The Cannabis Investment Opportunity Set

01. The US federal legal Landscape

The SAFE Banking Act1 passed its fourth revision in the House of Representatives on April 19th 2021. If passed by the Senate, the bill would allow banks and financial institutions to do deals with legal cannabis related businesses without the risk of federal prosecution. Similarly, Senate Majority leader Chuck Schumer et al are drafting a bill that would federally legalise the recreational use of cannabis. With the Democrats in control of the White House and both houses of Congress, the market appears poised for federal legalisation. Despite this, even if the bills pass in Congress, President Biden has stated that he will not commit to signing them into law. President Biden and Vice President Harris are both vocal and staunch opponents of the recreational use of cannabis. The passing of the SAFE Banking Act would introduce a powerful quorum of institutional investors who could subsequently lobby the federal government on federal legalisation - perhaps expediting the process.

03. The New York market

As of March 2021, recreational cannabis use is now legal for all those over 21. Early estimates project the NYC combined medical and recreational markets could be worth USD 3.1bn by 2025.

04. Big Tobacco, Big Alcohol, Big Pharmaceuticals

As the institutional awareness of cannabis as a commercial proposition has grown alongside the flow of state legalisations, Big Tobacco, Alcohol and Pharmaceuticals have been taking significant stakes in companies in the cannabis eco-system. In 2018 Altria (parent company of Marlboro and Philip Morris) took a 45% stake in Cronos Group, the multinational cannabis firm, for USD 1.8bn. Institutional investor interest is a powerful driver of the US federal legalisation dynamic.

05. Implications for the UK market

A 2018 report published by the Institute of Economic Affairs3 estimates the UK black market for recreational cannabis to be worth £2.5bn annually with 255 tonnes of cannabis sold per year, illustrating the existing market value that could be transferred into the legal recreational market. These estimations, and the rapid growth in the US market, illustrate the scale of the opportunity for early movers who pre-empt legalisation and establish an early foothold in the UK cannabis market.

06. The outlook for legalisation in the UK

There is an acceleration of interest within Westminster surrounding the legalisation, or decriminalisation, of the recreational use of cannabis and cannabis products. Recently, Mayor of London, Sadiq Khan, announced an investigation into the potential decriminalisation of cannabis and a decrease in cannabis related penalties. Whilst decriminalisation and legalisation can only be instigated by the UK government, the investigation’s conclusions are expected to contribute to the outcome of the national debate around the legal status of cannabis use in the country. From a cultural perspective, continued state legalisation in the US will only add pressure for the UK government to explain cannabis’ listing as a controlled substance. Conversation around cannabis is growing in the UK mainstream media, with 59% of the UK adult population4 supporting the legalisation of cannabis. Despite this, it remains a controlled substance. Federal legalisation in the US would be expected to exert further impetus towards legalisation, or at least decriminalisation, in the UK.

From an economic perspective, the global health pandemic of 2020 has left, and will continue to leave, a hole in the UK public purse. The revenue take that would be associated with the regulation and legalisation of cannabis as a commercial and medical product in the UK market is seen as the impetus that may finally expedite the legalisation discussion in the country. The corresponding evidence in the US serves as compelling testimony to the economic impact of the acceptance of the commercial cannabis eco-system into the mainstream.

07. Investment opportunities within the cannabis space

There are two ways to play cannabis investment.

The first, and most obvious, is investment into ‘flower’ activities; that is, investing in opportunities that directly use or profit from the flower, tetrahydrocannabinol (THC), or cannabidiol (CBD). These activities may include CBD and THC merchandise, ranging from candles and moisturiser to the cultivation of cannabis plants and combustion technologies. Whilst cultivation is becoming ever more artisanal, with California awarding ‘appellations’ to Cannabis cultivators, the same as they would their Napa Valley vineyards, any investor with an awareness of the cannabis industry is aware of these opportunities.

The Mayfair Technology Partners house view is that substantial opportunities also exist in non-flower activities. The cannabis industry is one of the fastest growing industries globally, and so too is it one of the most innovative, with cannabis-related economic activity expanding into other, more established markets. From supply-chain traceability and security, allowing growers to track their cannabis from seed to sale using innovative barcode technologies5, software that enables more efficient growing, allowing for higher-quality yields, extraction and biosynthesis technologies, or online community curation and education platforms, cannabis investment opportunities that do not directly touch the flower are abundant.