After selling off unprofitable divisions of the Babcock Lumber Company, the Babcock family began exploring new industries to invest in. Their search ultimately led them to an unexpected destination: the fledgling marijuana industry.
“The 2014 ballot initiative in Florida spurred our interest in medical marijuana,” said James Clifton Whatmore, president of MAB Investments in Sarasota, Fla. “Legal medical marijuana was so hyped up, it was hard to ignore.”
MAB Investments made its first direct investment in a marijuana company just one year ago.
“I was drawn to the newness and growth of the cannabis industry,” Whatmore told Private Wealth.
They are not the only family enterprise looking to make profits into the formerly taboo industry. Family offices nationwide are increasingly investing in legal marijuana companies despite the stigma that remains attached to cannibas, according to the Viridian 2015 Cannabis Industry Report.
“We have tracked numerous new private placement investors in the cannabis market, including existing family offices,” said Scott L. Greiper, president of Viridian Capital Advisors in New York.
Marijuana still sits in an odd legal area nationally, with many states and the federal government still considering it illegal. Businesses taking root in states that have legalized marijuana, whether for medical or recreational use, or both, also have to contend with the fact that banks generally will not work with them.
That's why many families that are put their money into marijana investments are secretive about it, to avoid being judged by friends and neighbors.
“The majority of family offices are quiet about investments in the marijuana industry because they don't want to jeopardize the family brand,” said Jim Fitzpatrick, an advisory board member of Kodiak Capital Group LLC, a private investment fund established by a multifamily office that has committed $32 million to more than a dozen cannabis companies since 2011. “They are targeting lower-risk investments that don't involve the handling of cannabis like real estate, providing picks and shovels or opportunities in permissive environments like Colorado.”
For example, the Wilson Family Office in Key Biscayne, Fla., is mulling over a $10 million real estate-backed investment into cannabis, but not as an act of support for legalization.
“This family is not pro- or anti-marijuana,” said Richard Wilson, CEO of the Wilson Holding Company. “We see this potential investment as an agriculture play. The capital needed by the company is going to potentially be provided in debt format so we will get a 12 percent return and 60 percent loan to value. We are considering it because of strong collateral and returns.”
Just two weeks ago, Kodiak completed a $1 million equity purchase agreement with MyDx and CannaSys.
MyDx is a handheld analyzer that measures the content of THC and CBD in marijuana and CannaSys creates software technology for companies in the marijuana industry.
“Our family offices are focused on the emerging cannabis market because of its attractive valuations and disruptive technologies,” said Fitzpatrick. “They feel they can conquer many segments early on with a minimal amount of capital. A portion of every estate is allocated to higher-risk investments and cannabis fits that bill."
For example, some 10 percent of the Babcock family’s portfolio is allocated to high-risk investments.Of that, about 25 percent is allocated to the cannabis space. One of them is the Colorado-based Ebbu, which makes distilled marijuana extracts for use in edible products. “EBBU is a post-flower production company, which is not limited to regional growth,” said Whatmore. “It has a proprietary system that can be licensed to other states that legalize marijuana use in the future.”
Another company the Babcock family portfolio is invested in is Nuka, a maker of edible marijuana products. “It’s their process that can be profitable,” said Whatmore. “The growth is in their concepts and intellectual property systems, which can be standardized across the country once marijuana is legalized federally."
Family office investments like Whatmore’s bring not only much needed capital but also great expectations.
“They provide more financing alternatives for cannabis companies and they demand better execution, operations and governance from issuers,” Greiper said.
Connecticut-based cannabis grower Curaleaf has nearly completed an extended friends and family capital round of some $5 million to fund the expansion of its product offerings and growing capacity. “A lot of the capital we see trying to come into the industry is from family offices,” said Curaleaf Chairman Robert Birnbaum. “The reason is medical marijuana is illegal under federal law, so many of the normal sources of capital are not available to the medical marijuana industry. The implication is that capital that can invest might earn a higher than normal return.”
