The CEO of a Peter Thiel-backed cannabis private equity firm reveals his 3-pronged strategy for choosing investments
- Brendan Kennedy, the CEO of Privateer Holdings, one of the oldest and largest cannabis-focused private equity firms, shared the three components of the firm's investment thesis in an interview with Business Insider.
- In cannabis, like any other industry, "brands are the future," according to Kennedy.
- Privateer, founded in 2010, raised $100 million earlier this year.
- Peter Thiel also backed Privateer's Series B in 2015 through the Founder's Fund.
As marijuana legalization sweeps across the US, a number of dedicated investment firms are piling into the booming industry.
One of the oldest and largest of those firms is Seattle-based Privateer Holdings. Since 2010 - when Brendan Kennedy, now the CEO, founded the firm along with partners Michael Blue and Christian Groh - the firm has kept to a tight investment strategy.
"We have a fairly simple thesis that we created almost eight years ago, and really haven't deviated from it," Kennedy, who's armed with an MBA from Yale, told Business Insider in a recent interview. "Which either means it was really good, or we're just really stubborn."
Their thesis has three main parts, according to Kennedy: The first part is that cannabis is a mainstream product. Second is that the end of prohibition is inevitable. And third, brands will shape the future of the industry.
The strategy seems to be working. Privateer, which functions like a Berkshire-Hathaway type holding vehicle for cannabis companies, raised a $100 million Series C round in January, putting its valuation somewhere north of $500 million (the company wouldn't disclose the specific number to Business Insider when asked).
The company also counts big-name investors like Peter Thiel - who invested in the company's Series B in 2015 through Founders Fund - as well as a number of high-net-worth individuals and family offices among its backers.
By some measures, it's the second-highest valued cannabis firm in the world, according to data from Pitchbook. That success boils down to the firm's tight investment strategy.
Diving into Privateer's three-pronged strategy
The first component of Privateer's strategy is geographically-dependent, owing to the patchwork of state and federal laws that guide the cannabis industry. In states where marijuana isn't legal, their strategy centers on the medical side of the cannabis industry - namely, that medical cannabis is a mainstream treatment, according to Kennedy.
In states where marijuana is legal for adult consumption, like California and Colorado, Privateer looks more broadly at the adult-use market.
In those states, Privateer considers retail cannabis to more generally be a mainstream product, "consumed by mainstream people," Kennedy said.
Here's how this works in practice. One of Privateer's portfolio companies, Tilray, a cannabis cultivator based in British Columbia, partnered with Sandoz Canada, a major pharmaceutical company, to distribute "non-combustible" (that is, pills and sprays) medicinal cannabis products to Canada's major hospitals and pharmacy chains.
With Canada's impending marijuana legalization, Tilray now also plans to bring Marley Natural-branded products - another one of Privateer's portfolio companies - to Canada's adult-use market.
On the mainstream side of things, Kennedy's right: The fastest-growing segment of cannabis consumers is people over age 55, according to Vivien Azer, an analyst at the investment bank Cowen. And greater access to legal cannabis could actually hurt alcohol sales, as binge-drinking rates have fallen 9% below the national average, in states that have legalized the drug, Azer said in a note to clients.
The second piece of Privateer's strategy, Kennedy said, centers on how mainstream cannabis has become in the last few years, leading to the inevitability of prohibition's end.
While Privateer is paying close attention to what happens on the legislative side, the company is making long-term investment decisions based on the assumption that marijuana will eventually be legal at the federal level, or that state-legal marijuana will at least be protected by federal law.
There are a number of signs Congress is taking the legalization debate seriously.
Senate Minority leader Chuck Schumer announced last week that he's planning to introduce a bill to decriminalize marijuana at the federal level, and Sen. Cory Gardner, a Colorado Republican, is working on a bipartisan bill with Sen. Elizabeth Warren of Massachusetts to protect state's rights to legalize marijuana. That bill may be introduced as early as next week after President Donald Trump promised earlier this month to support legislation protecting state's rights to legalize the drug.
That's not to mention John Boehner's recent announcement that he plans to join the board of cannabis firm Acreage Holdings.
In cannabis, like any other industry, brands are the future
The third piece of Privateer's strategy isn't specific to the cannabis industry - it's all about branding.
"Brands will shape the future of this industry, just like every other industry," Kennedy said. "That's what we believe."
Privateer's portfolio consists of four companies: Marley Natural, Bob Marley's family's cannabis brand; Good Ship, an upscale edibles manufacturer; Leafly, a media platform and resource for cannabis consumers, and the aforementioned Tilray.
"The vision is to create a portfolio of consumer-facing cannabis brands backed by a multinational supply chain," Kennedy said. "And so we invest in what we think are global cannabis brands."
Because of Privateer's success - and the mainstreaming of the cannabis industry as a whole - Kennedy said big, institutional investors are starting to show serious interest.
Institutional funds, like pension funds and big venture firms, have generally been reticent to enter the space because cannabis is still considered an illegal, Schedule I drug by the US federal government.
But according to Kennedy, that reticence is starting to change.
"We've spoken to some of the largest institutional investors in the world," Kennedy said, adding that they "wouldn't have talked to us eight years ago."
Tiger Global Management, a New York City-based investment firm that manages $22 billion, led a $17 million investment into Green Bits, a software platform for marijuana dispensaries earlier this month, in a sign that these big investors are warming up to cannabis.
"It's a global, inevitable, high-growth industry," Kennedy said. "We're rapidly approaching the point where, you know, every major global investor will have looked at the industry."
The days of Cheech and Chong, tye-dye shirts, and stoned out surfer-bros are clearly coming to an end. The bankers, for better or worse, are seeing green.
Read more of our cannabis industry coverage here:
- The rising stars of marijuana's investment scene that everyone from Wall Street to Silicon Valley should know
- The highest-valued marijuana companies of 2017 reveal 2 key insights about the booming industry
- A startup that runs marijuana dispensaries is America's first $1 billion marijuana 'unicorn'
- A hedge fund that focuses solely on marijuana is crushing it
- A $22 billion investment firm led one of the largest ever funding rounds for a cannabis tech company - here's why it's a big deal for the industry