As the movement to legalize recreational cannabis use gains momentum, investors are looking to get in on the action in any way they can. And that's a huge win for Canada because it's basically the only game in town.
"As an investor, you really have nowhere else to go but Canada," Martin Landry - Managing Director at GMP Securities - said last week during a panel at the 2018 World Cannabis Congress in Saint John, New Brunswick.
A cannabis bubble?
That rapid influx of cash in the emerging industry has some worried that the cannabis market is unsustainable. But Landry and his fellow panelists disputed that idea by noting that although legalization is new, cannabis consumption has an extremely longstanding history around the world. The demand has always been there. The only difference between now and then is that consumers are finally getting access to a legal supply.
“There’s already demand for these products," Ranjeev Dhillon, partner and Co-Head Of Cannabis at Bennett Jones said. "We’re not creating a product that people don’t know if they need or not. This is not a product based on ideas. We know that there is demand.”
And it looks like that demand will only increase as legalization moves forward. One of the expanding markets highlighted by the panel was the anticipated growth of ancillary products and services like packaging manufacturers and product testers. While many of these businesses face similar regulatory challenges as the licensed producers, they will play an increasingly large role in facilitating proper compliance with federal rules - a service that will become ever more necessary as legalized recreational use begins to role out in the country.
“It won’t be so much a matter of betting on a horse as betting on a jockey,” said Daniel Pearlstein, Executive Vice President of Canopy Rivers Corporation.
If Canada continues its current trajectory and remains successful - and the panelists expect it will - then the next likely step would be to begin moving into other geographic locations, such as Europe and the United States. Logical as this may be, the harsh regulations and inconsistent legislation make success far from certain.
The primary risk factor is that these investments are, technically, still illegal in many regions. Consequently, a failed investment in one of these ventures could not only result in a loss of capital, but also carry with it a host of legal ramifications as well.
"If you make an investment in a US 'touch the plant' operator, a savvy Attorney General could say that you aided and abetted, an offense under the Controlled Substances Act," said Paul Rosen, managing director of BreakWater Venture Capital. “You’re breaking the law.”
Investments are, by their very nature, a gamble. Investors can never really know what direction the markets will take, especially in a sector as legally uncertain as cannabis. Still, there are models to draw from when trying to predict the future of this industry.
"What’s going to happen is we’re going to see states by states fall into the fray," said Landry. "I think that one can look at the gay marriage process. I think it’s a great proxy for marijuana. At one point, there was so many states that were in favor of gay marriage, that it eventually passed the bill."
The future of cannabis investment
At its current rate of progress, national legalization of recreational cannabis in both Canada and the US seems like an inevitability. Even if this is the case, it does not necessarily mean that the battle will be won. There will remain a continuous struggle to combat the social stigma that still surrounds the plant.
Over time, as the sector begins to see larger companies with a great deal of political and economic pull begin to invest more into cannabis, the panelists claim the resulting shift in the corporate dynamic will add legitimacy to the industry. There is widespread speculation that many large companies are now just waiting for cannabis to become legal before making their move.
"I’m absolutely certain of it," said Dhillon. "I've seen telltale signs across the entire capital market spectrum that larger sources of capital than we’ve ever seen are figuring out their entry point into global cannabis."
For the smaller investor, however, waiting for these industries to become legitimized is not the most effective strategy for market gains. Rosen credits his own success in the market with being early, being informed and being aggressive.
"If there’s something I would give myself a bit of credit for, it would be having the courage to vote with my wallet and not just my brain again and again," he said.
Speaking with Civilized after the panel, Rosen conceded that an investor’s freedom to make these kinds of big bets is dependent on the the their ability to stomach risk. Considering himself much more built for risk than most, he suggests perhaps a more tempered approach for those who are less sure.
"I think in Canada now, you can start to invest in something like Canopy, and you’re not going to lose your money," He said. "You might do really well, but you won’t make ten times your money. Sure, load up on the ‘sure things,’ then, load half your portfolio with early stage companies that have shown promise. It’s a better time than ever to be looking towards investing."