American investors see green in the Canadian cannabis market

With Canada poised to be the first G7 nation to green-light the recreational use of marijuana among adults, American investors are increasingly looking northward to lay down a stake in the game.

Last month, the California-based retail, medical-consulting and investment firm MedMen announced a sizable commitment to the Canadian market by launching the $100 million (USD) MedMen Opportunity Fund, a private equity fund.

If successful, the fund will be the largest of its kind in the cannabis market.

The announcement was made in late January at a Canaccord Genuity wealth management event in Vancouver.

In 2016, MedMen reaped a $25 million (USD) gain on a $10 million-dollar investment in the Canadian licensed cannabis producer MedReleaf, based in Markham, Ont.

“MedMen, which operates dispensaries and production facilities in three states and has 700 employees, may be one of the biggest American cannabis companies to look to the north for growth,” the financial news network CNBC reported. “But it isn’t the first, and it certainly won’t be the last.”

MedMen’s investments already have attracted such Wall Street high-rollers as former BlackRock chief investment officer Chris Leavy, who chaired the first MedMen fund, and former Goldman Sachs investment banker Ruth Epstein.

“Most of these assets have been rolled into MedMen Enterprises in preparation for a reverse takeover to list on the Canadian Securities Exchange (CSE), an alternative exchange,” CNBC reported. “[MedMen founder and CEO Adam] Bierman anticipates MedMen will list sometime in the second quarter of 2018. [The company] is currently searching for a partner.”

The reverse takeover will allow MedMen to become a publicly traded company without filing an initial public offering (IPO).

Others are sure to follow MedMen into the active Canadian market. In October, the New York-based Corona beer seller Constellation Brands bought a minority stake in the Canadian medicinal marijuana company Canopy Growth for $241 million.

There are other international drinks companies rumoured to be considering an entry into the Canadian cannabis market, including the UK-based Diageo, Denver-based Molson Coors and Pernod Ricard of Paris. Industry analysts say they could be hedging their bets –  the rec weed sector could threaten future drink sales.

But why are U.S. companies turning to Canada when the domestic American marijuana market is estimated by Forbes magazine to be in excess of $10 billion and growing?

Eight states and the District of Columbia have approved adult sales of recreational marijuana, and another 22 have passed medical marijuana laws, but pot is still listed by the federal government as a Schedule I drug, right up there with heroin.

U.S. Attorney General Jeff Sessions is an outspoken opponent of legalization. Last month, he rescinded an Obama-era federal guideline that allowed Justice Department officials to turn a blind eye toward states that permit marijuana sales.

I’ve never felt that we should legalize marijuana,” Sessions said in September. “It doesn’t strike me that the country would be better if it’s being sold on every street corner. We do know that legalization results in greater use.”

While some studies indicate otherwise, his stance has put considerable uncertainty into the American cannabis investment market. As a result, U.S. regulators have rejected applications by cannabis companies to list on domestic stock exchanges.

Also, due to strict federal rules, American producers and dispensaries are not permitted to use federally insured banks, so the multi-billion dollar cannabis industry is strictly a cash-and-carry affair – which is awkward at best and dangerous at worse.

The Green Rush north of the border should continue to lure American investors, since the Trump administration is showing no signs of reforming US federal laws regulating cannabis. “We are not close, here in the U.S., to a place where you’re going to see real capital market exposure and participation and activity for this space,” MedMen CEO Adam Bierman told Business Insider. “We are not close here in the U.S. to seeing marijuana become federally legal.”

Of course, the Canadian cannabis frontier is not without its own risks: some market analysts are warning that it may be forming a bubble. Earlier this month, Forbes reported that Canadian traders and investors lost an estimated $10 billion in market cap due a correction in the overheated cannabis market.

That represents a nearly 15 per cent drop in the Canadian cannabis stock index.

Still, according to the capital investment firm The Arcview Group, the illegal pot trade has dropped 50 per cent, and January proved to be a profitable month for Canadian cannabis companies. In a cash-and-stock deal, Aurora Cannabis acquired CanniMed Therapeutics Inc. for $1.1 billion – a merger that will create one of the world’s biggest pot production firms.  

American companies won’t want to miss out on the action.

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