Cannabis has a been a huge growth as an industry in the past few years, but it is a complicated asset class with uncertainty due to government regulations and there have been booms and busts. It is important to find quality partners who have experience navigating the difficult regulatory hurdles that come with this type of investing. In this episode, Jim Pfeifer talks with Jordan Tritt, the CEO and co-founder of the Panther Group, as Jordan sheds light on the cannabis space and the real estate and operations investment opportunities. To hear more of Jordan’s wisdom on investing in cannabis, tune in to this episode now!
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The Panther Group: Investing In Cannabis With Jordan Tritt
I’m excited to have Jordan Tritt with us. He’s the CEO and Cofounder of the Panther Group. Jordan serves as principal and day-to-day manager of two cannabis venture funds and has been investing in the cannabis space since 2014, deploying $30 million across 50 companies. Jordan, welcome to the show.
Thanks a lot, Jim. I’m excited to be here.
I’m excited to talk about this topic as well because I have to admit, I don’t know much about investing in cannabis. I’ve done a couple of lending deals. They both turned out horribly. They were some of my first syndications. They were huge mistakes. I’m a little bit cautious. The way we start here is you could tell us about your journey. How did you get into the cannabis space? What’s your financial journey? How did you get to become a syndicator-operator in this space? If you can give us an overview, that’s a great place to start.
My life starts in Atlanta, Georgia. I went to the University of Michigan for undergraduate business school and also received my Master’s in Accounting. I started in commercial real estate a couple of years. I went through the financial and real estate crisis back in 2008, and then pivoted to early-stage companies, utilizing my background in accounting and finance to help a number of startups raise about $30 million in debt and equity as a senior financial and accounting professional within the companies.
In 2014, I joined my father entered the cannabis space as a limited partner in his fund, and then came into the space full-time in late ’16. We launched together with two other partners and our first venture fund in early 2017 called the Panther Opportunity Fund. We raised $8 million and deployed it across sixteen companies in the cannabis space.
In 2020, I started along with my cofounder, Scott Berman, the Panther Group, which is an advisory firm that helps cannabis companies raise capital and also with growth marketing and business improvement solutions. That’s how I got into the advisory side. We continued to raise and deploy capital. We raised another fund in 2021 called the Panther Microfund. We are continuing to actively deploy now, as well as advise companies in the areas that I mentioned.
Thank you very much. That’s a good summary. I am going to skip over the part about where you went to college because I live in Columbus, Ohio. We won’t have a friendly conversation about that.
We’re a couple of weeks away from the big game.
One of us will be happy and one will be sad. No offense but I’m hoping I’m on the happy side.
I understand.
We will let it rest there. I want to get back to marijuana. Why cannabis? What’s the deal with cannabis? Why are you investing in cannabis? What’s the overview and cannabis 101 of the industry?
I come from a very entrepreneurial family. I mentioned my father in the intro. He has been a physician for 40 years but also has taken a company public, and was chairman-CEO for five years. He has been doing a lot of early-stage investing since 2001. This idea of getting into a space where I could make my mark and come full-bore with the skillsets, relationships, and experiences I had was something that resonated with me when I went and first got exposed to the industry in 2016.
In a lot of ways, it’s a lot of early-stage companies, which I have got a lot of experience with. It’s an industry that’s growing still somewhere between 20% and 30% a year. That has been going on for eight straight years. It certainly got a lot of tailwinds behind it. Personally, I believe in the plant. I’ve seen both firsthand and secondhand a lot of benefits that come from it from a medicinal standpoint. I’ve always been looking for a certain industry where I can make my mark in. Cannabis is one where I saw huge opportunities and the natural evolution of my father getting into it.
[bctt tweet=”A lot of benefits come from cannabis from a medicinal standpoint.” via=”no”]
I went out in 2016 to a big cannabis conference. I frankly fell in love with the people. Everyone comes from different backgrounds for the most part. Most people have been doing something else, and then now have taken their experience and are applying it to the opportunities within the cannabis space. I liked that idea. It’s a very collaborative industry. I’m passionate about collaboration and working together. It’s a very open-minded group of people which I like. It continues to present a lot of opportunities and challenges as well, but that’s part of the fun of being an entrepreneur.
There have been a lot of states that have decriminalized marijuana recreationally and/or medicinally. It seemed like that was a wave coming. In this latest election, it seemed like there were more states that said no than yes. At the same time, the current administration made some changes to their outlook and wiped some records clean. Can you talk about that part of it and how states are recognizing it and passing laws? It’s still against the law federally, but the government has made some changes to that. Can you talk about the government and the regulations around it a little bit?
As a quick history lesson, the first state to legalize cannabis for medical was California back in 1996. Not a lot happened between 1996 and then between ’12 and ’14 when states like Alaska, Colorado, Oregon, and Washington all passed adult use efforts. When I say adult use, recreational is sometimes used for that. You have the adult use and the medical side. At this point, after the election, there are 20 or so states that have passed adult use, and then another 17 or 18 that have passed medical.
At this point, there are 38 or close to 40 states that have some sort of cannabis regulation that has either been passed or will be passed pretty much split between medical and adult use. That trend has continued to evolve every election cycle and sometimes in between election cycles. I’m not a political expert but I’ve started to understand that there are multiple ways that these laws can be passed, whether it’s through ballot initiatives or sometimes governors can come in and establish rules.
There are multiple constituents involved that can influence laws getting set up in each of these states. As you pointed out, there is a clear dichotomy between the states and the federal government’s stance. Dating back to the 1970s or so, cannabis became a Schedule I drug, which by definition says it has no medical efficacy and is considered something that can be abused. From a federal standpoint now, that’s where it sits.
You mentioned President Biden. He made the announcements about pardoning at the federal level cannabis convictions, and recommended at the state level that the government look at pardoning at the state level. He also initiated or recommended a review to be started around whether cannabis should be a Schedule I drug, a lower schedule, be descheduled completely, or be legalized. Believe it or not, that had been in the industry for 6 or 7 years.
That’s the first piece of good news or movement that’s happened at the federal level in 6 or 7 years. Everything that has been driving the growth of this industry has been at the state level. It’s gotten it from zero in legal sales in 2012 to now more than $30 billion in legal, medical, and adult use sales across the country, which is translated into billions of dollars of tax revenue for the states, which is one of the motivations for these states to pass. It is another revenue source.
What’s the total market then? I assume there are still people buying it illegally. What’s the whole market if they were to legalize it? I’m sure the black market wouldn’t go away the next day but let’s assume it would. What do you think is the total market?
We don’t know but it’s probably somewhere around $100 billion as we sit now. Given where the acceptance of the country has gone, you now have about 2/3 of the country’s population that’s in favor of full adult use legalization at the federal level. It’s closer to 90% that would approve it for medical use. You’ve got a lot of support. That number from an adult use standpoint years ago was under 50%. You’ve gone from under 50% to now 2/3 over the course of ten years.
It is something that is becoming more accepted. Because of that, the market size over time will naturally grow as the stigma changes and as people start to get exposed to cannabis and use it as an alternative to alcohol and opioids. There are other cannabinoids. I don’t want to get too detailed but the point is there are a number of different prescription drugs that could also be potential substitutes over time as we do research and understand the medical efficacy of the cannabis plant and different derivations of it.
How do these investments work, being that it’s technically illegal at the federal level? I don’t know if it’s still the case but several years ago, banking was a big issue. It had to be all cash because banks wouldn’t allow the businesses to operate. They wouldn’t fund them or allow them to deposit money and all that. Can you talk about how it could be illegal federally and legal on the state level, and then how the banking and all that financial stuff is working out?
Even the federal illegality of it is a little bit confusing because you have something in a tax code called 280E, which is a section of the IRS tax code. It says that if you are engaging in federally illegal activity but you have revenue being generated from that illegal activity, you are responsible for paying taxes on that. This dates back to Al Capone and some of his things.
There are disadvantages to that tax code, which says you have to pay taxes but in a normal business, you make $100. Maybe your cost of goods sold is $50, and then you’ve got $20 of sales and marketing general administrative expenses. You’re left with $30. That’s your taxable income. In cannabis, in the same $100, all you can deduct is $50 off the cost of goods. Your taxable income would be $50 even if as a business, you’ve got another $50 going out the door for sales and marketing.
Within the federal setup of it, it’s already this confusing aspect because there’s an acknowledgment that you’ve got something that’s illegal from a federal perspective but also at the same time, they’re expecting you to be paying taxes. Not only that, they have disadvantaged people by operating in this federally illegal industry.
I’m not a political expert but the federal government has limited resources. They have taken the stance that even though they are not allowing this to be approved at the federal level, they’re taking a hands-off approach and saying, “If you want to legalize this at the state level, we’re not going to use any resources to go and prosecute anyone who’s operating.”
Back in 2016 when Jeff Sessions was the attorney general, for a short period of time, he threatened that he was going to start applying pressure and pushing on the states to prosecute legally-operating cannabis businesses. It ended up going nowhere because states are behind this either because of maybe some social-political reasons or because of economic reasons, taxes and jobs.
They said, “We want to allow this in our state. We want it to be a source of revenue. Instead of it being on the illicit side, we want to bring it into the regulated side and make sure that these products are being tested.” There are motivations from the state level why they want to do this. You have the federal level that’s taken this hands-off approach.
That’s what allowed the states to continue to operate. It does get confusing because, on the banking side, a lot of the bigger banks that we know of are federally chartered. The banks that are serving the industry primarily are state banks and credit unions that are not at the federal level because at the federal level, in general, you have this usual documentation and rules that says, “You can’t engage in any activity that is illegal at the federal level.”
Bank charters and a lot of different institutions have that standard approach that says, “You can’t engage in anything at the federal level that’s illegal.” It sits at that threshold of being federally illegal but legal at the state level. I wish I had an easy and clear answer to it but there is not. It has been part of the challenge of the space because it’s not legal at the federal level.
One of the impacts is there’s a lot of cash because it’s more challenging. Some of these state banks and credit unions can’t handle the volume. You got those challenges. You also have the fact that as a cannabis business, you have to set up operations in each individual state. You can’t just have a central West and East location, produce products, and ship them from there. You cannot move any cannabis products across state lines because of federal illegality.
You can only keep that product within the borders of the state, which creates its own challenges as well. There are a lot of individual impacts that all add up to it being challenging. You’ve got this situation where you’ve got an industry that’s growing at 30%, yet because of this federal-state situation, it does end up being fairly challenging and limits the resources that companies have available to grow.
When you invest in some kind of cannabis operation, is one of the risks that you need to evaluate the danger that perhaps a new administration will come in and try to crack down on the states for this illegal activity that is still illegal federally?
I mentioned Jeff Sessions. It was more relevant six years ago. This is my opinion. We’re now up to 40 states. As more states passed it, it’s harder for the federal government to come and squash this. Using the analogy of the toothpaste out of the tube, I felt like that was the case in 2016. There was a little bit of a pause when Jeff Sessions took over and said, “We’re going to start treating the states differently.” Quickly, the states were like, “We’re not participating.” In order for what Sessions was trying to do to happen, he was going to need support from the state’s prosecution, police, and all that.
Look at what President Biden did. He’s looking to divert fewer resources toward prosecuting people who are consuming or possessing cannabis. More and more, it becomes evident that this is an inevitability. How quickly it happens and what we can do to impact the speed are more of the question that is talked about within the industry than, “What happens if something at the federal level will derail it all?”
When we’re talking about investment opportunities, there are a lot of public stocks that are traded. There’s also private equity but we’re more interested in the private equity side. What’s the difference between opportunity and return? I haven’t followed it widely but a few years ago, the public stocks did well, and then all of a sudden they didn’t. The industry is growing but the publicly traded entities aren’t doing very well. Those are six questions in one, but can you talk about the opportunities, private versus public?
As you pointed out, both are available for investment. The landscape of the public is that the vast majority of companies operating in the cannabis space are private. It’s 95%-plus or maybe even more. Few as a whole are on the public market. If you’re looking to get exposure to the space, most of the companies that are operating are private. The reason is because of the federal illegality, if you’re a plant-touching business or if you touch cannabis products, you can’t list on any US exchange. That’s not available.
If you list on the exchanges that are available like the Canadian Securities Exchange, there’s much less institutional support for stocks. The only people buying the stocks are retail investors. That’s not enough support and capital for these companies at the public level. The challenge for public companies is a lot of times, the main reason you go public is to access the public capital markets. That’s not a benefit in the cannabis space yet. Therefore, most companies continue to operate on a private basis.
Plus, it’s challenging enough to run a cannabis business. You also have that full-time job of running a public company, stock support, and all that. Most companies have opted to stay private. In terms of what’s happened in the public market, I agree with you. There was a lot of excitement and enthusiasm in the 2014 and 2015 timeframe after the states on the West Coast legalized. You started to see the green wave shifting to markets in the middle of the country like Michigan, Illinois, Ohio, and Pennsylvania or states that were passing medical, but still were moving forward and had big populations.
There was an exuberance there. Unfortunately, this also was in the Canadian market. Both the Canadian companies as well as the US public companies have largely underperformed relative to expectations, proformas, and that sort of thing. What you’ve had is a limited investor base that now looked at this industry and said, “What’s going on here?” A lot of these companies aren’t meeting their expectations. Their financial performance is poor. They don’t have a lot of availability of capital coming. There has been this withdrawal of public support. It’s a supply-and-demand thing.
The price of these stocks has gone down significantly to probably all-time lows. I’ll put a quick plug for why now is a great time to come into this space. It’s relative to history because of what I described. There’s a lot of exuberance. That exuberance as a whole has a little bit been taken out of space. There’s this opportunity now to come in for valuations partially because of the macroeconomic times but also because of the industry. Valuations have never been any lower. Not only that, relative to the strength of a lot of these companies, that valuation versus risk piece of it is in favor of investors coming in now.
What are the opportunities in the private equity space for investors? Mostly, we’re investing in real estate types of syndications. Are these structured as syndications? Are these something different? Is there real estate involved? Is it just the operating businesses? Can you talk about the different sectors where there are opportunities and what those look like?
I’ll mention how we have set up because it’s a good indication of the industry at large. One opportunity is to invest in private venture capital or private equity funds. These are pools of capital that are going into diversifying investment across a number of companies. You can come individually and be on the cap table as an individual investor within these private companies. As you pointed out, there is a tremendous opportunity on the secure debt real estate side of the industry.
We have talked about banks. You’ve got some banks that will allow you to deposit into it. Of those, very few lend. From a debt perspective, the lending is coming from high-net-worth individuals, family offices, private investment funds, and all private non-institutional. Because of supply and demand, not a lot of capital is being brought into the space. You can get pretty high capital returns on the debt side. You have the aspect of being secured. In real estate, there are all kinds of real estate investors who know how to value real estate.
It’s a question, “We understand what this building or this asset is worth. What’s our likelihood? Let’s understand the strength of the underlying business.” That’s where we as a fund and advisory firm come in and help these underlying companies so that if an investor were to come in and invest in real estate, they want to make sure that the tenant is going to be able to continue to pay the service, the debt, and the rent. That requires sometimes support from other aspects of what we can provide.
[bctt tweet=”If an investor were to come in and invest in the real estate, they want to make sure that the tenant will be able to continue to pay the service, the debt, and the rent.” via=”no”]
It could be debt. It could be equity. Are they set up in a familiar form to those of us that invest in syndications? Are these syndicated deals? Are these securities?
The biggest difference that you would see relative to other investment classes or asset classes is that the tenants are licensed operators. They’re getting their licenses issued, whether it’s a retail license, a cultivation license, or a distribution license. All that is happening at the state level. As I mentioned earlier, there’s the 280E. The prohibitive taxation that I mentioned only applies to licensed cannabis businesses.
Oftentimes, when you’re talking about a deal where you have real estate involved and then a licensed operator, you will have multiple investments going on. You will set up the real estate as its own LLC or thing where you can come into that. That’s separate from the licensed business. You then have a licensed operating business. It’s a little bit of the structure of the number of entities involved, which partially has a legal ramification and also a tax reasoning for how that’s set up. Aside from that, you would be a traditional syndication or investment opportunity.
We have a number of REITs. For instance, I have been in the single-tenant net lease area of retail and have seen the opportunities to come into cannabis. Instead of a 7% or 8% cap, you can buy this on a 12% or 13% cap. You’re buying at a much higher yield. The goal is over time for prices to condense. You get your cash-on-cash yield, plus some bumps when the pricing for these assets normalizes. Maybe as capital comes in, it’s more bountiful.
How are investors taxed? I imagine if it’s just the real estate component, then you’re taxed normally like it’s a normal real estate deal, but if you’re on the side of the operations, are you taxed normally like you would be investing in a business? Do some of those rules that increase the tax on the business flow down to the investor?
They don’t flow down to the investor. When you talk about the risk standpoint, 6 or 7 years ago, when people were considering for the first time investing in licensed cannabis businesses that aren’t legal at the federal level, there was a concern, “Am I going to go to jail for being an investor in this business?” What we have seen over time is that there are enough layers of separation. For investors who invest in an LLC who is then investing in a licensed company, there’s enough of a break. The type of impact we’re talking about only hits at the corporate level and doesn’t ever make its way down to the individual investor level.
We have our way of doing things. We vet sponsors. That’s the biggest part of it. We analyze the deal and look at different asset classes and markets. If we’re looking at a cannabis investment, how do we vet the sponsor? What do we ask the sponsor? How do we analyze an actual deal and figure out, “This is a good thing to invest in?“
I’m sure you’ve got experience in this but my answer is this. Given the nuances, how quickly the space evolves, and the different aspects of it, I highly recommend finding a sponsor that’s got a track record and that has been in the industry for a while. There’s so much complexity to try to figure this out, “I’m going to make one investment and hope that it goes well.” You made two investments. Both went poorly and now, that impacts your desire to come into the space.
We feel strongly that if you’re going to come into the space, your best approach is to go with an experienced operator that has got a track record in the space and who you can vet through other people and assess, “Is this sponsor someone that I can trust?” The best thing to do is, given the nuances, to let the sponsor deploy capital and use your judgment and gut feeling. Largely, in terms of making that call, “Does this investment make sense?” It’s one more so than ever would be prudent to go through people who are full-time in the space.
[bctt tweet=”If you’re coming into the cannabis space, your best approach is to go with an experienced operator with a track record in the space that you can vet through other people.” via=”no”]
As far as the actual deal, do you rely on the sponsor? Do you dig in and look at the metrics of the deal, cap rates, IRRs, and things like that? You have to figure out, “Is this sponsor good at what they do?” If they are, then you ride with them.
It’s both. When we’re looking at real estate deals, there’s the real estate aspect. You want to choose someone who’s an expert and a great sponsor, but then there’s the tenant who needs to make sure that if they’re not solid in this deal itself even though the real estate is good, the ultimate returns are going to be challenged. It comes to both understanding the sponsor, the deal, and the terms. Where is that relative to what the market is doing now? How are you going to ensure that this continues to be a profitable investment? That to me requires, given the challenges of the space, ongoing support, advice, and resources. I look at it holistically from the sponsor to the deal and the actual underlying operator.
Are there differences in states? You’re going to invest in a state where it’s legal but are there places to avoid? I’m not interested in California. That’s one of the places where I lost money. In Oregon, that deal is also struggling. The West Coast is not the place to do it. Do you invest in Midwest or South? What are the differences? Are there places to avoid?
It’s a great point. Each state has evolved at its own pace. Colorado for the cannabis industry is an extremely mature state at this point. The volatility and pricing are there but they’re not quite as dramatic as in states like Massachusetts, Michigan or Oklahoma where you’ve seen 2021 pricing go down from the raw materials’ cultivation standpoint, as well as the end product to the consumer. Each of these states is in its own life cycle.
You mentioned California. In terms of getting in with a new operator in California wouldn’t make sense at this point. What you see in California is consolidation. You’ve got more established operators that have two stores. Now, because of what transpired in California like the investment that you were in, you have assets and operators that can be acquired for pennies or quarters on the dollar. In California, there’s a lot of consolidation happening.
You look at states like New York that are coming on. I am in Georgia, Alabama, Mississippi, and South Carolina. These states are coming on. What we know is people all over the country consume cannabis. They consume it illegally in a lot of states, but if you set it up, the demand is going to be there. What you’ve seen with newer states on the East Coast primarily is they have gone to a much more limited license model, whereas in California, there are hundreds of licenses. In Georgia, there are six.
In Massachusetts, there are 300 or maybe even fewer. There are much fewer licenses in a lot of the newer states, which helps control that aspect of you’ve got a lot of operators coming in, then within a couple of years, they can’t make it. The governors and regulators recognize and see what happened in some of those other states. They are largely learning from it and scaling up over time so that they don’t create another scenario where you’ve got a lot of losses in companies that don’t make it.
It’s a fascinating industry. We’re up against the time here. The last question I always ask on the show is, what’s a great podcast that you like to listen to? It can be related to real estate or cannabis or just for fun.
You told me I was supposed to answer this and I forgot. I’m going to do the lamest thing possible and say Joint Ventures, which is the podcast that we started. I listened to it. We just launched. That’s one. There is one in the cannabis space called Seed to CEO, which is a very good podcast. There are other ones as well that are escaping me. I should have written it down but those are a couple within the cannabis space that could be good to listen to and learn from.
If people want to get in touch with you and learn more about cannabis or your operations, what’s the best way to do that?
Visit ThePantherGroup.co. You can email me at Jordan@ThePantherGroup.co or google Panther Group, go to our website, and take a look at what we’ve got going on. I’m always happy to educate and teach people about what’s going on in the cannabis space. It’s a passion of ours.
Thank you very much for being on. This was not the normal episode for us but it was certainly interesting. I learned a lot. Thank you very much.
Thanks a lot for having me, Jim.
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That was definitely not the normal episode we do, but it was super interesting. It’s a new asset class and cannabis use is growing fast and states are allowing it. The federal government is loosening restrictions. As investors, we need to look at everything and the new stuff. Sometimes, it’s super volatile. As I said, I was in two deals and as a lender. One didn’t work out at all. I lost money, and the other one is delay, delay, delay. Now it’s not even a cannabis investment anymore. I’m not sure what it is. Those are some of my earlier investments. I would not do those again.
New asset class, I definitely want to look into and see if there are some opportunities here. Part of it is me chasing the shiny object, but also you got to seek returns. Things are going on in the economy right now. Everything is uncertain. You have this new asset class or new-ish asset class. I think it makes sense to dig into it a little bit. The opportunity is now. Not only is it growing fast, but valuations are down because of the economy. Because of what’s happened in the public markets, people are down on cannabis investments. That’s a perfect time to buy.
Also, there isn’t much lending because the banks can’t lend, so they need private money. Private money lending can be very lucrative. It wasn’t for me on my first two, but make smarter decisions than I did at the beginning with operators who know what they’re doing. I did it with an operator who was a single-family home turnkey guy. I don’t know why I decided I was going to throw my lot in with him for cannabis. It was because it was a while ago when cannabis was the rage, and I was just looking for a cannabis investment rather than looking for a good operator. That will change. The next time I look into this, I’m going to go with quality operators. That’s one thing to look at.
You can invest in the real estate side or the operations side or both. Those are some of the things to look at. The sponsor probably matters more here than on any type of investment that we look at because we’re not going to be able to evaluate these deals exactly the way we would other deals because we don’t know enough about cannabis and the operations in the particular states.
You’re relying on an experienced operator with a track record. I would not go near anyone who doesn’t have experience and a good track record. I learned my lesson there. This was super interesting to me. We’ll see where it goes. We’re going to keep track of Panther and see what they’re doing and see if there’s anything that we’re comfortable enough investing with. That’s all we have for this time. We’ll see you next time in the left field.
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About Jordan Tritt
Jordan Tritt is the CEO and Co-Founder of the Panther Group. Jordan serves as Principal and day-to-day manager of two cannabis venture funds and has been investing in the cannabis space since 2014, deploying $30 million across 50 companies. Prior to entering the cannabis industry, Jordan also worked as the CFO, VP of Finance, and Controller for high-growth private companies and venture funds—raising over $30 million.
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