PE’s Largest Cannabis Investor: The Time is Definitely Now

With its first fund just closed, Tuatara Capital is focused on the expanding opportunities within the legalized cannabis market

The legalized cannabis market is not the destination for the vast majority of private equity’s dry powder, but a growing number of PE firms are focusing on a sector poised for growth—provided expected legal changes materialize in the U.S.

There are five PE investors currently raising capital for the cannabis market, as of the end of June. New York-based Tuatara Capital is among them, with its first fund closing at the end of July.

Robert Hunt, a founding partner and lead advisor to Tuatara, says in an interview with Privcap that the fund is the “largest pool of PE capital that exists” to invest in legalized cannabis, but declined to specify the amount raised.

Other marijuana-focused investment groups include Dutchess Capital, a firm founded in 1996 that until 2012 invested in energy, healthcare and IT, before turning its focus to legalized cannabis; and High Times, the monthly magazine covering the world of cannabis, which is reportedly resuming fundraising later this year for a $100M private equity fund.

Finding initial investors for Tuatara Capital wasn’t difficult, Hunt says, as most of its partners had extensive careers on Wall Street and tapped their immediate network of high-net-worth contacts and family offices.

While interest from institutional investors is rising, critics of investing in the sector point out that it will be a long while before cannabis investments will be supported by traditional limited partners. To date, the amount of capital raised for the cannabis sector so far is miniscule, and the big guns of institutional investing will remain on the sidelines.

“The CalPERS’ of the world aren’t going to touch this yet,” Hunt admits. “The [federal] illegality is a pretty big black mark.”

Hunt says that while family offices and HNW individuals are the prime investors in Tuatara and other funds in the space, there have been murmurs of interest from institutional investors and the more traditional venture capitalists. “We just turned the corner. I’m not sure how it happened, but we’re seeing people who say ‘Can we put this on our platform?’”

Deals Getting Bigger

Twenty-five states and the District of Columbia have passed medical marijuana legislation, and four states and D.C. have legalized recreational use, with more expected to follow suit. Hunt says these numbers—and the need for real capital to fund players in the industry that banks aren’t willing to provide—only strengthen the case for PE to get into the market.

In the two years since Tuatara started raising capital for legal cannabis, Hunt has noticed one noticeable change: “Deal sizes are getting bigger,” he says. “When we first went to market there were venture deals, but we wanted to be a growth equity firm. Ninety percent of the deals that came across our desk were in the straight venture space, $250,000 to $1M. Now we’re seeing companies looking to build out infrastructure, and the asks are $15M to $20M.”

While many of the entrepreneurs looking for capital in legalized marijuana are “four guys wanting to build a bigger warehouse,” there are more and more sophisticated, business-savvy teams with proper financial forecasting and real auditing companies behind them reaching out to PE firms, says Hunt. “Everything you want to see in traditional private equity, you’re seeing coming out of the cannabis space.”

Do Risks Trump Rewards?

Tuatara raised $37MM in calendar year 2015, says Hunt. So far it’s led the Series A Round of investments for Willie’s Reserve, the brand from the singer Willie Nelson, and for Teewinot Life Sciences, a “biopharmaceutical company focused on the use of synthetic biology for the production and implementation of cannabinoid-based therapies.”

The latter investment was a strategic, long-term play pending the classification of cannabis and THC being changed from Schedule 1 to Schedule 2 by the U.S. Drug Enforcement Administration. “The second that Schedule 1 moves to Schedule 2, big pharma will be moving in in a large scale to do cannabinoid-based medicine to treat specific ailments,” says Hunt, citing drug companies tapping specific molecules in cannabinoids to treat diseases like multiple sclerosis.

Other areas within the legalized cannabis market that firms are focusing on include synthetic technology, backing large-scale commercial cultivators and boutique operators with premium products and proprietary genetics, and large-scale commercial processing companies.

So what are the potential risks to being an early PE investor in legal cannabis? The biggest risk—losing money—isn’t unique to cannabis. Investors worried about somehow being prosecuted for running afoul of federal drug laws can relax, says Hunt—those kinds of legal risks are virtually nonexistent. “It’s never happened before. We went through a great deal of work from the legal [perspective] before launching [Tuatara].”

However, there are political risks: if Chris Christie, current governor of New Jersey, a Trump ally and marijuana foe, becomes the next U.S. Attorney General. “That would obstruct, or make it difficult, for the industry to flourish.”