High Time For A Cannabis Hedge Fund?

Sep 30 2014 | 7:07am ET

By Mary Campbell
Senior Reporter, FINalternatives

Launching a hedge fund is always a gamble, but Leslie Bocskor's decision to launch one focused on the legal cannabis space actually began with a trip to the casino.

“I was doing some research on online gaming and what would happen to the casino industry when we saw online really take hold,” Bocskor told FINalternatives' in a recent phone interview. “And so, of course, if you are looking at the casino industry in any form, where do you go? Las Vegas.”

Bocskor, whose background is in corporate finance and investment banking, moved with his wife from New York to Las Vegas while he researched the casino industry; they liked the city and stayed. And it was living in Nevada that opened his eyes to the legal cannabis industry:

“Coming from the East Coast, there's a very different idea about cannabis than there is on the West Coast. [T]he idea of a dispensary to me was completely alien.

“I started to find out there is an entire industry being born, so I started to take a look at it.”

Legal Environment

What he found was an industry that was actually two industries.

First is the illegal market. That space, according to a Rand Corp study, was worth an estimated (emphasis on 'estimated' as the market for illegal drugs is notoriously difficult to measure) $40.2 billion in the United States in 2010.

“That is really just the adult-use market,” said Bocskor. “That's really recreational use...What we've discovered is that medical marijuana has an industry entirely of its own, of people that are using it for various therapeutic uses—PTSD, cerebral palsy...seizure disorders and the list goes on.”

According to market research from The ArcView Group, the U.S. legal marijuana market was worth $1.53 billion in 2013 and is expected to grow 68% to $2.57 billion in 2014. Currently, 20 states plus D.C. allow medical marijuana use and two—Colorado and Washington—allow 'adult-use' by individuals over the age of 21. ArcView predicts 14 additional states will adopt adult-use laws within the next five years, including California, which will vote on the issue in 2016—and which represents a $980 million marijuana market even without adult-use laws.

And while marijuana remains classified as an illegal narcotic under U.S. federal law, the Department of Justice has permitted the legalizing states to implement their own regimes, instructed federal prosecutors across the country not to focus federal resources on individuals complying with state medical marijuana laws and announced that U.S. Treasury and law enforcement agencies would issue new rules opening banking services to state-sanctioned marijuana businesses.

Hedge Fund

Nevada, which has a medical marijuana program, recently legalized—albeit under limited circumstances—the licensing of medical marijuana dispensaries.

The law recognizes the medical marijuana programs of other states and countries, and as Bocskor followed its progress through the Nevada state legislature, he began to get excited:

“That reciprocity combined with businesses [that] are for-profit entities that could be owned by outside interests and a merit-based system for deciding who gets the license...created...a perfect storm of a business friendly environment that would create a very stringent regulatory framework. It all made such great sense, I got very involved in it when I saw the economics of having those types of businesses in Nevada with 45 million tourists a year that come here.”

“Getting involved” for Bocskor included becoming the founding chairman of the Nevada Cannabis Industry Association, a chapter of the National Cannabis Industry Association, and teaming with Gordon Katz to establish Electrum Partners which hopes to launch its maiden, cannabis-focused hedge fund in the first half of 2015.

The fund, which he expects will carry a minimum investment of $100,000, will invest in cannabis producers, processors and distributors but also in ancillary businesses that do not involve direct handling of cannabis.

“What are the opportunities?” said Bocskor. “Financial services, software services, security services, buyer services, manufacturing of parts for the industry every step of the way, retail-specific, cultivation-specific, processing-specific, laboratories to do the testing, marketing, industry-specific advertising agencies,” plus biotech, pharmaceuticals and hemp.

“All of these surrounding businesses that you see whenever you see an industry that has the type of growth and tailwind that this industry does.”

Rodawg

One such ancillary business is Rodawg, a producer of cannabis packaging for both dispensary and personal use.

Josh GordonJosh Gordon“I got into the industry back in 2010-2011,” Rodawg founder Josh Gordon told FINalternatives in a phone interview. “I've got a house out in Colorado and was able to see the transition to the mainstream from black market firsthand."

Gordon saw “a big void in the market for appropriate packaging and branding to the medical marijuana dispensaries. When you walk into a liquor store and you buy a fine bottle of cognac or whiskey, it comes in a very impressive bottle, impressive branding...You walk into a dispensary and buy a couple of hundred dollars' worth of cannabis and it comes in a plastic bag or cheap vial...”

Rodawg designed a proof-of-concept product—“essentially a joint case so that dispensaries could position their joints like fine cigars.” He did well with it and realized there was  a parallel opportunity in the consumer space “as there is paradigm shift [in] how people are approaching cannabis.”

Rodawg raised $500,000 in April 2013 to extend its line of products, establish infrastructure, secure patents, even attain the child-resistant certification required in certain states.

The firm is now hoping to raise $2.65 million in a second round of capital raising.

“We actually just released our offering memorandum last week and are excited to talk to investors about it,” said Gordon.

Terra Tech

Given the current legal landscape for marijuana, the key to operating an ancillary cannabis is not to stress the cannabis—Rodawg's joint cases, for example, have what Gordon describes as a “very slight cannabis undertone but essentially they're just storage accessories with a real fine eye on style.”

Derek Peterson, the founder of Terra Tech, has taken this a step further: he's running a completely different business in facilities that will eventually be converted to marijuana cultivation.

In 2009, Peterson, a Morgan Stanley employee with a “lucrative, stable, comfortable career” in California, had an “epiphany” after seeing the books from a friend's medical marijuana dispensary.

“They were doing close to $18 million a year out of something the size of a Starbucks,” Peterson told FINalternatives. "These guys are doing three to five thousand dollars of revenue per square foot. The only other retailer on the planet that does anywhere close to that is Apple Computer. That's where the light bulb went off for me and I started to figure out how I could get involved.”

Peterson decided that hydroponic technology for indoor cultivators would be his entry point into the industry.

“You know the 52-foot dry boxes you see big rig trucks hauling around?...We...started converting those into these plug-and-play hydroponic systems...We call them the Big Bud and the Little Bud.”

Growers, he said, “liked the idea of having a unit that they were cultivating and that they could move. So if a landlord ever became concerned or kicked them out, they didn't have to break down this huge infrastructure, they just hooked up a trailer to a big rig truck and pulled it out in two minutes.”

After selling these units throughout California, Colorado and Michigan, Terra Tech expanded into designing and selling components for indoor cultivation including lighting systems, carbon filtration systems, and grow room automation systems.

“Last year we took it a step further,” said Peterson. “We know marijuana cultivation is going to really take off over the next five or 10 years, especially when the Feds start to deregulate the industry in some way, shape or form. So we thought, how can we establish a footprint across the United States of large-scale facilities that are ready and able to grow marijuana but instead of leaving those facilities dormant right now, how can we make money off them?”

The answer was to build large-scale greenhouses—Terra Tech owns them in New Jersey, Florida and the Midwest—and use them to launch a line of hydroponically grown produce called Edible Garden.

“We grow lettuce and basil and oregano and tarragon and you name it,” said Peterson. “We sell it to...about 1,100 retailers right now.  And...down the line, when federal regulations change, in a few days we can convert these particular facilities to grow cannabis for us.”

Peterson said the company is currently competing for permits to both dispense and cultivate marijuana in Nevada and hopes to get them by the end of this year.

Unlimited Opportunity

Peterson and Bocksor both point out that an interesting aspect of the move to legalize marijuana federally is that it has bipartisan support.

The Hinchey-Rohrabacher medical marijuana amendment, which defunded Department of Justice actions against states with medical marijuana laws, was co-sponsored by Republicans including California's Dana Rohrabacher.

“It was only one of the bipartisan bills we've seen passed, I think, recently,” said Bocskor. “Who would have thought that cannabis would bring the House of Representatives together?”

Peterson said this bipartisan support combined with guidelines from the DoJ have made investors more comfortable:

“As soon as we started to see that, we started to see an inflow of capital into the industry...the creation of private equity, the creation of hedge funds. To give you an example, in 2010, we raised about $1 million...and it took us the entire year to raise that...This year we've raised a little over $7 million, year to date.”

As for Bocskor, preparing to launch his cannabis hedge fund, he said he “can't remember one-tenth of the opportunities that currently exist” in the space.

“It's just manifold, the amount of opportunities for investors to look at.”


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