Investing in “Alternative” Alternative Investments: Cannabis & Theater

One session at EisnerAmper’s 11th Annual Private Wealth & Family Office Summit was a continuation of a “miniseries” on nonconventional and cutting-edge alternative investments for families to consider in their portfolio.  In the past, the Summit has focused on investing in sports franchises and artwork as well as direct investing. This session tackled two diverse topics: the first panel discussed investing in cannabis and the second panel focused on investing in theater.

The panel on investing in cannabis was moderated by Rick Frimmer, EisnerAmper’s national leader of the Cannabis and Hemp Group. Speakers Heather Quinn Malloy of TerraAscend and Michael Schwamm of Duane Morris LLP shared their insights and perspectives on the current climate both from an investment and legal perspective.  There are unique challenges in this industry because 33 states have legalized cannabis for various uses (medical, recreational, etc.) while the federal government has not.  Much of the capital in the cannabis industry currently comes from Canadian sources, even though most of the profitability is in the U.S. markets.  Another unique challenge because of the legality issues is that product must be grown and sold in the same state because at this point it is not allowed to cross state lines.  However, the formula and brand can be brought from one state to another, just not production.  Each state has its own markets, California being one of the first.  The California market for cannabis was developed from a place of caring as a response to the AIDS crisis.  The state had a head start in distribution but continues to only allow cannabis for medical use.  Pennsylvania and other east coast state markets have limited licenses to produce and sell product.  When looking to invest in a company involved in the cannabis industry, investors need to consider whether it is a retail or pharmaceutical investment, and whether the positions are defensible for the formula and brands.  Most cannabis companies are built to sell and the intention is not to have the business passed down to future generations.  A separate but related developing market is the market for CBD.  There are less issues in the CBD space because there are not as many challenges with legality.  Additionally, many believe that current wellness and skincare providers (Neutrogena, Oil of Olay, etc.) will start adding CBD to products because they have already established distribution channels.  Manufacturers and retailers are still waiting for the FDA to respond on how they are going to treat cannabis and CBD.  It is unclear whether CBD actually does anything because there have not really been sufficient research studies documenting the benefits of CBD.  Once the challenges with the legality are addressed, investment activity will flow in both the recreational and medical use cannabis products.

The second panel was moderated by James Jacaruso, a member of EisnerAmper’s Athletes and Entertainers Group and featured Tony-award winning producer Jordan Roth, president of Jujamcyn Theaters, who explained the unique challenges and considerations of investing in a high-risk investment such as theater.  All productions start with lead producers, who then have co-producers, who then go out to investors to raise capital.  None of these offers are public, it is more about ‘who you know.’  Both groups (producers and investors) want to find each other; however, no open markets exist.  Once an investor is part of the Broadway landscape, then they get invitations for future investments.  The hope is that the investors choose a show that they love and believe in.  Investing in a show is a super high risk, so part of the process should be that you helped a show that you love and believe in get produced – because you have to assume that you will never see this money again when making the investment.  Investors who lose all their money say it’s the best thing they’ve ever done because they helped out with a project that was dear to them, and even though it did not work out, they have no regrets.  Jordan also emphasized that investing in a show that you don’t love but you think will succeed is a mistake.  He says that investors must have respect for the audience, so if you don’t love the show, why would they?  In terms of recouping investment, it’s unique in the theater business because there is no product unless you keep making it.  Over the weeks, the show will be paying back the investors assuming that it is operating at a profit.  The house is the scarce resource in the theater business.  There are more theaters than there are shows.  An indicator of the health of the industry is the pipeline.  At this moment, the industry is very successful as there are many shows and theaters don’t stay unoccupied for long.  As time goes on, the industry is expanding the boundaries of who is interested in shows, continuously growing the demand for theater, and as a result the audience.

Overall, both types of investments are high-risk but also high-reward.  The similarity between these two industries is that there is an element of believing in the brand or the show that is required for people to make the investment.  Unlike other markets, investors who put their money into cannabis or theater don’t necessarily have the same expectation of returns.  These sessions were interesting and engaging, providing a different perspective to both seasoned and amateur prospective investors.