Who will profit from the decriminalisation of marijuana?

Social attitudes to marijuana have shifted quickly. The global movement towards decriminalisation will dramatically change the nature of the legal marijuana market. Who is best positioned to “win” in this market?

The legal marijuana market opportunity

The decriminalisation of marijuana provides a massive opportunity for entrepreneurs and investors. Tens of billions of dollars will transfer from the black market to private enterprises as decriminalisation plays out. In the US alone, the legal marijuana market is forecast to increase by c. US$15bn to US$23bn by 2020, according to Arc View Market Research. Around half of this is expected to be “adult use” (i.e. non-medical). Note: You can download a 51 page executive summary of Arc View’s report if you follow the link (free).

There are many challenges for those in the legal marijuana industry. Vague and conflicting regulations between states and countries are a major hurdle. Significant market growth appears inevitable, the speed of growth is dependent on the political process.

Unfortunately from an investor’s point of view, the legal marijuana market is currently highly fragmented, and the sector’s performance on public markets has been volatile:

North American Marijuana Index performance 2015 and 2016

north-american-marijuana-index

The index is available here.

Away from the public markets private equity firms such as Privateer Holdings are launching to take advantage of the decriminalisation opportunity. Privateer has an agreement with Bob Marley’s family to sell Marley Natural products, as well as Tilray (“Exceptional Medial Marijuana”) and Leafly (“The World’s Cannabis Information Source”).

Who is best placed to take advantage of the opportunity?

Eventually, I foresee both artisanal and industrial producers, similar to markets such as wine and beer.  Ultimately, I think very large multi-national marijuana companies will emerge (this could take decades). These will likely be well-funded businesses who excel at marketing, distribution and M&A. 3G Capital’s growth and consolidation of the beer industry comes to mind, as does the current trend of brewers acquiring promising artisanal/craft brands. These early entrants are likely to have the option of selling to industrial marijuana companies which seek to consolidate the industry.

From an investors perspective, my guess is that the big winners from marijuana decriminalisation will be venture capital / private equity firms and their investors for the following reasons:

  1. Large corporates are risk adverse and are unlikely to enter the market until the regulatory “grey areas” have been clarified. VC and PE firms have a much greater appetite for risk, and will enter the market earlier.
  2. VC and PE firms have plenty of “dry powder” to put to work, and banks are likely to remain wary of financing the marijuana industry (or unable to).
  3. PE firms often have experience in executing the “buy and build” strategies required to quickly scale in a fast growing market.

Firms like Privateer Holdings have a head start, but more established firms are sure to follow in the near future.