Emily Paxhia, a co-founder of what is thought to be the longest-running cannabis investment fund, Poseidon Asset Management, had the courage to take a chance on a new industry when she decided to pursue a career in cannabis.
In the six years since its inception, Poseidon Asset Management has more than $105 million in assets under management and an IRR of 70% net of fees.
Its first fund outperformed its target return by more than double, and Posiedon is actively raising capital for its second fund.
It wasn't easy in the beginning.
"When we first launched the fund, it was definitely a contrarian point of view to invest into cannabis. And so we were out there very much alone in terms of putting this together, and it was very important to us to put it together in a very institutional manner," Paxhia told Benzinga.
Poseidon's Early Cannabis Investing Challenges
Finding banks, law firms and third-party administrators was challenging at the time, as institutions were worried about the legal nature of cannabis, Paxhia said.
It was also "a heavy lift of educating and informing people about what it meant to invest in cannabis and why we believed that investing in cannabis was a positive thing, not a sin industry or something that could be potentially deleterious to society."
Six years later, finding those service providers is much easier, Paxhia said.
“They now have about six years of an investable landscape to look back on and see what it looks like. And you can sometimes extrapolate what that might look like for the future.”
‘Give Us The Bad News’
Recognizing founders is one of the most important tasks for investors, and Paxhia spoke about the qualities Poseidon looks for in a founder — and what the cannabis hedge fund wishes to avoid.
One of the biggest drawbacks in a founder is arrogance, as it debilitates a person’s ability to learn, grow and adapt, Paxhia said.
What a good founder must have is confidence, she said.
“And there's a little bit of crazy in every founder to believe that they can do something so enormous as build a company, especially within the confines of a very constrained cannabis industry,” the Poseidon co-founder said, stressing the importance of humility in creating a successful team.
“You want to see that they're hiring in their executive team in a diverse manner, such that they're not getting a bunch of ‘yes people’ around them and that they are different in their points of view [so] they can challenge them and lift them up.“
Aside from humility, Paxhia said she's looking for honesty in cannabis company founders, adding that Poseidon always asks for the bad news.
“In investing, you need the bad news just as importantly as you need the good news, because the bad news is where you can make the changes that can save the company.”
Focusing On Tech Companies, Relying On Diversification
Poseidon stands out from other cannabis investment funds because of its orientation toward tech companies in the industry versus plant-touching businesses.
“It was our realization that technology was going to be essential to keep these businesses compliant, to help them run transparently and efficiently,” Paxhia said.
Another advantage of tech businesses that they can scale regionally easily and quickly, she said.
Poseidon relies on diversification as a part of its risk management process, and Paxhia said that's been important to the fund’s success.
She gave the example of the recent vaping industry crisis, saying "it would be a disaster for our portfolio if the entire fund has been focused on vaporizers."
Another benefit of diversification is that it helps create inspiring synergies across the fund’s portfolio companies, she said.
Poseidon's 2020 Outlook
Poseidon’s portfolio includes over 50 companies hailing from Canada, Mexico, Colombia and elsewhere, and Paxhia revealed to Benzinga which international markets the fund is focusing on for 2020.
“We love Mexico because of the size of it. We believe that legalizing cannabis and regulating it there will truly be beneficial to their society, where they've been kind of suffering through the hand of the cartels, and some of the — I'll say it — overt racism against Mexican citizens when it comes to cannabis.”
Paxhia sees a big opportunity in Mexico and praises it for being strictly regulated.
“We do like Latin America because of the size of some of those markets. Europe feels very early to us, but there are definitely interesting opportunities to participate in there.”
For those are considering cannabis, Paxhia advises them to enter the industry only if they are motivated to build a company and are not just in it for a quick return on capital.
“We're in a building phase of cannabis.”
She also advised investors to "watch out for overhyped pro forma financials and modeling and big bold statements about being the best in this industry — we have a ways to go before we know who the true winners are going to be.”
In 2020, cannabis companies will be pushed to have a better focus on corporate governance and running a business with strong reporting and transparency, in Paxhia's view.
“We are very excited for what's coming in 2020. We think it will continue to be a challenging landscape, but we think that the best companies of this industry are being built right now. And so it's a great time to be an investor.”
Photo courtesy of Poseidon Asset Management.
See more from Benzinga
- Quebec Issues Canada's Most Rigid Age Restriction For Cannabis Consumption
- Green Thumb Industries Opens New Rise Cannabis Retail Store In Lakewood, First In The City
- Nabis Posts Q4 Financial Results
© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.