Private Capital Eyes Hemp Investment Bounty

The Deal

By Steve Gelsi

2 January 2019

For a glimpse into the future of CBD deal-making after the U.S. Farm Bill legalized industrial hemp, look no further than LiveWell Canada Inc.

In the waning weeks of 2018 alone, the producer of cannabidiol (CBD) inked a merger with Montana-based Vitality CBD Natural Health Products Inc. to expand its footprint into the U.S. It purchased Acenzia Inc., a developer of natural health products, for $20 million. It also announced a deal to supply CBD to Tilray Inc. (TLRY), the cannabis company backed by private equity firm Privateer Holdings Inc.

Ottawa-based LiveWell Canada, which has declared 2019 as the year of hemp, pulled all this off in a flurry of action, with plenty more maneuvers planned to raise capital and bulk up its business on deck for the new year.

"You're just starting to see the development of an addressable marketplace that'll rely on a number of forms of capital," David Rendimonti, CEO of LiveWell, told The Deal. "Debt will be instrumental to build our facilities and private capital will play a role in this area. Certainly, in new business development, we'll look to partner with public or private companies."

Dealmakers from the public and private sector have hailed the Dec. 20 signing of the U.S. Farm Bill by President Donald Trump as instrumental to their investment plans because the measure legalized the use of hemp for the first time in more than 50 years. The law will pave the way for hemp farmers to get crop insurance, obtain loans and grants and write off business expenses on their taxes since hemp no longer appears on the list of federally banned controlled substances. While hemp is used as an industrial fiber and for many other products, it's also the parent of CBD, an oil extract with no psychoactive properties.

"You will certainly continue to see inflows from private equity and institutional investors as they recognize the enormous growth opportunity in CBD," said Joe Lusardi, CEO of Curaleaf Holdings Inc., a U.S.based cannabis grower and retailer that trades stock on the Canadian Securities Exchange.

The Brightfield Group, a Chicago-based research firm that focuses on cannabis, estimates that the legal CBD could surpass $20 billion within four years. CBD is seen as a health-boosting ingredient in a variety of products.

"Consumers across the spectrum, from pet owners to chronic pain patients to glam users, will be able to learn about, understand, accept and more easily access CBD products," The Brightfield Group said recently. "Research, including human trials, will be better financed and broader in scope. Mainstream consumer packaged goods companies will set themselves up to enter the space with scalable nutritional supplement lines, CBD-infused food and beverages, cosmetics, topicals or other products."

The firm projects the U.S. Food and Drug Administration will drive CBD growth by approving hemp-based products within 18 to 24 months.

To be sure, private equity and venture capital has not played a major role in the agriculture business in general. The sector isn't even listed among the 10 investing business types for LPs in the most recent Coller Capital Winter Barometer, for example. But private capital pros do play a big part in the healthcare, pharmaceutical and consumer product industries -- all of which will be affected by CBD as an ingredient. Health care and pharma ranked as the most attractive sector for PE investment in North America and Europe in the next three years, according to Coller.

Among the consumer products in the works, is Prima, formerly called Hempia, which makes CBD health products. The company is studying plans to distribute products through Albertsons Cos., the supermarket chain backed by Cerberus Capital Management LP, according to a source. Prima was co-founded by Christopher Gavigan, who is also co-founder of Honest Co. Inc., Jessica Alba's line of beauty and wellness products backed by L Catterton.

Jeffrey Howard, managing partner of Salveo Capital, said the firm is close to announcing two deals in the CBD space to capitalize on the "massive shift" in the hemp business as a result of legalization. CBD health and wellness products will multiply.

"Now that hemp is officially legal, it'll open up the floodgates," Howard said. "We've been looking at CBD for quite some time," he said. "The CBD market will accelerate, with more focus from private capital."

Shea Alderete, CEO of Gen X Biotech, a California-based startup in the CBD extraction and purification space, said a few investment groups have slowly entered the CBD market by getting their feet wet with CBD hemp isolate made products, but most have avoided the business.

"This new Farm Bill will allow us to get the capital needed to fuel and grow this market into the legal cannabis space, and allow the larger investment bankers and firms to plant a stake once and for all," he said. "Private equity firms find it extremely interesting being on the ground floor of a booming new emerging industry similar to being the first people to invest in Anheuser-Busch InBev SA/NV (BUD) or Jack Daniels."

For its part, LiveWell, which has raised capital from more than 900 private shareholders, plans to continue to grow as quickly as possible in the hemp business as larger players take aim at the space.

"Our vision is big, we could be a number one player," Rendimonti said. "As we move forward, you'll see more consolidation."