Family Offices Investing in Cannabis
We recently co-hosted a roundtable on investing in Cannabis with Duane Morris and HLB Gravier in Miami. In attendance were 20+ prominent family offices. Our discussion was lively and engaging, with a cross section of experiences represented. There were investors who have already made cannabis investments or are thinking about the ways to enter the market, and others who had taken the approach to invest in one single operating company.
The diversity in approaches and investment strategies is indicative of how family offices invest, and the key take away is that family offices are very much looking for the optimal strategies for investing in the cannabis markets. As a group, family offices are difficult to identify and there is high degree of variety in how these investment offices are set up and operate.
To understand the role of family offices in the cannabis markets, it is important to define what a family office is. When people talk about a family office, they are referring to an infrastructure that individuals and groups set up to manage their wealth. Many times, these are small teams of accountants and operations people who can do everything from paying bills and managing properties, to investing directly in and managing operating companies. There is a large component of wealth management, tax management and a focus on how wealth is transferred across generations. The most senior non-family member hire tends to be the Chief Investment Officer (CIO).
There are two types of family offices, multifamily offices and single-family offices. Multifamily offices pool resources together and share services and largely focus on portfolio management. In that capacity they are unlikely to be making investments in anything with a high degree of risk and stay to investments in things like real estate and funds.
Single family offices manage the wealth for one family group. This is the category of investor who has been very active in the cannabis markets in recent years. While traditional venture capital and wealth management firms are staying on the sidelines due to internal or federal regulations, these investors with the ability to make significant investments have filled this gap, although they remain very difficult to identify and access.
Raising capital from family offices is fairly nuanced and has some distinctions from raising capital from either angels or investment funds in the following respects:
The investment decision will be made by the individuals with the consultation of their attorneys and close advisors
The investment is funded with their own money
Family members play a role in the decision process in particular spouses
There isn’t the same pressure to make investments as funds do when they are under a timeline to put the money in their fund to work
They are however seeking a great return for their investment, but can also be invested in a company for longer periods of time
Their exit strategy can be more flexible, there can be less pressure to engineer quick exit and liquidity event, and instead benefit from dividends for the long term
Some investors will want to have their family members actively involved and may even place them in full time roles in the companies they invest in
They have typically created the wealth through entrepreneurship
Anther differentiator is that family offices have the capacity to make very sizable investments. Without traditional sources of capital many companies that needed $10 million or $20 million of investment early on (think vertically integrated operators) turned to single family offices to provide that financing.
What was clear at the cannabis investing round-table, is that sophisticated family offices see cannabis as a market that is here for the long term, and an investment class that they need to allocate to. When managing a large corpus of wealth, investment officers are always looking for where to find more returns in new sectors such as cannabis. As an investment class, cannabis is still in its infancy and although there is little debate that investing will be part of an overall investment strategy. The issue remains that there the public markets are in turmoil and many of the first mover companies are going out of business. This causes pause and smart investors are taking their time to find the optimal strategy that will achieve their goals while participating in the momentum that the cannabis market is leading.