A Wall Street private equity firm affiliated with Danny Moses, a trader who played a role in Michael Lewis’s book The Big Short, is setting up shop in Canada, as it deepens its investments in the cannabis sector.
Merida Capital Partners, which launched its first fund in late 2016, will open an office in Toronto in the coming months — it will be the firm’s fourth office after its New York headquarters and satellite shops in San Francisco and Bethesda, Maryland.
Moses, who is an investment committee member at Merida, and is long on cannabis, began advising the firm over three years ago. He was previous head trader under investor Steve Eisman at FrontPoint Partners, known for shorting mortgage-backed securities at the cusp of the 2008 financial crisis.
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Alongside the office opening, Merida is planning to launch its biggest fund yet: US$200 million to be deployed in the cannabis sector across North America. The firm currently has two other funds, worth US$80 million and US$125 million respectively and is invested in 25 cannabis companies mostly in the ancillary space.
“There has never been an offering like this to Canadian investors. We’re long on cannabis and we want to be able to take larger positions in companies in the space that are looking for funds,” said David Lubotta, a Partner at Merida who will run the Toronto office.
Lubotta has advised on various M&A transactions in the cannabis sector including the purchase of Xanthic Biopharma Inc. by Green Growth Brands, the American cannabis retailer that has launched a hostile bid for Aphria Inc.
But the location of the new office does not necessarily mean that the company will invest more heavily in the Canadian cannabis industry, according to Lubotta, especially when it comes to cultivation.
“When you have the U.S. and South America and Europe coming on board, it’s going to be tough for the Canadians to compete with them on production. This is just like our wine industry in Niagara-on-the-Lake. They’re okay, but they struggle to compete with say, Napa Valley,” Lubotta said.
Because of its foundational roots in the U.S., where cannabis is still illegal at a federal level, Merida’s investments so far have been in businesses related to cannabis and the supply chain but that for the most part do not touch the plant. The private equity firm’s portfolio includes pot data and research company New Frontier Data; CB2 insights, which provides software to the medical cannabis space; and Emerald Scientific, a testing and extraction company, amongst many others.
“As Merida transitions to our third fund, we continue to define our thesis through the depth of our information gathering and synthesis, our focus on ecosystem connectivity, portfolio company governance and identifying opportunities that offer asymmetric upside returns to our investors,” founder and CEO Mitch Baruchowitz said in a press release last Thursday.
Lubotta emphasizes that the firm’s overall outlook for the sector is focused in a couple of areas — U.S. multi-state operators, big retail brands, and CBD.
“We’re essentially big on multi-state operators because we believe that they are going to have more of a bandwidth to play with because they are spread across so many states. That’s going to really work out well once federal legalization happens,” he said.
On brands, Lubotta believes that as the cannabis sector evolves more from cultivation to an industry more similar to the consumer-packaged goods space, companies that are able to cultivate distinct brands will stand out more than others.
“People who are growing stuff in bulk put a brand on their product and they say they have a brand. But that’s not what I think is going to work. You need a brand that people will consistently see online and buy in person.”
There are still very few private equity-driven cannabis-focused investment funds in North America. Merida’s main competitors are Green Growth Investments and MedMen Capital, both based in the U.S.