Why Private Equity Is Investing in Marijuana Cultivation

A private equity fund announced plans to raise $250 million to invest in cannabis companies, particularly those operating in areas such as Las Vegas, Los Angeles, and midtown Manhattan. Co-chaired by former executive of BlackRock Inc., MedMen Opportunity Fund II is actively looking for businesses that grow, manufacture, and sell weed in some of the country’s most popular tourist destinations.

The initiative comes at just the right time: New York just added chronic pain to its list of qualifying conditions for medical marijuana, Nevada legalized recreational use back in July, California opens its recreational market in January, and even Canada has plans to legalize cannabis nationally by no later than July next year.

Achieving MedMen’s target of raising a quarter-billion dollars would put it among the largest investments made yet in the nascent cannabis industry, which financial institutions still shun due to understandable skittishness about servicing a product that federal law still considers illegal. The law bars the industry from traditional banking services.

Furthermore, the industry itself faces extreme political uncertainty under the Trump administration. Attorney General Jeff Sessions is a well-known, vocal and ardent enemy of state-legalized marijuana, even going so far as to appeal Congress to overturn the Rohrabacher-Farr amendment, which prevents the Justice Department from using federal funds to enforce marijuana laws in states that allow it.

However, the same risks that deter most investors attract others. The people involved in Los Angeles-based MedMen cite a widespread lack of understanding of how the marijuana industry works, as well as the legal gray areas that surround it, as the main reasons why legalized marijuana is such an intelligent investment. The risk makes the assets cheaper, and there are fewer investors competing in the space.

MedMen managed to raise $60 million for its first marijuana fund last year. Ruth Epstein, an investment banker in San Francisco who formerly worked for Goldman Sachs Group, Inc. and who recently bought into MedMen’s fund said, “They were looking at markets where there was a lot of disruption and where there is not a lot of transparency.”

MedMen’s credibility on Wall Street comes courtesy of its co-chair, Chris Leavy, a former chief investment officer of fundamental equities at the largest money manager in the world, BlackRock. Prior to that, he served as chief investment officer of equities at Oppenheimer Funds. Epstein says that Leavy’s presence is calming to investors who would otherwise hesitate over a weed fund.

Leavy took one of the largest stakes in the first fund organized by MedMen, and the security of his presence is a big deal for investors. “That was the thing that really pushed me to pull the trigger,” Epstein said of her decision to invest. By 2026, experts predict the now $6 billion legal pot market to morph into a $50 billion industry.

According to Cowen & Co., eight states have made recreational use legal thus far, including both the District of Columbia and the lucrative state of California. Another 21 states permit the use of medical marijuana, including the great state of New York. Leavy had this to say, “I never thought we would find an emerging market right here in the United States, but here we are.”

The company is actively courting affluent people such as Epstein, as well as family officers. For the firm’s second fund, the minimum buy-in was $1 million, a level that the company claims rose to $3 million last week Thursday. MedMen started out humbly in 2010. Back then, it was just a dispensary offering consulting services to marijuana businesses.

In 2013, the role of MedMen began changing: It became a management company, and it decided to create a fund for private equity. At the start of 2016, the firm was employing 15 people. It has grown, however, and now employs nearly 300 workers. This labor force is pivotal to identifying the few locations that permit marijuana businesses.

Cannabis-related companies, especially storefronts, may not situate themselves anywhere near community centers. In fact, they must be a specific distance away from religious institutions, schools, playgrounds, and other places that children frequent. This makes it more difficult to secure retail locations in areas with high traffic, but they are notably more lucrative.

MedMen has both purchased and leased rental property in high-traffic areas, including just off the Las Vegas Strip, on the border of Beverly Hills in Los Angeles, and in midtown Manhattan. The firm obtained its store in downtown Los Angeles for $6 million in order to acquire a license for its Beverly Hills facility. Co-founder and Chief Executive Officer of MedMen, Adam Bierman, explained it this way:

“If we can be in Los Angeles, Manhattan and Las Vegas, then from a brand perspective, we are defensible all the way around. What we did not realize is no one else was going to be able to do it, or at least to be able to do it at this point in time.” To date, MedMen’s management group and two funds either own or operate 11 different marijuana businesses.

These include eight dispensaries, two facilities for cultivation, and one plant for manufacturing. There is another facility in Reno, Nevada, for both growing and processing, and it will begin operating this year. The firm is closing several deals, including those it made in Venice and Santa Monica, California, and it spent $26 million acquiring a business licensed to dispense weed in Manhattan.

At the Four Seasons Hotel near Beverly Hills on a recent Saturday, Bierman and Leavy spoke to approximately 20 possible investors. This year alone, the firm has held three of these events. The entrepreneurs are attempting to quell fears surrounding the regulatory ambiguity that they believe makes the opportunity so promising.

After the event, the group then toured MedMen’s dispensary in West Hollywood and its cultivation facility located just 30 minutes away. Bierman said, “Let us say these guys were energy guys, they would know everything in the world about oil and gas, but none of the people here that may be marijuana investors know anything about marijuana.”

In conclusion, Bierman explained, “So much of it is the same; it is the fundamentals of investing. However, so much is different too. Fundamentals of investing do not include something that is federally illegal.” Yet, despite uncertainty about federal law, the momentum for legalization is continuing to spread. Soon, the federal government will have to buckle under the pressure.

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