The November election is still months away but with Minnesota Gov. Tim Walz recently named as Kamala Harris’ political partner, the future of drug policy looks bright. As do the formerly “risky” investments and alternative sources of capital retention, like cannabis.
Why Cannabis Investment Is Booming Now
Jordan Tritt, CEO and co-founder of The Panther Group, a cannabis investment group and business advisory firm, believes now is the time for advisors to invest in the cannabis industry. For one, he highlights the sector is estimated to have sold around $40 billion in total legal sales across medical and adult use. Meanwhile, family offices have devoted on average, 45 percent of their portfolios to alternative assets in the last year.
According to fintech site, NerdWallet, the largest marijuana ETF in terms of AUM is the AdvisorShares Pure US Cannabis ETF (MSOS). The best-performing marijuana ETF by one-year performance is the Roundhill Cannabis ETF (WEED).
Tritt says there’s no reason why RIAs can’t invest in the “devil’s lettuce” as there are high risk rewards associated with it and because there’s less competition.
“Institutional investors and fiduciaries at big banks fit into lots of rules that aren’t there for independents at family offices and RIAs. They’re so risk averse that they’re not touching this space,” he says. “It creates this opportunity for people who can live in the gray area a little bit and aren’t hindered by reputational or other riskier hold backs.”
Tritt also acknowledges that the $45 million that was deployed into the sector originally was from high-net-worth individuals, but the last two years in particular has made them realize that there’s “only so many individuals that we directly know that we can source capital from.”
“If we’re going to continue to invest in this space, RIAs and family offices are the ones that can direct that investment. They’re looking for opportunities that are unique and compelling and in the right instances, that’s what cannabis presents,” said Tritt.
After all, one of Panther’s investors is an RIA based in California, who’s looking at acquiring other cannabis practices, Tritt highlighted.
“A big thing that him and I talk about is, he’s always looking for an edge compared to other advisors. What are we doing different, and what can we offer to clients that someone else isn’t necessarily doing?” He’s got comfort in our ability to be stewards of the capital.”
Tritt believes Panther represents “an interesting angle” for advisors who choose to allocate in the cannabis space, pointing to the next generation of advisors who will likely be more accepting of cannabis stocks and who will also be dealing with the upcoming wealth transfer.
Potential Growth and Challenges
While cannabis is illegal federally nationwide, nearly half of the country – or 24 states – has legalized marijuana for recreational use. In 2022, the Justice Department moved to reclassify marijuana as a less dangerous class of a drug. The policy move would ease federal cannabis restrictions, but it would not make the substance legal or decriminalized nationwide.
The passage of federal legalization efforts, specifically the rescheduling of cannabis from Schedule I to Schedule III, Tritt explains, could impact the cannabis industry significantly in several ways.
It could also unlock significant growth opportunities for the industry and would allow for easier access to banking, capital, and insurance coverage, enabling existing operators to expand and consolidate the fragmented market.
The industry is also expected to see a wave of mergers and acquisitions as larger, more established players acquire smaller competitors to gain market share and economies of scale.
As for public markets, federal legalization would provide more comfort for institutional investors to participate in the public cannabis markets. This could lead to increased trading volumes, higher valuations, and more cannabis companies listing on major U.S. exchanges, which have been hesitant to list plant-touching businesses due to the federal prohibition.
However, Tritt highlighted that public companies would also face increased scrutiny from investors, as they would need to consistently meet financial projections and performance targets to maintain investor confidence.
Tritt also points out that the rescheduling of cannabis would eliminate the onerous 280(e) tax provision, which currently prevents cannabis businesses from deducting normal operating expenses, leading to significant cash flow improvements.
This regulatory change would make the industry more attractive for both investors and operators, as it would improve profitability and access to capital.
“The growth is there, more than many [other] industries,” he says. “The capital needs are there, but the capital supply is not. We have an opportunity now where you can make very high risk reward profiles. You can essentially put money into businesses that are already cash flowing and have already proven that they can survive in an extremely competitive environment.
“Now we just need the additional capital to go to that next level of growth.”
Investing In The Future
The cannabis industry is one of the fastest-growing sectors in the US, and this growth is only expected to accelerate in the coming years. While it is important to be aware of the risks, investors who are willing to take on some risk stand to benefit significantly from the cannabis boom. As cannabis legalization spreads across the United States, investors have a rare opportunity to invest in a high-growth sector with a clear path to profitability.
The cannabis sector is an example of the exciting opportunities that can arise when regulations evolve and adapt to changing societal views. With the potential for significant growth and increased investor interest, cannabis investment is certainly worth considering for those seeking alternative investments with high risk rewards.
