Privateer Holdings is a private equity investment firm focused on the marijuana industry, where the line between good investment and illegality can be hazy.

But Privateer officials see an industry full of clear investment plays, citing as just one example the marijuana information portal had 180,000 visits per month and no revenue before Privateer Holdings acquired it in 2011.

“Leafly is one of our four portfolio companies,” said Christian Groh, Privateer’s chief operating officer. “It’s a clean, mainstream website and app that allows consumers and patients to read, review and research dispensaries as well as strains by effect.”

Today, more than 3.5 million people visit the popular portal and its mobile apps to compare cannabis strains and dispensaries.

“We used four different components to purchase Leafly, including a small out-of-pocket cash payment up front, employment contracts, options and a revenue earn-out for the founders,” said Michael Blue, CFO of Privateer Holdings. “That’s how we pay for most of our acquisitions.”

CEO Brendan Kennedy founded Privateer Holdings in 2011 with Blue and their longtime friend Groh. The three founders bring backgrounds in investment banking, private equity and operations.

“Our investors include ranchers in Texas, farmers in Kansas and finance professionals in New York,” said Kennedy.
Securing funding for cannabis-related start-ups is no easy task because the plant-based drug is still illegal recreationally in most of the U.S.

“The risks include lack of clarity on the regulatory front because the rules can change,” said Alan Brochstein, founder of 420 Investor, a cannabis investment group. “Another point is that people with significant expertise may have gained it by operating illegally, which can create some potential ethical concerns.”

Prior to entering the marijuana space, Privateer’s founders were successful in the venture capital arena in the late 1990s.
“They are Silicon Valley people who were affiliated with Silicon Valley Bank,” Brochstein told Private Wealth.

Silicon Valley Bank is a high-tech commercial financial institution that has helped fund more than 30,000 start-ups.

Although the firm’s mission is to be a private equity firm that succeeds in the cannabis space, Privateer is structured as a holding company.

“This gives us the flexibility to acquire companies, to make majority controlling interest investments and to incubate companies on our own,” said Blue.

Privateer Holdings raised $7 million in Series A capital last year and has officially launched Series B financing to raise $50 million.

“This round we are talking to institutional investors,” said Groh. “They are top-tier venture firms that are brand names who are very interested.”

In addition to Leafly, Privateer Holdings’ cannabis portfolio contains two start-ups and one subsidiary, but no penny stocks.

“We try to avoid them because most don’t have revenue,” Groh said. “With the SEC coming out against them saying that cannabis penny stocks are wrought with fraud, we don’t think they are good for legalization of the industry over time.”
Other holdings include Tilray, a marijuana producer in a $20 million facility licensed by Health Canada under the Marihuana for Medical Purposes Regulations (MMPR) enacted in Canada last year.

“It’s the largest legal [growth] facility in the world, and we are only one of 12 licensed producers in Canada,” said Groh.
Located in Nanaimo, British Columbia, on Vancouver Island, Tilray is a 60,000-square-foot facility that expects to produce 15,000 pounds of medical grade cannabis this year.

 “Canadian licensed producers and even some applicants under MMPR have been great private equity plays thus far,” said Brochstein. “While it’s difficult to know if the companies will be winners in the long term, providing capital to help expand capacity or complete necessary security measures can reap high short-term returns.”

In fact, many U.S. states are limiting dispensary and cultivation licenses, creating huge barriers to entry and boosting potential returns.

“The opportunity is that there is tremendous white space in the cannabis industry,” Brochstein said. “Brands don’t exist and there is little threat of large companies competing as long as cannabis remains illegal at the federal level.”