CANADA, A.K.A. THE TESTING GROUND FOR U.S. POT HOPES
Nation could become hub of cannabis industry innovation.
As the U.S. takes a state-by-state approach to cannabis legalization, investors south of the border are pining for a chance to see how a market booms when national legalization arrives.
ArcView Market Research projects that in 2016, the legal market for cannabis in the U.S. will grow 26 per cent over last year to US$7.1 billion and will surpass US$22 billion by 2020.
Leslie Bocskor, founder and president of Las Vegas-based investment fund Electrum Partners, believes Canada is set to become a hub for the global cannabis industry, a place for research and development as well as a testing ground where U.S. firms can establish brands, knowledge and best practices before bringing them back home.
“You’ll probably see a lot of innovation in Canada,” Bocskor said. “(Canada) will become sort of the global centre with the largest economy and the best regulatory framework — the only regulatory framework — on a national basis with that kind of economy. Then that can become sort of the Silicon Valley of cannabis, to a certain extent.”
Bocskor believes U.S. firms will choose to migrate their “best of breed” product categories, innovation, technology and methodology into Canada. Business issues solved in Canada can then be used in market leadership in the U.S.
From Bocskor’s perspective, Canada is already an environment conducive to doing cannabis business, with a large population and high cannabis consumption rates, a broad land mass and a good economy.
“It’s a clear and easy-to-navigate playing field in a very business-friendly environment that is going to be sort of changing the world, with regards to policy on this issue,” he said. “I’m sure there’s an enormous section of the U.S. market that’s looking to do business in Canada.”
Bocskor believes legalization will present a great opportunity for Canadian and U.S. firms to collaborate. States with legalization, such as Colorado, Washington and Oregon, have cultivation processes that are “really pretty advanced” and large, experienced markets that he said have led to techniques, knowledge and intellectual property that will be important to migrate to the Canadian market.
“Canada will have an incredible opportunity in being federally legal before the United States, to adopt U.S. practices,” he said.
New York-based Tuatara Capital led a round of investments in Willie’s Reserve — musician Willie Nelson’s independent-grower-supplied cannabis firm — and Teewinot Life Sciences Corp., a firm developing cannabinoid-based therapies headquartered in Florida that conducts research in Manitoba.
Emily Paxhia is the managing director at Poseidon Asset Management, a San Francisco-based hedge fund focused on cannabis that recently invested in two licensed producers in Ontario.
“We’re in a constant state of research and seeking opportunities to fill up our pipeline for investing,” Paxhia said. “We really like the strategy of kind of covering North America and not just the United States, and ultimately we’re seeing this as a global investment opportunity. It just happens to be nice that our neighbour to the north is really digging in on this so that we can get up there, see things happening in person, and do the due diligence on the ground.”
Paxhia’s brother and founding partner at Poseidon, Morgan Paxhia, said with Canada’s legal medicalcannabis system already in place, it has a “really solid foundation” for a regulated, good-quality market with strong institutional support.
“You’re just seeing the benefits of a true functioning market in Canada first, and hopefully we’ll see the U.S. catch up to that,” he said. “From an investor’s standpoint, it’s interesting to see because it is a really limited marketplace. From a production standpoint, there’s about 35 (licensed) producers to date in Canada, and in California there are thousands of producers for (a comparable) market size. So you can see these businesses scaling much faster and becoming much more stabilized because they are getting those economies of scale.”
Al Foreman, a partner and chief investment officer at Tuatara, said the firm’s focus is on the next wave of expansion states: California, Arizona and Nevada.
But as the U.S. cannabis market remains fragmented because of state-by-state legalization, Canada’s position as the first national market “right out of the gate” has Tuatara’s attention, Foreman said.
“We’re watching the tone and pace of the legalization effort and believe that Canada is going to be an attractive market for investment dollars,” he said. “We believe that the Canadian efforts on the medical side have been a good kind of bellwether for a program done right and so, based on that, we would expect that federal legalization for adult use would follow a similar path.”