Navigating Co-Investments in the Cannabis Industry: A Strategic Guide for Family Offices

NEW YORK-Family offices operating in the cannabis industry often view co-investing as a pivotal component of their investment strategy. When executed thoughtfully, these collaborations not only spread the risk associated with cannabis investments but also present opportunities for substantial returns, introductions to new segments of the industry, and effective risk mitigation. For Chief Investment Officers (CIOs) overseeing both single and multi-family offices, co-investing in the cannabis sector opens avenues to amplify deal flow, diversify holdings, collectively conduct due diligence, and harness diverse industry expertise to identify promising investments.

However, given the unique challenges and nuances of the cannabis industry, family offices must approach co-investing with a comprehensive understanding of the associated risks and potential rewards. This is particularly crucial for those with limited experience or lacking broad expertise across various cannabis-related verticals. Prudent decision-making requires meticulous due diligence, not just on the investment opportunity itself but also on the collaborating family offices and their operational partners.

Key Considerations for Successful Co-Investments in the Cannabis Industry

1. Investment Criteria and Philosophy in the Cannabis Landscape

Defining clear investment criteria is the foundation for successful co-investing in the cannabis sector. Relevant considerations include:

– Active or passive involvement in cannabis operations.
– Preferences for specific roles, such as advisory positions or board seats.
– Preferred investment structures within the cannabis industry (e.g., direct investments, funds, types of stock, partnership structures).

Mission-based considerations, such as the social and environmental impact of cannabis investments, become integral components of the decision-making process.

2. Sector Expertise in Cannabis Co-Investing

Given the diversity within the cannabis industry, family offices often possess expertise concentrated in specific segments. When exploring co-investment opportunities in new facets of the cannabis sector, collaborating with a family office boasting a proven track record in that specific area becomes paramount. Such partnerships offer valuable insights, reducing risks associated with the unique dynamics of different cannabis segments.

Example: If a family office is well-versed in cannabis cultivation and seeks to diversify into cannabis-infused products, partnering with an office with expertise in this specific sector provides informed due diligence.

3. Evaluating Management Teams in the Cannabis Space

Effectively evaluating the management teams of cannabis-related ventures is critical. Considerations include:

– Rigorous background checks for regulatory compliance.
– Evaluation of past incidents and resolutions, crucial in the evolving legal landscape of cannabis.
– Track record of successful exits, especially relevant in the dynamic and evolving cannabis market.
– Scrutiny of the entire management team’s experience, particularly in roles crucial for cannabis ventures.

4. Risk Tolerance in Cannabis Co-Investing

Understanding and aligning on risk tolerance is especially crucial in the cannabis industry, where regulatory uncertainties and evolving market dynamics can pose unique challenges. Discussions about potential actions in case of underperformance or regulatory shifts are essential before formalizing co-investment agreements.

5. Governance and Covenant Protections in Cannabis Co-Investing

In the cannabis industry, governance expectations, legal compliance, and covenant protections require heightened attention. Discussions should encompass approaches to regulatory compliance, consensus among co-investors on governance matters, and responses to changes in cannabis regulations.

Co-investing in the cannabis industry provides family offices with a strategic approach to spreading risk, amplifying deal flow, and leveraging collective expertise. The guide emphasizes the significance of thoughtful decision-making in cannabis co-investing, underscoring the need for due diligence and alignment of investment philosophy to navigate the unique challenges and opportunities within the cannabis sector.