Despite the growing legalisation of cannabis in various jurisdictions around the world, there still are not many public funds in the industry in 2023. But why institutional investors may be hesitant to invest in the cannabis industry and what is the future? We are going to discuss it.
Legal and Regulations
As everyone is aware, cannabis is still categorised as a Schedule I substance at the federal level in numerous countries. Due to the regulatory risks and ambiguities this causes, including potential legal and compliance concerns, institutional investors may be hesitant to invest in the cannabis business. Institutional investors that are required to comply with strict rules face difficulties as a result of their complexity and inconsistency.
Risk perception of the cannabis market
Investors examine and assess risk information, making decisions about the likelihood and severity of probable negative occurrences. Because the cannabis sector is new and fast expanding, institutional investors may view it as high-risk. The cannabis industry can be unpredictable, with supply, demand, and pricing fluctuating. The cannabis business also confronts difficulties such as restricted access to traditional banking institutions, a lack of uniform rules, and changing consumer tastes, which could raise the perceived risk for institutional investors.
Cannabis in social
There is of course rising acceptance of cannabis for medical and recreational use in some jurisdictions. However, cannabis still has a social stigma due to its history as an illegal narcotic. Due to potential reputational concerns, institutional investors, particularly those with a conservative image or those with policies that limit investments in businesses viewed as contentious, may be hesitant to participate in the cannabis market.
Cannabis – no track record
The cannabis business is immature in comparison to other industries. Thus many cannabis companies may lack a track record of financial performance, making it difficult for institutional investors to judge their potential for long-term success. In making investment decisions, institutional investors may face hurdles. These can be acused by a lack of trustworthy financial data and analytics, as well as insufficient research and analysis on the cannabis market.
Liquidity concerns
There are liquidity risks associated with the foregoing. Because many cannabis companies are privately held or listed on lesser stock markets, the cannabis industry may face shortages of liquidity. This may prevent institutional investors’ capacity to easily buy and sell their investments, which may be problematic for large institutional investors who require higher levels of liquidity.
Access to banking services, high levels of risk and volatility in the cannabis business, and a lack of trustworthy financial data and metrics for evaluating investment opportunities might all be obstacles in the industry.
Compliance and due diligence
Institutional investors are subject to strict compliance and due diligence standards. Investing in the cannabis industry may raise worries about potential legal or regulatory offences, such as anti-money laundering (AML) and know-your-customer (KYC) restrictions. This may result in increased compliance challenges and expenses for institutional investors. Eventually, they may discourage them from engaging in the cannabis business.
Public funds in cannabis industry
As discussed, there are several difficulties around the world. But still some institutions have opted to take the risk and begin investing in the cannabis market. There are some European countries where institutional investors have shown interest.
The United Kingdom is the first example. Cannabis is still categorised as a Schedule 1 substance in the United Kingdom. However, the government has built a legal framework for medical cannabis use. Some UK-based enterprises have received institutional investor funding. Another example is Switzerland, which has a legal framework that permits the manufacture and sale of cannabis with low THC levels. Institutional investors have invested in Swiss enterprises involved in the production, processing, and distribution of low-THC cannabis products. Denmark has also built a reputation for high-quality cannabis production, and numerous Danish companies have received institutional funding for their cultivation and production operations.
Before making an investment choice in cannabis, institutional investors in Europe often analyse the regulatory environment, market potential, and other considerations.
Potential future trends for public funds in cannabis industry
Changes in cannabis restrictions, growing acceptability, and normalization of cannabis use are all possible trends. The next phase will be for larger and more established corporations to enter the cannabis sector. However, additional study and data on the cannabis sector are required to provide accurate information to institutional investors. A lack of comprehensive data and market analysis can make it difficult for institutional investors to make investment decisions.
To attract such investors, regulatory reform and industry standardisation are critical. This is not only consistent legislation and trustworthy financial reporting standards. There can be needed also well-established best practices can all contribute to a better investing environment for institutional investors. Taking everything into consideration, there are of course potential benefits to institutional investment in the cannabis business. These can include more financial inflows, better corporate governance, and increased reputation for the cannabis industry.
However, it is crucial to remember that institutional investors’ attitudes toward the cannabis industry may differ. It can depend on their individual investment strategies, risk tolerance, and regulatory environment. As the cannabis business evolves and legal circumstances shift, institutional investors’ opinions regarding cannabis investments might change as well.