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Trailblazer Ruth Epstein Unpacks the Challenges and Opportunities in Cannabis

What ever happened to Mary Jane? High times for cannabis trailblazers

Nearly two-thirds of Americans believe recreational cannabis should be legal, according to the latest polling [1] from Gallup. And while different levels of the government have shown various levels of acceptance to the plant, investors with institutional expertise are already working to exploit the opportunities they see in the space.

PAM spoke with Chris Leavy, former BlackRock executive and now co-chairman and partner at cannabis management firm MedMen, along with individual investor Ruth Epstein about the state of play in the cannabis industry.


MedMen was founded in 2009 by Adam Bierman, formerly senior brand manager at marketing firm Brand X Group, and UCLA School of the Arts and Architecture graduate Andrew Modlin. Over the past eight years the firm has grown to include eight dispensaries in California and New York along with a greenhouse facility in Utica, New York. As of 2017 the company has 270 employees.

In 2016 MedMen launched its first private equity offering, the MedMen Opportunity Fund, with the aim of pursuing “strategic investments in supply-constrained, high barrier to entry markets.” The fund also owns a portion of MedMen itself, which serves “as the fund’s captive operating partner, providing unrivaled resources and operational oversight for the fund’s assets.”

In nine months, the fund raised a total of $60m of a $100m goal before closing early due to the initial public offering of one of the firms in its portfolio, Canadian firm MedReleaf.

In April MedMen hired Leavy, formerly managing director and chief investment officer of BlackRock’s U.S. fundamental equity division, to manage the firm’s investment operations.

Three months later the firm launched its second fund, the MedMen Opportunity Fund II, that has raised $30m so far with a goal of $250m.

Why Cannabis

Leavy told PAM there are two factors investors tend to value when they come into the cannabis space. The first centers on the financial aspect.

“This is a very undervalued asset class because there is an artificial barrier to a lot of institutional capital and as a result it’s the opposite of the rest of private equity. In private equity, there’s too much money chasing too few deals,” he said. “In the cannabis industry, it’s the opposite. Traditional private equity firms do not participate in this industry and as a result you have far fewer buyers in an industry that currently needs capital.”

Leavy noted that globally there is $1.5trn of committed capital in private equity that is not yet deployed.

“That means that when deals pop up outside of cannabis, you have 3,500 private equity firms that can take a look,” he said. “But Investors are really in the driver’s seat in [the cannabis] industry, especially when you’re aligned with a platform that knows how to navigate the ecosystem and find the best opportunities.”

The opportunity to avoid competing with institutional capital has attracted ​​the interest of family offices and individual investors, such as Epstein.

“It’s a very different market than any one I’ve seen before,” she said.

“The biggest difference is because it’s federally illegal, because of the issues of 280(e) and the tax consequences in investing in anything that is plant-touching, there is a gap in this market in terms of institutional money.”

Where there are funds in the market, Epstein noted, they just don’t have institutional heft.

“Most of them don’t have very much capital,” she said. “They either have already invested it or they’re just raising their first fund. We’re all used to these multi-billion dollar PE/VC funds. That money has not found its way into this space yet.”

What has developed as a result is what Epstein calls “a peculiar dynamic,” where the lion’s share of the capital is sitting with individuals and family offices, not with institutions.

Social Capital

In addition to the attractive financials, Leavy also cited the social aspect of cannabis investing.

“Cannabis has been proven to help with cancer, epilepsy, [multiple sclerosis], among other health issues. In addition to that, in states that have legalized medical marijuana, opiate-related incidences go down 20-25%,” he said. “This is an investment that is very attractive financially, but it’s also an investment that does good for society.”

That social aspect extends the investment culture itself, according to Epstein.

“There’s an amazing amount of openness,” she said. “If you think about back in the early tech days, you couldn’t get Jeff Bezos on the phone. It wouldn’t happen. But in the cannabis space, your ability to speak directly to the CEOs and get information about the companies and get involved even as a small investor in most deals is still very much in existence.”

This comfort with being open extends to the investor base as well.

“There is a lovely dynamic in this industry that I have not seen in other industries, where there is a massive amount of openness and a sense of investors supporting each other and helping one another,” Epstein said.

“Every time I speak with somebody, they say ‘You should talk to this person or maybe you can help this other person.’ It’s very nascent and there’s a little bit of a sense of social justice to this.”

And while Epstein expects things to heat up as more investors pour into the space, she is hopeful that the current culture will persist as the industry grows.

“There’s no question that will be a downside as more and more people get more comfortable, there will be more competition for deals,” she said. “But there is this sense that they’re doing something good and I think that will keep that sense of comradery.”

The Cannabis Investor

Leavy described his limited partners as a mix between newer entrants to the cannabis space and those who have been waiting for a vehicle they believe to be of institutional quality. He added that the investor base for MedMen has also evolved over time.

“If we look at fund one, that was people who tended to have a bit more of an entrepreneurial bent, saw the business opportunity and invested as a way to capture that opportunity,” he said. “Fund two includes the more traditional high-net-worth and family office investors.”

The two factors driving this shift towards a wider investor base, per Leavy, center around how state-based legalization has changed perceptions of cannabis’ risk profile.

“The perception of the asset class derisking has brought more investors to the table and the contrast between cannabis and the rest of the private equity industry is stark,” he said. “The other thing that resonates with the more traditional high-net-worth and family office types is the low correlation properties of cannabis compared to other asset classes.”

For her part, Epstein explained how her initial curiosity led to discovering the potential, and limitations, of cannabis investing.

“My original thought was ‘Hey, my best bet is to put my money with someone else who is going to have a diversified portfolio, is very experienced in looking at these companies and doing the due diligence in finding these opportunities and knowing how to price them,’” she said. “What I discovered is that there’s a real scarcity to of good opportunities to invest in that way.”

Future of Cannabis

Epstein acknowledged the impact of U.S. Attorney General Jeff Sessions’ aggressive anti-cannabis views.

“That’s had a chilling effect on the big institutions who are saying there is too much risk with this,” Epstein said. “Whether it’s a group worried about losing its non-profit status or somebody involved with the banking industry, there are a lot of reasons for people to stay out of this space.”

She emphasized that other countries are leading the way when it comes to cannabis.

“If you look at Canada, there is much more openness,” Epstein said. “There are lots of companies on the Toronto Stock Exchange. There are active capital flows at the institutional level. And I don’t think that’s likely to happen here until we get federal legality.”

Without action at the federal level, Epstein believes it will be institutional talent, rather than institutions themselves, who will take the lead in the cannabis space.

“What I do think is going to happen is like what’s happening at MedMen, where you’ve got Chris Leavy coming over from BlackRock along with that level of sophistication,” she said. “You’re going to see more and more of these funds that are premised on people who have a very high degree of expertise in the investment space versus what you typically see, which is people who are coming from smaller institutions who have not had a lot of experience running money of any significant size.”

Future of MedMen

Despite threats from the Trump Administration, MedMen has an aggressive growth strategy.

“Our deal pipeline has some really attractive assets in LA, Vegas and New York markets,” Leavy said, noting that the firm plans to open two more dispensaries in California along with a New York City location on Fifth Avenue.

The firm also plans to open another Dutch-style greenhouse in Nevada by the end of the year.

For now, MedMen is focused on securing high-demand locations and Leavy emphasized the importance of having a first-mover advantage. “There’s enough limitations on licenses and locations that if you’re isolating key locations, you can get the so-called ‘beachfront property’ from a location perspective,” he said. “I’m speaking metaphorically of course, but the opportunity to secure beachfront property in prime markets is an opportunity that I don’t think we’ll see again.”

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