Private Equity: A Sector That Will Build Cannabis Into A Multi-Billion Dollar Industry

One of the most popular trend that’s transpiring in the millennial generation is the exponential growth of entrepreneurship. Thanks to influencers such as Evan Spiegel, Mark Zuckerberg, Dustin Moskovitz, and Elizabeth Holmes for being a role model and leader in their generation. But what’s even cooler is being an entrepreneur in an industry that started as a cartel driven market, and now it’s becoming a nationwide epidemic that will improve our country’s economic status. How great would it be for a Millennial entrepreneur to become a part of the American history, and at the same time have the potential to make a “Bill” from it?

Hemp Educate America had a chance to sit down with Nilo Tabrizy of VICE News, and we had an opportunity to exchange notes from our collected interviews of industry pioneers in the cannabis space.

VICE News: Inside America’s Billion-Dollar Weed Business. Click here to watch

The cannabis market has expanded much faster than anyone expected. In the past three years multi-millions of dollars have been invested in the industry, with most outside funding coming from Private Equity (P/E). The players in the private sector are needed because otherwise the industry will not be able to grow properly, and the good news is that Private Equity firms are indeed interested in America’s fastest growing market, much more than anyone anticipated.

The Limitations of Cannabis Funding.

Why do we need Private Equity firms? The reason is simple – almost every industry runs on loans and investments from commercial banks or financial institutions. Most entrepreneurs present their deck plans to commercial banks first, and once they provide the proper documentations with 24 to 36 months profit and loss statements, then there’s a probability for funding. Banks play a crucial role in helping entrepreneurs. But, this is where the problems come in – banks have to follow federal laws, and Cannabis is still restricted under the federal guidelines. It won’t be soon, that is a clear sign just by looking at the way society is moving, but it isn’t now. This means that cannabis entrepreneurs couldn’t depend on securing funding from commercial banks or financial institutions for their startups or businesses.

Alex R. Thiersch, CEO, Salveo Capital

Private Equity firms and Cannabis.

Private Equity firms can operate at a state level, which means that as long as they’re following state laws, they aren’t too exposed to legal issues. This is why there are already P/E firms that have more than $100M available in their investment pool.

Privateer Holdings was the first to cross $100M in raised capital, but rest assure they won’t be the last.

The reason this relationship between the Cannabis industry and Private Equity firms is going so well is simple – it is very beneficial to both parties, and it will only get better in the future! The entrepreneurs in the Cannabis industry needed a source where they can get funding for their innovative ideas, and Private Equity firms are the perfect source for their capital needs. P/E players are always looking for investment opportunities that are going to see an explosion in growth, and if you see the writing on the wall, the Cannabis industry is perfect for their portfolio.

P/E players acquires companies primarily because of the Human Capital value. Human Capital – which can be thought of as the knowledge, skills, ideas, and commitment of employees – plays a big role in creating companies that are attractive targets for acquisitions.

Private Equity firms buy businesses the way individuals purchase houses – with a down payment or deposit supported by mortgage finance. A critical difference between how an individual purchases a home and how a Private Equity fund purchases a portfolio company, however, is that homeowners pay their own mortgages, whereas Private Equity firms require the companies they buy to assume the debt and pay it off. In the early 90’s, the P/E fund’s down payment or equity investment was typically 10% of the purchase price while 90% was borrowed.

Private Equity owners sit on boards, frequently visit their portfolio companies, and educate management on value metrics and the importance of future cash flow. Because the reporting is direct and focused on issues of corporate value, the Private Equity owner/investors spend more time finding creative ways to enhance the value of their investee companies.

They may transfer executives among portfolio companies. They may recommend proven operations or marketing consultants. In some cases, the Private Equity group may buy a company because it already has on board a talented and experienced executive team whom they hope to build a successful business. They find ways to get people to work toward the same goals, despite enormous difficulties and ideological differences.

P/E players focus on a three- to eight-year value building horizon. They are acutely aware of short-term results, but they target on long-term value. Typically when a firm acquires a new company, they are thinking 10 years until they get their ROI.

Where the money comes from.

In order to properly utilize this great source of funding, cannabis entrepreneurs need to understand the private equity model. The question most frequently asked is always where the funding is originated. Private Equity firms usually raise capital from high net-worth individuals or large financiers that do not directly want to invest in companies. This includes organizations like New York State Teachers’ Retirement System (NYSTRS), California Public Employees Retirement System (CalPERS), and Non-Profit Foundations. These entities want stable growth in their funding, which is why instead of directly funding companies (which may fail), they prefer to invest in the private sector. Private Equity firms then invest the money in multiple companies, which diversifies the funding of these entities, thereby adding stability to it. So when private fund returns are strong, a lot of workers, teachers, and pensioners benefit.

Cannabis Biz Expo in San Diego [Mar 6, 2017]

How Private Equity firms are changing the cannabis industry.

Private Equity firms do not just give money to a company and let them do what they want. Since they make such a sizable investment, they also focus on ensuring that the fund is managed and disbursed properly. This may sound problematic, but it is just what the cannabis industry needs. P/E players are known for their use of earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples as a rough approximation of value and a tool for disciplining management. This makes some entrepreneurs uncomfortable as they may feel like the Private Equity firm is taking too much of a short term approach.

It is also good because this is what the cannabis industry needs. Right now there are a lot of cannabis entrepreneurs who don’t really have a proper business plan. We definitely need a more professional and structured approach in this sector. In order for this industry to become a multi-billion dollar market, it must be integrated with corporate value builders. It needs attorneys, accountants, distribution channels, sales managers, HR, payroll representatives, and other professional trades to operate more of a corporate structure. After all, this is what the government wants to see in order to legalize it on a federal level, and to have a grounded assembly to collect taxes.

However, at the end of the day, P/E managers know that they need the companies they fund to succeed. Private Equity firms are operated by some of the smartest financial managers around, and it is important that cannabis entrepreneurs work with them to build intrinsic value for their companies.

We all remember the pioneers of the oil, steel, automobile, and IT industry; Rockefeller, Carnegie, Ford, and Bill Gates are just a few business icons to mention. The question now is, who will become the magnates of the cannabis industry? In twenty years when the market is worth multi-billions, whose name will appear on Forbes or interview segments on CNBC?

Well, look no further because here’s an article, Mr. Green Rush – Tripp Keber on the Future of Cannabis and Millennial Entrepreneurs, about an individual that is leading America’s fastest growing marijuana market.

PRIVATE EQUITY CALL: Are you a Private Equity investor seeking for opportunities in the cannabis sector?

We are dailed-in with several millennial entrepreneurs with established companies in the cannabis industry. If you wish to partake in this future multi-billion dollar market, please call (858) 952-6330 so we can refer you to these talented team of millennials. I hope you enjoyed this content and please share to spread this article by emailing it to a friend, or share it to your network. Thanks for reading!

About the Author: Carlo Desierto is a serial entrepreneur with over a decade of experience in business startups. He has founded, built intrinsic value, and sold several companies in which he sits as an adviser for the Board of Directors. Carlo has interviewed over 200+ entrepreneurs and published mini-biographies for new digital media channels relating to entrepreneurship, health, self-help, futurology, and the green industry.


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