NORTH American investment in the European cannabis industry has grown at pace over the last few years, with hundreds of millions in capital flooding into the region from across the Atlantic.
As patient numbers rise and it transitions ‘towards a fully legal, regulated market worth billions of euros’, Europe sits on the precipice of a new wave of capital investment.
Ahead of Cannabis Europa London 2022, taking place on between June 28 -29, BusinessCann spoke to investment giant Casa Verde’s Managing Partner Karan Wadhera about the opportunities Europe presents for North American investors.
Hi Karan, thankyou for joining us. For those who might not know, can you tell us a bit about Casa Verde Capital and the work you do there?
It’s a pleasure to be here, thank you very much for having me. My name is Karan Wadhera, I’m the managing partner at Casa Verde Capital.
We have been active as investors in the cannabis space for over six years now, and we’ve been known to put a lot of emphasis and focus traditionally on a lot of the ancillary technology businesses that support the industry.
We’ve been quite active here in the US, but we’re getting more and more active in Europe, and can really invest across the spectrum.
We believe this is one of the most exciting, important industries in the world, and we feel very fortunate and blessed to be an active part of it
You’ve now made a handful of investments in the European market, Cansativa, Oxford Cannabinoid Technologies and Sanity Group. With the EU in its early stages compared to the more mature US market, what do you think makes a good early investment?
I’d say we are looking for largely the same things no matter which region we are investing in, and because we focus largely on the cannabis industry, everything for the most part is in its earliest stages of iteration.
The US may be a little bit further along, but the reality is this is just such a nascent industry globally, that even though Europe is a little bit more nascent, it doesn’t really change things.
What I would say there is we look really specifically for incredible operators. The reason I double up on an emphasis on that side is because things can change in this industry in a heartbeat, or regulation moves, or there is some scare from a political standpoint.
No matter what happens, whether into a pandemic, what you really need are operators who are nimble and quick and can move with the changing waves of this particular industry. So that’s still where we put a lot of emphasis.
Now obviously as we’ve been looking at Europe, and with some of the investments we’ve made there, we’d love to see some element of traction because that shows that this is not just my fanatic view on what’s going to happen in Europe.
For example with companies like Sanity Group and Cansativa in the German medical market we’ve been able to establish ourselves as one of the leaders, we have real traction, we have real revenue.
We’re incredibly excited about what more we can do once legalisation takes more of a shape if we have more capital at our disposal.
So really a lot of emphasis on the entrepreneurs and some sort of example that you can and you have made traction in the industry is incredibly helpful.
So what you invest in companies based on how they fit into the market as it stands right now, rather than ‘crystal balling’ which companies could be successful if it develops a certain way. Is that a fair assessment?
I’d say that’s a fair assessment. However, some traction is just to show that it’s not all about the crystal ball, as you put it.
But no, we are dreaming alongside these entrepreneurs. Our excitement about Europe, our excitement about the opportunities in that part of the world are due to what we’ve been able to see and witness here in North America. So certainly that is the end game and what we’re really excited about for the future.
To couple that along with some operational chops to say that even in this, let’s say ‘medical only market’ or one with a lot of handcuffs as to what we can do, we’ve already shown some traction, that gives us a lot more confidence and helps us de-risk the investment for our fund.
You mention that the EU market is currently ‘medical only’, I wonder how you see it developing and how this might differ from North American markets?
So I’d say right away one of the most exciting things for us about Europe, even versus what we’ve been seeing here in the US is that a lot of the regulation has been developed at the federal level.
You’re obviously aware of the challenges here in the US where at the federal level, cannabis is still a Schedule 1 narcotic. And at the state level there’s varying sorts of initiatives as to how legal it is in California vs. Massachusetts vs. Colorado, Oregon etc. Every market has its slight nuances, which makes it incredibly complex, which also makes for a lot of opportunity.
The fact that a lot of the developments happening are happening in national governments in Europe is very exciting, and makes it slightly different than what we’re dealing with here.
In terms of how it will develop, I’d say we’re not super concerned about the short term nuances of how things develop.
Everyone, whether it’s in the US or Europe wants to know the timeline, the date. Is it six months? Is it 18 months? Is it three years?
We’re long term structural investors, we’re not as concerned there. Obviously, we don’t want this to be a 20 year story, but we’re long term in nature. So in the short term, what would be probably more relevant to public markets, saying ‘is this gonna happen in three months, or six months or whatever?’ It’s just never been a concern for us.
So I think what we’ll see is very similar to what we saw in the US market. It developed from a medical perspective, and then due to a number of factors, whether it’s access, taxes or revenue, started to see a little bit more of a liberalisation and open up the cannabis markets to a broader audience for recreational or adult use.
I think that’s still the way we’re gonna see things happen in Europe, the big question is always around timing. And while we think there’s a lot of good signals, that things will move quite quickly, it doesn’t change our thesis or our approach, whether things are going to happen in six months or things are going to happen in two years.
Do you think the European market has the ability to develop more quickly because it can use North America as a case study?
I would hope so. I’d say that is a massive advantage that Europe has that obviously the US never did.
Look at California, which on its own is one of the biggest markets in the world. You have multi-year lessons to be learned around how to fix things like licensing ect. I really do believe there’s a lot to learn.
We know from experience that a number of politicians and regulators are visiting the US and Canada to understand more about how they should think about the legislation and what a formal market looks like. I think that is a huge edge.
What I can’t predict again is what the political variances are from country to country. Will there be things outside of reasonable, logical thinking around how a market should be developed? Or will it be based on things that are outside of our control, like which political party wants to leverage.
I would say there’s a lot to be learned, I would hope that it would mean the regulations and the laws move through the system at a quicker pace. But again, it’s hard to make a bet on because a million things can impact the timing.
Are you concerned about the poor performance of cannabis stocks across the EU?
Certainly public markets are a barometer for the entire world, and it gives you a sense of the temperature from an investor appetite perspective. So certainly we keep an eye on everything happening there.
It’s always helpful when things are on a positive trajectory versus the other way. But you need to remember, cannabis stocks are in a particularly odd position.
We recently wrote a letter to a bunch of our investors commenting on what we’re seeing and the reality is, there’s a few things structurally which need to be resolved before we can see the cannabis names fully rebound. While Europe is not great, the US and the Canadian names have not fared that much better.
I’d say first is that there is a lack of long term institutional investors in this space, in the US, in particular, because most of the names that are potentially attractive are listed in Canada. That makes them a little bit harder to access. What you see is a lot of the major stalwart investors are just not part of the cannabis names at all. So that’s a big issue.
The other problem is you don’t have access to a lot of these traditional banking services, and therefore you’re limiting where you can list, I think it’d be a much different story of a lot of these names were listed in the US on your traditional exchanges like the NASDAQ or the or the New York Stock Exchange. That is a big issue as well.
Then remember that especially in the US a lot of these names are suffering because of the tax issue, which basically means you can’t write off anything but the cost of goods sold. So your effective tax rate in a lot of these companies is 80%, that does change things.
But the reality is that the growth prospects for the cannabis analogues, whether it’s CPG, or tobacco or pharma or alcohol is much lower than what we’re seeing in cannabis.
Even though they have higher growth prospects, they’re trading at lagging multiples of those analogue industries, which is just crazy. There’s a huge disconnect there.
Right now there are technical issues which are keeping that arbitrage or that or that gap from resolving, and hopefully that’ll happen soon.
Again we have the fortune to look at things from a multi-year perspective, and not get too rattled by whether the stock prices are, and aside from a couple of companies that have public positions, most of our companies are private and so don’t have to be subject to a lot of that volatility.
What role do you see large investors such as Casa Verde playing in changing the attitude of policy makers and traditional institutions like banks?
That’s a great question. We’d like to think that we have a voice in the industry, and that we can help educate longer term larger institutional investors as to the prospects of cannabis and why they should be paying attention to it.
We feel fortunate that we have a little bit of a track record in doing that on the private side. As I mentioned earlier, a lot of what we did initially was in a lot of these ancillary technology businesses, which your more traditional generalist VCs or private equity firms were more interested in.
So we’ve been conduits to a lot of those names, whether it’s Tiger Global, or Founders Fund and all of these great investors who have invested in some of our businesses, I’d say it was a multi-year process in getting them comfortable with what we’ve been doing.
I think that process never ends. I spend a lot of my time educating public investors as to why we’re excited and what names they should be focusing on. Hopefully, that will start to bear fruit.
I’d say in Europe it’s even more interesting because a lot of those structural issues I was mentioning are not there, especially access to banking or some of the scheduling and tax issues. In Europe, I think there’s potentially an even bigger opportunity to get people excited.
But remember that when we’re in the environment we’re in today, which is just generally risk off, and a lot of people are selling indiscriminately, everyone suffers, and the names which are in more emerging industries like cannabis suffer even more.
So I do think this is a short term issue, it’s technical in nature. Unfortunately in the public markets you don’t necessarily get a lot of credit for your five year plan, it’s a lot more about executing on a quarterly basis.
Given the European opportunity, are we set to see more large North American investors shift their focus across the Atlantic?
I wouldn’t call it a dramatic shift where investors are now stopping their focus in the US and putting all their attention to Europe, I don’t think that’s the case. I think it’s additive in nature.
What I’m hoping to see, and which we haven’t seen a lot of yet, is a lot of more emerging investors in Europe getting active and excited about their own markets. I’d say that’s starting to happen, and it’s a little bit better than it was a few years ago, but it’s still nowhere near what has transpired here in the US.
I think that’s probably what we’re most excited about. Again, we have this fortunate position of having seen how things work out here and understanding the dynamics and basically getting the same opportunity we would have had six or seven years ago in the US now in Europe.
That’s the simplest way for me to break down our thesis and why we’re so excited. But I wouldn’t say necessarily that the attention is leaving the US and moving to Europe.
Certainly Europe is getting more and more exciting. What I’m very hopeful for is that a lot of European investors will start to wake up to the opportunities in their own backyard and start to get more active.
It becomes hard in this moment and environment. I can tell you just from getting my own investors’ attention on cannabis, when all these growth technology names in the US and the public markets are down 60-70%, it’s hard to get your attention.
That is always what cannabis has competed with, and we go through waves. Many times over the course of the last few years there’s been excitement about cannabis, and then it quickly gets replaced with cryptocurrency or something else. I think that’s what we always have to battle with. But eventually, I think it will prevail and will get their attention as to what is developing in our space.
So far your investments in the EU have focused on Germany and the UK, is there anywhere else in Europe you have your eye on?
We’ve also made a small investment in Portugal as well, we think that can become a really interesting market both from a supply side and from a consumer perspective.
We’re tracking what’s happening in the UK, I’d say it’s a little bit further behind than markets like Germany, but again one that can be incredibly exciting. And there’s a lot of great, signalling from various parties and the Mayor of London.
We’re closely tracking other countries that are further behind, but I believe there needs to be that catalyst. That’s what we saw here in the US and it can happen very quickly.
I think people forget that the entire excitement around the East Coast of the US, markets like New York and New Jersey and Connecticut and Florida, etc. While they were all bubbling COVID really accelerated that entire situation.
So similarly in Europe once you start to see the numbers really come out of markets like Germany, I think it’s really going to force other countries to quickly change their policies and accelerate a lot of what’s happening.
The numbers are just so incredible, half of Europeans I believe support adult use, I think, something like 25 or 30% are interested in trying it.
The core population, if you look at Europe as a region, is almost one and a half times larger than the US and Canada combined. So, it really is something that people need to be paying attention to, which is why we’re already starting to make our core positions and build them around the region.
You mentioned your struggle in ‘getting investors excited about cannabis’, how important is having someone like Snoop Dog onboard to solving this issue?
Yeah I think it’s been incredibly helpful, and I hope it’s been not only helpful to us but to the industry at large. Just by having him involved brings a lot more attention and eyeballs to things.
Snoop is someone I’ve known now for over 20 years. I started working with him when I was in college, and we’ve had a long-standing relationship together, which was around these new emerging opportunities.
In cannabis I think that a lot of what we’re able to do is leverage his brand into interesting opportunities and businesses and open a larger population’s eyes as to what’s happening in the space.
So, I think you can never discount how helpful he is. He’s been an active proponent for cannabis for 30 plus years now and he’s been doing it at the highest level.
As we sit here today in May of 2022, he’s probably never been more of an important figure than he has been. So I think he’s a great advocate for the space, he’s obviously incredibly passionate about it and we feel very fortunate for him to be our partner and friend for so many years. Hopefully, you’ll be seeing a lot more of him in Europe as well.