When the sun rises on legalized cannabis October 17, many eyes will be on institutional investors who have so far neglected to invest in cannabis companies.
Observers will be keen to learn if legalization changes these institutional investors’ minds.
Other eyes will be on the investors who pumped money into cannabis ventures soon after Prime Minister Justin Trudeau won the 2015 election, when he made clear that legalized cannabis was on its way.
The question for those investors is whether they will follow the investment-industry maxim of buying on rumours and selling on news. If they follow that advice, many could view the arrival of legalized cannabis as an ideal time to cash out.
“I wish I had a crystal ball and could handicap it for you,” said Neal Gilmer, a research analyst at Haywood Securities who covers the cannabis sector.
Many large pension funds have already hopped on board. British Columbia Investment Management Corp. earlier this year, for example, revealed that it owned 606,000 shares of Canopy Growth Corp. (TSX:WEED; NYSE:CGC) – an investment that would have been worth a peak of more than $45 million earlier this year and, more recently, $38 million.
Canadian big banks have also become involved in the cannabis sector. The Canadian Imperial Bank of Commerce (TSX, NYSE:CM) last year, for example, signed a $20 million credit deal with licensed producer Med-Releaf Corp. (TSX:LEAF).
The Bank of Montreal (BMO) in January then became the first of the big banks to help head an equity financing for a publicly traded medical marijuana company, when, along with GMP Securities LP, it co-led a $175 million bought deal.
Two months later, BMO’s (TSX, NYSE:BMO) investment banking subsidiary, BMO Nesbitt Burns Inc., co-led a $100 million bought deal for cannabis producer Cronos Group Inc. (Nasdaq:CRON).
Many institutional investors, however, are bound by fund guidelines that restrict in what companies they are eligible to invest, Gilmer said.
Even though large publicly listed licensed cannabis producers are focused on the legal medical marijuana sector, and not on supplying the black market, Gilmer said that their simply being in the cannabis business has been enough to turn some institutional investors away.
“There are still Canadian institutional investors that have not invested into the [cannabis] landscape given the fact that there is not a recreational or adult-use legal framework until October 17,” he said, without naming any specific funds. “Only after that time would they consider taking a look at the space.”
AltaCorp Capital Inc. managing director David Kideckel told Business in Vancouver he is not sure whether institutional investors will suddenly jump into the cannabis space, but he predicted investment in the sector will increase over time.
“There certainly could be a new influx of money, or money could be taken out of current cannabis companies and reinvested into new cannabis companies,” Kideckel said. “We’re also going to see a flurry of investment activity with a bunch of new companies that are coming public.”
Institutional investor Wayne Wachell, whose Vancouver-based Genus Capital Management has about $1.5 billion under management, has not invested in any cannabis companies.
His funds tend to focus on socially responsible investing and fossil-fuel-free investments, although he has some funds that have conventional portfolios.
Minimum client investments in his funds are at lease $50,000.
“We don’t invest in tobacco,” he said. “There are some good things and some bad things against marijuana. We have analysts doing more work on that to figure out what course we’re going to chart. A lot of people in that space seem to think that the good outweighs the bad, but we want to do more work and get more consensus from our clients.” •
