such as alcohol, tobacco and FMCG.

4. Against the COVID backdrop the legal sector grew 38% to $20bn

What happened? In a turbulent year, global legal cannabis sales are estimated to have grown 38%, reaching almost $20bn and in the process overtaking the size of global music recording industry, even at this early stage of its development. In fact during the pandemic lockdown, many US states deemed cannabis retailers ‘essential service’ businesses that could remain open against wider shutdowns.  

What does it mean? Amidst many other sectors that will struggle to grow over the next few years, the cannabis industry’s impressive growth is forecast to continue. A compounded annual growth rate (CAGR) of 22% is expected over the next 5 years and global sales are forecast to reach $47.2bn by 2025.[1] Again, this is further evidence that the sector is a genuinely viable alternative asset class that can deliver significant outperformance for investors.

5. Public market valuations bottomed in March 2020

What happened? Following a tough 2019 for listed cannabis stocks, prices of publicly traded cannabis companies have rebounded materially from March 2020 lows. Appreciation has been driven by a combination of strong Q2 and Q3 financial metric performance, US election results, anticipation of change to the current Federal illegality, and ongoing M&A news. All eight of the cannabis ETFs we tracked are up between 55-170% from March lows..

What does it mean? We believe that 2020 has marked the lows in the sector sell off. The financially weaker and poorly managed public companies are falling by the wayside while the strong companies are starting to deliver and command institutional investor attention. However, in the private markets the strong well-run businesses are still struggling to access growth capital such that there still exists a significant arbitrage between private valuations and their strong growth potential. That remains the compelling opportunity for Verdite Capital being a $200m growth capital fund focused on the cannabis healthcare sectors.

6. Summary

The medical cannabis sector has further highlighted its status as a viable alternative asset class in 2020 and one all sophisticated investors’ should consider including in their investment portfolios. The sector has strong momentum heading into 2021 and existing structural catalysts are expected to maintain this trend. The Verdite Capital investment team has identified a number of compelling investment opportunities that we hope to execute on following first close. We currently have $80m secured and we expect to reach the first close target of $100m by the end of Q1 2021.

We would welcome the opportunity to discuss the sector and the Verdite fund with you. If you wish to do so, please email Verdite@chrystalcapital.com.

Newsletter 003: Regulatory momentum continues to drive the cannabis industry forward

Progressive regulatory changes have been thrusting the sector forward. These changes account for much of the 45% growth in legal cannabis sales in the United States last year, rising from $13.2bn to $19.1bn. Canada’s cannabis industry has also continued to mature and develop, forecast to reach $2.5bn this year from $1.6bn in 2019. A lack of supply, access and variety of product had blighted the early phase of federal legalisation IN Canada but new regulations have allowed an increase in stores and form factors. Europe’s cannabis market is still a way behind its North American cousins but is growing fast. Growth of 25% was realised in 2020 but a massive CAGR of 52% is forecast over the next 5 years, reaching $3.1bn by 2025. Much of this growth is predicated on continued regulatory developments. Below we will discuss a few of the major regulatory changes that have occurred in just the last month at both national and international levels.

Earlier this month, the US House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act). The vote passed with 228 votes to 164 and would remove cannabis from the US schedule of Controlled Substances if it came into law. The act would bring an end to the contradiction between current state and federal cannabis policy and would aim to provide restorative justice for the communities of colour that have been damaged by the US ‘War on Drugs’.

The More Act would be a major boost to the cannabis industry and would open up the capital markets to the sector. This would allow US companies to list on a major exchange, and trigger a wave of institutional investment into the industry. Anticipation of these changes is driving US cannabis markets higher, which is similar to what was seen in Canada prior to their cannabis legalisation in 2018. During that time we saw some Canadian cannabis indices increasing more than 10 times, and a similar effect in the US would not be surprising in the coming years.

Additionally, the MORE Act would be expected to generate substantial income for the US treasury, as well as reducing the pressures on the federal prison system. According to a non-partisan report by the Congressional Budget Office (CBO), the MORE Act would likely generate $13.7bn in taxes and cut nearly $1bn in federal prison spending over the next decade.

The recent vote is significant but may only be symbolic for the time being given the Senate, in its current incarnation, is unlikely to vote through the act. Even if the Democrats win both of the Georgia runoffs next month and manage to achieve a 50/50 share of the Senate, 10 Republican would be required to back the act for it to pass.

There is some hope though, pressure on Republican senators to vote in favour of cannabis legalisation is increasing. The number of Republican senators in states with medical cannabis is now 22, of which 6 are in states that have fully legalised. Many view their position to be hypocritical in blocking progressive federal legislation while their states benefit from the growth of the industry and this could force a shift in position if public sentiment is strong enough.

In mid-November, following a case between a CBD vape manufacturer and the French state, the EU Court of Justice ruled that CBD should not be considered a narcotic and therefore the trade of legally produced CBD products should not be restricted. The landmark case provides clarity around the legal status of CBD in the EU and will allow the industry to thrive.

Specifically the ruling will allow CBD, extracted from the hemp flower (as opposed to the seeds or fibre), to be sold without restriction across the customs union. This is especially significant in France, the biggest hemp grower in Europe, as farmers will now be able to switch their hemp cultivation from fibre to the potentially more lucrative cannabinoid production.

The ruling applies to the whole customs union and we expect to see its effects across the EU in the coming months. In Germany we have already seen politicians joining calls for easier CBD access and these voices are only growing.

Additionally, the decision discussed the validity of existing CBD marketing bans. It stated that countries may only ban the marketing of CBD products if the risk to public health is “sufficiently established”. The burden of evidence is certainly on the side of CBD businesses in this regard, given the safety data from licenced CBD based medicines, such as Epidiolex.

This decision will be a substantial boost to the cannabinoid industry in Europe and will open up new markets.

The global prohibition of cannabis and its derivatives was triggered by the signing of the 1961 UN Single Convention on Narcotic Drugs. Cannabis was placed in Schedule I and IV of this convention, a combination reserved for substances with extremely limited or no medical value, despite evidence to the contrary. However, this month the UN Commission on Narcotic Drugs agreed to remove cannabis from Schedule IV.

Although cannabis remains in Schedule I, the removal from Schedule IV will provide countries with greater freedom to implement regulatory reform in relation to cannabis, in particular when it comes to medical cannabis. The removal of this structural barrier is a substantial development and will be a significant boost to the rapidly growing industry across North America, Europe and beyond.

This decision to reschedule cannabis was made following the recommendation of the World Health Organisation (WHO) in January 2019 and, although this one was accepted, there were an additional 4 recommendations that were not agreed by the Commission. These included the deletion of extracts and tinctures from Schedule I, the removal of THC from all schedules and the rescheduling of THC and Dronabinol from Schedule II to I. We anticipate that these additional recommendations will be accepted in the coming years

Encouraging signs have been emanating from UK regulators as well. Earlier this year the FCA provided clarification for the listing requirements for medical cannabis and CBD companies, opening up yet another global financial market to the industry. In 2021, we expect to see several medical cannabis and CBD companies listing on both the LSE Main Market and AIM. They are likely to perform well as European institutional investors look for exposure to the sector.

The opening up of new regional and global stock exchanges is a positive development and provides additional viable exit routes for companies in the sector. The growing adoption of the sector and the progressive regulatory changes will re-assure banks, private equity funds and institutions that medical cannabis is now a viable asset class for investment.

Other upcoming changes to look out for

Looking into 2021 there are a number of other countries that should be on the radar of investors interested in the cannabis sector:

• Mexico will vote on an adult-use cannabis legalisation in early 2021 and could become the biggest cannabis market in the world (120m people and c70% adult population)

• Israel is expected to legalise recreational cannabis market Q2- or Q3-2021 and could have a domino effect on other Mediterranean countries

• Luxembourg was due to legalise cannabis in 2020 but has delayed to 2021 due to the pandemic

• Netherlands will begin a recreational cannabis trial with 11 cultivators in 2021 and is very much seen as the prelude to full legalisation in the next couple of years

• China is opening up to the sector with domestic provinces having issued 15 licenses for CBD extraction and 60 for hemp farming (CBD exports were $964 million in 2019)

• Thailand’s Ministry of Tourism and Sports has announced they will start to develop the medical cannabis tourism industry in early 2021

For those interested to hear more about Verdite’s investment strategy and how the team expect to generate >30% IRRs, please contact verdite@chrystalcapital.com.

Newsletter 002: US Election & Cannabis Reform

HIGHLIGHTS

• Cannabis ETFs/Indices up over 30% in week following the election

• 4 states voted to legalise adult-use cannabis (NJ, AZ, SD, MT)

• 2 states voted to legalise medical use cannabis (SD, MS)

• Additional states around New Jersey expected to follow NJ lead (NY, CT, PA)

• Republican controlled senate has the potential to block federal legalisation

• Banking reforms (SAFE Banking Act) likely to have cross party support

It is now 2 weeks since the American people went to the polls to elect a new President and, for most of the watching world, it appears clear that Joe Biden is going to be the next President of the United States. However, it was not only the next President that was on the ballot, 5 states were voting on medical and adult-use cannabis legalisation and there were all important Senate and House seats up for grabs. Now that some of the dust has settled, we wanted to take this opportunity to discuss the election results and the potential implications for the cannabis industry.

It is safe to say that cannabis has been a clear winner in this election with 5 states voting for new medical and/or adult use cannabis legalisation and a cannabis-positive Democratic administration in the White House. Following the announcement, cannabis stocks saw a swift uptick with most cannabis ETFs/indices up over 30% week on week and some stocks up by more than 130%. Surprisingly, many Canadian stocks actually outperformed their US counterparts post election. We believe this is in part due a renewed enthusiasm for the sector as a whole, and part as a result of investors having factored in the expected uplift to US stocks prior to the election. Some US cannabis indices are up over 120% over the last 6 months in comparison to +40% for Canadian indices, suggesting this is the case.

Above: Map of United States showing cannabis legalisation by state

All 5 states in which cannabis regulations were on the ballot passed the proposals.
• New Jersey – 67% voted to legalise cannabis for adult-use
• Arizona – 60% voted to legalise cannabis for adult-use
• Mississippi – 68% voted to legalise cannabis for medical use
• South Dakota – 70% voted to legalise cannabis for medical use and 54% for adult-use
• Montana – 57% voted to legalise cannabis for adult-use

This brings the total tally of states with legal medical cannabis to 35 and states with legal adult-use cannabis to 15. This equates to more than two thirds of the country’s population with access to medical cannabis and one third with access to adult-use. A new Gallup poll mirrors this momentum, with the survey indicating that public approval for cannabis legalisation has surpassed two thirds of the population this year. With state regulations moving in one direction, we can now look to those states that are likely to be next and whether federal legalisation is on the agenda for the upcoming presidential term.

Above: Gallup poll of Americans' views on legalising cannabis

Following New Jersey's vote to legalise adult-use cannabis, a domino effect is expected in the surrounding states. This group of highly populated states has indicated their intentions to progress their cannabis regulations in line with one another. Therefore, it is highly likely we will see New York, Connecticut and Pennsylvania propose similar changes to their regulations in the coming months. Beyond these, it is possible we will also see Florida, Ohio and Maryland move from medical to adult-use next year and South Carolina, North Carolina and Kentucky may potentially become the next states to legalise medical use.

At the federal level, the path to progress is less clear cut. On the positive side, come January we will have a cannabis positive administration in the White House. Biden has publicly declared his support for decriminalisation and federal legalisation of medical cannabis. While Harris is the lead Senate sponsor of the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act, which seeks to end the federal prohibition of cannabis and provides inducements for states to expunge the records of those with cannabis-related convictions. The Democrat controlled House of Representatives is scheduled to vote on the MORE Act in December and it is expected to pass. However, it will be in the Republican controlled Senate that barriers remain.

Senate majority leader, Mitch McConnell, has been a staunch opponent to cannabis legalisation and has blocked numerous cannabis reforms. Prior to the 2022 mid-terms, his continued presence would seem to block the passage of the MORE Act or the STATES Act, which would exempt federal enforcement of cannabis and defer to state regulations. Of the two, the STATES Act is more likely to gain support from Senate Republicans due to the libertarian nature of the legislation. Additionally, the growing number of Republican Senators in states with adult-use cannabis (8) may also add weight to the side federal legalisation.

Other cannabis reforms may also be able to garner cross party support. We expect the Secure and Fair Enforcement (SAFE) Banking Act (which will provide cannabis companies with improved access to banking services) and amendments to 280E of the tax code (which currently prohibits cannabis companies from benefiting from federal tax credits and deductions) to pass either as part of Covid Relief Bill or as standalone pieces of legislation. Administrative action to re-schedule cannabis is also possible.

The North American cannabis industry has had a rocky last 18 months but this election has highlighted the continued progress the industry is making despite structural barriers remaining in place. Piece by piece these barriers are being torn down and the sector is reaping the benefits. Increasingly, any stigma associated with cannabis is falling away, indeed this is the year that we saw many US states declaring medical, and in some cases adult-use, cannabis to be an essential product.

The Chrystal Capital team remain very positive for the prospects of the industry globally. We believe that medical cannabis has become a new viable alternative asset class that is only going to become more established and pervasive in the coming years. We have launched Verdite to provide investors with diversified exposure to this high growth industry and welcome the opportunity to discuss our views with you further.

Newsletter 001: Interview with Bruce Linton, founder and ex-CEO & Chairman of Canopy Growth Corporation

Bruce Linton, founder and ex-CEO & Chairman of Canopy Growth Corporation

Geordie Hadden-Paton 

Today I'm joined by Bruce Linton, founder and ex-chairman & CEO of Canopy Growth Corporation and member of the Verdite Advisory Board. He's here today to answer a few questions on the current state of the cannabis sector and where opportunities exist for investors. Bruce, thank you for coming and looking forward to hearing your answers.

First up, do you think we are experiencing the end of cannabis 1.0?

Bruce Linton
Cannabis 1.0 is legal production of the plant and that isn't over, because there are a whole bunch of places where it's not yet in production, or on sale, so there's still room for that to develop, but its diminishing.

2.0 is when you turn the product into formats that are enjoyable, interesting and reliable, but not scientifically validated. So a 5mg dose, is always a 5mg dose and a 2.5mg beverage, is always a 2.5mg beverage at tasting.

The third phase is when you actually use science and process to validate benefits. For instance, if you take this capsule or this input, you will get seven to eight hours of uninterrupted non-disruptive REM sleep. The product has gone through a validation process so that you know that you're actually getting a wellness product that could, overtime, become an insurance covered product. Phase three is where you can actually define an outcome.

I would say each of the phases needs more development, and each is a function of both progression of regulatory permissions and competent execution.
 

GHP: Given your experience and longevity in the industry, what lessons have been learned and how can they be applied to the next phase of growth?

BL: What we've learned in the last few years, is that cannabis has a lot in common with porridge, it can be too hot, too cold and just right. In that when the price per gram of cannabis was extraordinarily high everybody wanted to get into the business. Then when the price per gram fell through the floor and many participants failed as a result. Only the well-managed, balance sheet capable entities were able to sell at a value based price that made sense. So we have already seen several markets going through these phases. One too hot, one too cold, and one just right.

GHP: So what do you expect from this new phase we are now entering?

BL: I think there will be a bit of consolidation for competency and there will be a bit of disintegration for those that just showed up thinking it would be easy. The ones that disintegrate are not going to get bought up because they didn't allocate their capital towards creating valuable enterprises. And that’s the reason an investor needs an experienced team like Chrystal representing their capital. You need sector expertise to know whether or not a company is going to consolidate, be consolidated or disintegrate and those are very different rates of return.

GHP: Thanks. What do you think about the significance of cannabis being designated an essential product during this pandemic?

BL: I think it's remarkable because most those states that declared cannabis to be essential, a year, two,  or five earlier marginally passed cannabis as a ballot initiative. To go from a legal ballot, to a pandemic making it essential, there is nothing else in American society which has had such a dramatic change of position and progression, over that period of time.

GHP: Looking at the market now, what excites you and in particular which subsectors do you think investors should be paying attention to?

BL: I think that states that have financial problems are going to seek a solution and some of the solutions will include cannabis. When I say states, I don't mean just US states, I mean globally. Federal and or lower level officials will say “we need income and this is an untapped source”. I think this is an important thing to look for.

Currently, most of the discussion and debate has been about two ingredients that come from a plant with over 100 ingredients, CBD and THC. There will be successful scientific endeavours to determine what the other ingredients are in terms of isolation, activation inside of your body and what benefits they have. And the outcome could be massively disruptive, like treating obesity, dealing with Glaucoma, managing chronic pain to a threshold before treatment goes to opioids and veterinarian care. The science of ingredients is going to be critical.

GHP: What are the key catalysts that will drive the industry forward. You already mentioned science, are there others?

BL: People want to operate in a legal framework and they want to be allowed to choose things as adults that are legal and credibly permissible and they want to buy outcomes not ingredients. So you don't want to hear about milligrams of an ingredient, they want to hear “I will sleep better, that it will be affecting on my REM and my deep sleep pattern”. And so the transition of the discussion is going to go from ingredients which are THC and CBD, to outcomes, with sleep as an example.

GHP: In terms of geographic development, what regions do you expect to see the most growth in the next five years?

BL: The US is the kick-off, we're facing whether or not the Democrats have done enough and if at least one of the Houses shifts, you're going to see cannabis in the US become a really big deal. Europe is close, because you're starting to see really advanced regulation in places like Germany, Denmark and the Czech Republic and so that means that countries like France, the UK and others are going to start having increased pressure to continue moving at a good pace. The wild card for production is South America, but really I would say currently we have less than 10% of global population with rational governance of cannabis.

GHP: In terms of where we are at in the development of the sector, why is now an exciting time to get involved?

BL: Seven years ago would have been more exciting, but also more dangerous. There is a continuum of opportunity where I would say many of the lessons have been learned in small geographies of population like Canada, and now they can be globally applied, as the remaining 90% of the world evolves. So while you may have missed the first mega wave, there are many subsequent waves coming and the comprehensive knowledge of how to harness those waves exists but hasn't yet been fully exploited.

GHP: Do you think there's a preference between public or private investing at this stage in the cycle?

BL: I would have a preference to a bit of a mix. Private has typically more upside as long as founders and entrepreneurs are rational. Investing in private companies you have to be more inquisitive, but I like a majority private as long as you have insightful people doing the investing. But there is still quite a lot of difference in terms of valuation of public companies between the really big and the less big, in terms of multiple of revenue and the valuation of the enterprise. I think there are some serious arbitrage opportunities where some medium sized companies that we've seen will have big gains, but I don't know that I want to buy into any of those really large public companies.

GHP: What are the benefits of a fund approach in the cannabis market and how difficult do you think it is as a private investor to invest?

BL: You can either go to your barber, or your baker, or your friend in the pub for a good investment idea and that sometimes works. Or you can allow people who've been involved in the sector for a significant time and have a combined 40 or 50 years of relevant regulated experience. Absolute capacity to identify, select, and avoid the pitfalls will enhance multiples and returns. Do I want to participate with experts in a field that has few, or do I want to listen to my barber?

GHP: In what ways can investors add additional value to the companies that they put capital to work in?

BL: If it’s a fund and you invest, then you need to look at the rest of the ecosystem and maybe at an acquisition or acquirer that comes around. There may be a licensing opportunity for someone operating in state A, that could use in the state B. You can use the combined entities to offset the total cost of science and have a common license pool of IP, investors can bring key personnel.

I would say that the sector is still young enough that companies don't necessarily openly share and collaborate, but the investors, by cross investing and seeing the bigger picture, can actually do that to their portfolio.

GHP: And finally, what do you think triggers greater institutional and blue chip involvement in the sector?

BL: Well, let's break it down.

There is not a consumer packaged goods company on the planet that doesn't have an internal group contemplating “What can we do with cannabinoids?”. There's no alcohol company that does not have a team looking at cannabinoids. There's no tobacco company that does not have a team that looks at cannabinoids.

I guarantee you, all the pharmaceutical companies are looking at cannabinoids to some degree, but they are currently reluctant to execute based on the existing regulatory landscape.

As soon as the US federal policy shifts, the dominoes will start to fall and all these companies sitting on the sidelines will enter the market, and it will be a terrific boost for existing shareholders. These new entrants are not going to go and start growing their own product, they're going to buy up existing product and businesses that give them an accelerated point of entry. And so they all have a plan and the plan depends principally on things like federal regulation in the US and new markets opening across Europe and globally.

GHP: Thank you Bruce, it has been a pleasure speaking with you today.