Betting Big On the Cannabis Industry

"The fact that there is now a clear path to legalization, whether it be in two years or three years, is huge."

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Friends,

For many people the State of Texas represents conservative red-state values, especially when it comes to drugs. For one Texan who had the foresight to see what was on the horizon, though, this challenge was not insurmountable.

In 2014, Matt Hawkins correctly identified that the cannabis industry was poised to take off, but lacking one key ingredient: growth capital.

With this insight, Matt began investing across the value chain, resulting in one of the most impressive portfolios of top-tier cannabis companies, including Green Thumb Industries, Terrascend, NorCal Cannabis, Cann, and Cellibre.

For today’s publication of Four PM, I had the pleasure of sitting down with Matt to learn about his journey into cannabis, his outlook on legalization in his home state, and much more.

Matt Hawkins is a former Managing Partner at Adjacent Capital Advisors and is currently the Founder & Managing Partner of Entourage Effect Capital.

You began investing in cannabis in 2014, which is extremely early by all accounts. What were the insights that spurred your first investment?

I've been in private equity for over 20 years.

I had an investment I made in 2011 that we exited in 2014, and one of the things I had done in the downturn was private lending to broken real estate deals. so I started looking at those types of transactions again. 

I got an inordinate amount of deal flow from warehouse owners in Denver, Colorado, looking to refinance their mortgages out of commercial debt into a private debt so they could then lease their facilities to cannabis growers, as cannabis legislation had just passed in 2014 in Colorado, Oregon, and the state of Washington.

I knew nothing about cannabis at the time. We made a deal, and we liked the security we had with the warehouses, but I kept thinking that the yields would dry up; however, because of the federal illegality we knew these companies would have a hard time raising capital for growth.

With this insight, I quickly shifted gears to try to socialize with my network, just to figure out if I could raise some capital to make equity investments in the operating companies. That started my journey, and many years later we've made 66 investments in the cannabis industry to-date.

You recently wrote an article outlining your positive outlook for the cannabis market in Texas. What makes Texas such an interesting market for cannabis?

It's primarily the size of the population, with over 29,000,000 people.

There’s no question that there’s an illicit market in Texas that's thriving, as there is in any other state, quite frankly. What makes Texas unique is that there is a very, very small sliver of legality for medicinal use.

There's obviously a huge opportunity to tax and regulate cannabis to clamp down on the illicit market as many other states have done in the past. 

What are the primary lessons to be learned from the states that have legalized cannabis thus far? 

There are lessons to be learned from every single state that's gone through the process.

Some of the states that have recently come online seem to be better than others at taking the good and adding it to their own regulatory platform; however, others not so much, and that’s just fine, as there’s a lot of red tape and bureaucracy that exists with each state trying to put something like this together.

What seems to work best for new states coming online is limited licensing in the beginning with a merit-based allocation of these licenses, and then growing the licenses as the market grows. That’s what I hope Texas would do, but the problem with Texas is that there is a very conservative state legislature that is likely not going to do much of anything.

Unfortunately in this session, even though there's a $4 billion-plus budget shortfall that currently exists, legalizing cannabis remains a low priority. If cannabis were legalized and regulated, you could potentially see a quarter of this deficit reduced.

With the Democrats now in control of both houses, is the federal legalization of cannabis in clear sight?

With the Democrats now controlling the House and the Senate and a reasonably cannabis-friendly White House, the likelihood of federal legalization is certainly higher than it would have been otherwise. I think that ultimately you're going to be looking at something like the States Act.

This would effectively remove the federal illegality of cannabis, leaving it up to the individual states to decide for themselves as to what policy they would like to have in place for cannabis. We have a similar type of regulatory framework in place for alcohol, where each state is different in how they choose to regulate alcohol. 

Long-term, this will ultimately be the same for cannabis; however, in the very early years of federal legalization, it will be a quasi-legalization in that cannabis products likely won't be able to cross state lines, and states will continue to capture the revenue from their own cannabis cultivation.

What has you most excited about the U.S. cannabis industry in 2021?

In 2020 we had a majority of cannabis companies receiving the essential business designation, which was huge for the industry, in addition to a number of states legalizing cannabis.

The tailwinds of this are going to continue into 2021, and the fact that there is now a clear path to legalization—whether it be in two years or three years—is huge. 

With a number of publicly-traded cannabis companies now turning profits, it seems increasingly likely that there will be increased institutional capital coming into the cannabis industry, with all signs pointing towards this.

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