Wall Street Wants Weed to Become the Next Big Investment Opportunity
A marijuana bud of THC Design's Cali-Dad sativa
The nexus of Wall Street and recreational cannabis has always been looming on the sidelines, attracting would-be investors curious about the new market and repelling enthusiasts who would rather keep operations small and local. Yet the recent passage of Proposition 64 is ushering in a new, seemingly inevitable era of big money as Wall Street financiers prepare to enter the country’s largest marijuana market.
Seventh Point LLC, a private equity firm that amasses discrete funds from top-dollar partners, is planning to invest up to $100 million over the next 24 to 36 months in Los Angeles. The organization will acquire legal medical marijuana dispensaries in good standing with the purpose of building out associated cultivation facilities for each acquired business. The move could give Seventh Point control of roughly 10 percent of the L.A. market, or eight to 10 dispensaries, and capture up to 50 percent of the $1 billion in annual revenue.
“We firmly believe Los Angeles is to cannabis what Silicon Valley is to technology or New York is to fashion and finance,” says Steve Gromley, Seventh Point founder and CEO. “If you want to lay the groundwork for being a formidable national brand, it’s critical to have a presence in L.A.”
Seventh Point is closing on its first acquisition, though Gromley declined to say where the property is located until the deal is finalized later this month.
The L.A. market is already bubbling with heady opportunities for any investor with a little bit of patience and creativity. According to market analysts, the state is likely to triple the size of the legal pot market in 2018 and the national market is projected to increase ninefold over the next decade, with consumers spending upward of $50 billion by 2026. Currently, the only thing standing between investors and weed is the Drug Enforcement Administration, which earlier this year refused to reclassify pot from a Schedule 1 status. This defiance in the face of changing public views keeps financiers on the sidelines, at least publicly, until the day when pot is federally recognized.
“Even though it’s legal and recreational cannabis has passed, it’s still a gray market because of the shadow cast by the federal government,” Gromley says. As a result, “Private equity is the best structure to exploit the current opportunities.”
Gromley, who worked in private equity for 15 years, linked a group of Fortune 50 Wall Street–based professionals with his robust cannabis Rolodex, which he has amassed since entering the cannabis industry five years ago. This pipeline of financiers and experts is poised to take full advantage of changing attitudes toward legal weed, Gromley says.
“I liken it to the trajectory we’ve seen with marriage equality,” he says. “Ultimately you saw a state-by-state takedown of opposition to same-sex marriage, and eventually it became law of the land.”
The move from Wall Street to cannabis is likely to be just as slow and complicated with a new, presumably anti-weed administration taking control of the White House. President-elect Donald Trump is already nominating a series of recreational-pot opponents, including Sen. Jeff Sessions (R-Alabama) and U.S. Rep. Tom Price (R-Georgia). While respecting states' rights has been the bread and butter of Republican philosophy for decades, it remains unclear how a Trump administration will affect the federal government’s stance on legal marijuana.
As the fate of recreational pot hangs in the balance, the stock market remains a decidedly volatile place for cannabis companies. National banks won’t touch money coming from dispensaries and growers, and this kind of financial instability worries potential investors. There is also the question of how California will regulate the size and scope of weed companies. Insider fighting has plagued even the most ardent supporters of recreational pot, some of whom recoil at the idea of Wall Street taking over the otherwise folksy industry. These opponents of capitalized weed worry prices will increase, quality will decrease and small operations will be put out of business.
To this, Gromley says change is inevitable.
“The regulatory environment is legitimizing and, as such, institutional money and financial professionalism will end up entering the market because it’s a meaningful industry from a revenue and profit standpoint,” he explains. “There will be entrepreneurs who will want to cash out and take advantage of that opportunity. Change is coming.”
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