In the Golden State, marijuana is big business, and perceived risk and uncertainty means opportunity for smaller investors to take part.
By Dawn Chmielewski
Adam Bierman still sounds incredulous as he
recounts his initial plunge into California's medical marijuana
business. A former college baseball player who had never so much as
taken a toke, he found himself in his apartment surrounded by 20 pounds
of weed sealed in Ziploc bags.
"I was looking at my wife, like, 'What have we
done?'" recalled Bierman, before stuffing the marijuana into garbage
bags, depositing it in a bicycle basket and pedaling the merchandise to
the pot shop he and his business partner were about to open in the
seaside community of Marina del Rey, west of Los Angeles.
Bierman's business, and the state of the cannabis industry in California, have evolved substantially in the seven years since.
That first dispensary is gone, but Bierman and
partner Andrew Modlin have helped more than 100 marijuana businesses
navigate regulatory issues, refine their cultivation and production
techniques or operate retail shops. Their management company, MedMen,
just closed a $60-million private equity fund for investing in the
emerging industry – with another investment vehicle on the horizon.
MedMen embodies the promise of the legal
cannabis business in California, where there's a new gold rush to
capitalize on a potential multibillion-dollar market.
Colorado and Washington state receive
considerable attention for their fast-growing recreational cannabis
markets – which reached a combined $1.5 billion in sales in 2016, up a
brisk 66 percent from the prior year, according to the latest statistics
from Marijuana Business Daily.
Yet California's legal sales already dwarf that.
Arcview Market Research estimates medical marijuana purchases totaled
$1.8 billion last year, on the way to a projected $5.7 billion by 2021,
as the state opens the door to adult recreational use.
"There's a lot of excitement about what's going
to happen there," says Chris Walsh, editorial director of Marijuana
Business Daily, which each year publishes a comprehensive cannabis
industry Factbook. "But it's going to be messy as they try to regulate
this medical marijuana industry that's not used to any rules."
California was the first state to legalize
medical marijuana use in 1996, but it never set statewide regulations –
leaving oversight to local governments. That opened the door to
disreputable players, says Walsh, making the state a pariah of the
marijuana industry as it fought for legitimacy.
The Golden State has been slow to conform to
guidelines laid out by the Justice Department in 2013, as it struggled
to reconcile Congress' view of marijuana as a dangerous drug whose
illicit proceeds finance criminal groups with state ballot initiatives
legalizing pot use. The Obama administration spelled out its enforcement
priorities so state regulators could avoid running afoul of federal
prosecutors – namely preventing marijuana sales to minors, the diversion
of revenue to gangs and cartels, or the use of an authorized businesses
as cover for illegal drug trafficking.
"That's why California has been a hot seat for a
while," says Mitchell Kulick, founding partner at the New York City law
firm of Feuerstein Kulick, which advises investors and early stage
cannabis companies. "Despite being the first, they were the worst."
Nearly 20 years after legalization, the
California Legislature took steps in 2015 to license and regulate
medical marijuana. The proposed rules – unveiled just last month – would
require testing, seed-to-sale tracking and licensing of dispensaries.
But these rules have yet to take effect.
Meanwhile, Gov. Jerry Brown is scrambling to
align regulations for medical and recreational cannabis use, after
voters last November approved a referendum legalizing its sale to adults
21 and older, starting in 2018.
"Even though California is the Holy Grail when
it comes to cannabis – there isn't even a close second – I'm directing
clients away from it until California gets its act together," Kulick
says.
Uncertainties about whether the Trump
administration will step up enforcement in the 29 states that have
legalized medical or recreational marijuana hang over the industry.
Most banks still shun the cannabis industry
because of burdensome and costly federal regulations aimed at preventing
money laundering. Some 301 banks and credit unions now do business with
the industry – less than 3 percent of the nation's financial
institutions, according to Arcview.
Internal Revenue Service rules also prohibit
growers and sellers from writing off normal business expenses, such as
marketing, involving anything "associated with selling illicit
substances." That leaves legal cannabis businesses paying effective tax
rates of up to 70 percent, Arcview notes.
In a sign that the marijuana industry is
stepping out from under the grow lights and into the sunshine, cannabis
company representatives met last week with congressional representatives
in Washington, D.C., to advocate for tax reform and a change in banking
regulations.
These in-person meetings, said MedMen's Bierman, are crucial to shaking off outdated notions about the industry.
"If I was going to talk to a regulatory affairs
director for a pot company, (legislators may wonder) 'Is it someone who
shows up with Birkenstocks and braids in her hair?'" Bierman says.
"That's not what happened."
Still, the perceived risk and uncertainty is
enough to keep Wall Street money out of the marijuana business – at
least for the time being.
That creates opportunities for new players such
as MedMen and others, whose private equity funds provide a way for
smaller investors with a tolerance for risk to capitalize on an industry
that financial services firm Cowen & Co. projects should reach $50
billion by 2026.
"You will not find another multibillion-dollar
market growing at this type of rate anywhere in the world that does not
already have big institutional players in it, big institutional funds
and big multinational players," says Troy Dayton, chief executive of
Arcview, whose investment network has invested in excess of $117 million
into 145 cannabis startups.
The size of the opportunity coaxed Chris Leavy
out of retirement. He spent two decades in asset management, most
recently as chief investment officer responsible for $115 billion of
fundamental equity assets at BlackRock.
Leavy's all about identifying undervalued assets
– and the cannabis industry is ripe with businesses that are cheap
relative to their potential, he says. With so many pools of capital on
the sidelines, he decided to invest with MedMen. He took on an advisory
role in late 2016, and in March was named co-chairman.
Bierman's aha moment came even earlier, in 2009,
when he and Modlin were running a branding and marketing company called
ModMan, a contraction of their surnames that also offered a subtle nod
to the popular AMC television series "Mad Men," set in the 1960s
advertising world of New York City's Madison Avenue.
The operator of a Sunset Boulevard pot shop had
contacted ModMan about developing a new logo, store concept and website.
Wearing a suiting and tie, and lugging a briefcase, Bierman met the
owner of the tiny, 600-square-foot dispensary devoid of any amenities
(he actually called it a "dump"). He asked basic questions about the
operation, including revenues. He thought the owner misunderstood when
he inquired about her monthly revenue. He was wrong.
"I left there, called Andrew and I said, 'This
lady turns $300,000 a month. We can do way better,'" says Bierman,
seeing parallels between the budding legal marijuana business in
California and online poker.
"Gambling is something that Americans are
participating in, whether it's legal or not," Bierman says. "When online
poker became accessible, the demand was there. It was being fulfilled
by black market means. It was being repressed."
The duo spent a year researching medical
marijuana dispensaries before opening their dispensary, The Treehouse.
The business evolved in 2012, when Massachusetts became the 18th state
to legalize medical marijuana and Bierman began receiving calls from
would-be dispensary operators, seeking to tap his expertise.
Bierman and Modlin shut down their branding
operation, divested their assets in the marijuana world and began
building a management company. They hired a chemist with a background in
petroleum to develop standards for cannabis extraction and analysis.
Another expert with a background in large-scale agriculture techniques
helped develop guidelines for breeding, seed production and other
practices in marijuana cultivation.
"That was a two- to three-year process," Bierman says. "We invested everything we had."
MedMen was out of cash when the phone started
ringing with requests to operate dispensaries or help raise capital. The
company's fortunes quickly rebounded. Earlier this year, it closed a
transaction for $26 million to acquire Bloomfield Industries, one of
five companies licensed to sell medical marijuana in New York.
Now, the company is growing so quickly it is searching for new office space.
As the business gains velocity, Bierman is
turning his attention to wiping away the stoner stigma attached to
marijuana use. The company took over operation of a dispensary in West
Hollywood, renovated the space and reopened it under the MedMen brand
last year, giving it an Apple-esque appearance, with long walnut tables,
glass displays and an airy, well-lit interior. Small touches, such as
artfully arranged circular glass cases that showcase individual buds,
lend it the feel of an upscale mall store.
"If you sit and watch who walks in and out of
the door, it is a representative of that community: young and old, gay
and straight, rich and middle class, working and retired, it's Hollywood
and blue collar," Bierman says. "That's what tells me we are succeeding
in our attempts to mainstream marijuana."
Following the example of Apple Inc., which spent
decades cultivating Hollywood, MedMen has been romancing the
entertainment industry. Earlier this year, it hosted a private cannabis
pairing dinner prepared by celebrity chef Neal Fraser attended by film,
television and music industry executives.
Bierman hopes that such social events will help
normalize pot use, and embolden Hollywood filmmakers to incorporate its
use in mainstream films like the 2009 romantic comedy "It's
Complicated," in which stars Meryl Streep and Steve Martin spice up date
night by sharing a joint.
"These weren't hippie stoners," Bierman says. "These were middle-aged people dealing with complications of divorce and sharing an experience with cannabis. For me, that moment stood out."
No comments:
Post a Comment