Poseidon Co-Founder and Managing Partner Emily Paxhia joins Yahoo Finance Live's Julie Hyman to discuss investing in the cannabis industry as well as the outlook for the space.
BRIAN CHEUNG: Now, of course, a lot of interest in the individual sectors, but one sector that we're watching on a macro scale is, of course, cannabis stocks, which puts investment funds in that space in focus as well. And joining us to discuss more is Poseidon co-founder, Emily Paxhia, alongside Yahoo Finance's Julie Hyman, down at South by Southwest in Austin, Texas. I'll toss it over to you, Julie, for that conversation.
JULIE HYMAN: Thank you so much, Brian. Indeed, I am here with Emily, who has been speaking at the conference, and of course, attending a lot of the various events surrounding it. And Emily, you've been in cannabis investing for a while. You started your first fund in 2014, I believe, is when it closed. Cannabis has had a bit of a rocky road in terms of the publicly traded companies. And that's even though if you look at the numbers that they're doing, they're not necessarily negative, certainly not across the board. Is it just the federal legalization overhang that is-- is that the problem?
EMILY PAXHIA: It is certainly the main contributing issue around the cannabis names, especially because, yeah, to your point, we've already had the Q4 earnings coming out, and we've seen that they were a little bit slower in terms of growth or flat because it was kind of one of those quarters. But we're about to have another massive ramping up with New Jersey opening their adult use market. And it's just one of those things where, where there's not enough capital flowing into the names, there's just not enough action around it.
So we're standing here as institutional investors that have been investing since, as you pointed out, since 2014, and we're hoping that groups like us can continue to drive this forward. And maybe we'll see change at the federal level, but we're not holding out hope for that any time soon right now.
JULIE HYMAN: Oh, interesting, OK. So you don't think we're going to see movement this year. Next year, any prospects?
EMILY PAXHIA: Next year, we could see something. And there are people who do think 2022 could see a change in the Safe Banking reform. I was just having dinner with an analyst last night, and she was sharing that she feels it is possible. The way we invest in cannabis is we invest in the fundamentals of the businesses.
And the market can do what it's doing. We don't love the action. It certainly is difficult to be kind of weathering another bear market cycle in cannabis. But it's the nature of an emerging market where you have these kind of these tight cycles, and then you kind of move into that next slope of growth. But we're just going to keep focusing on investing in really good companies with really great teams and building an industry that this year, should have an economic impact in the United States alone of over $100 billion.
JULIE HYMAN: And I was also reading, too, that companies have more cash on hand versus some of the prior cycles that you're talking about. So that implies that they will weather this cycle a little bit better. But that said, I mean, if you're looking at a rising rate cycle, an inflation cycle, et cetera, et cetera, it seems hard that you're going to be able to convince investors perhaps to come back in this year.
EMILY PAXHIA: Yeah, and that's something we may have to just deal with, but we are optimistic that we'll see people coming back. I mean, these companies, especially the top operators, have raised over a billion dollars in debt in the last 12 months. And so the credit markets are certainly leading the equity markets on this. So there's definitely capital at the table. And when I saw the constituents of those credit facilities, they were institutional investors. And what that tells me is that that's the way the institutional investors are getting comfortable with participating in the industry before they take that step into the equity market side of it.
The other thing to think-- so they do. They have strong balance sheets. They're making acquisitions. We're seeing the growth in the companies. And I think they'll just continue to execute while we wait for these things to change. But I'm optimistic about where this industry is heading because we're really starting to see how these different companies are differentiating themselves. They're building brands. They're opening really interesting and sophisticated retail and omnichannel opportunities. So it's all going in the right direction, whether or not the market is caught up to it yet.
JULIE HYMAN: One of the things you were talking about here at South by Southwest is the global market for cannabis. What does that look like right now? Because you do obviously have a patchwork of regulation around the world.
EMILY PAXHIA: Mm-hmm, yep, and that's a familiar concept to us, is we have patchwork regulation here in the United States. So it's kind of a similar thought process. But the way we've invested globally is we've looked at what some of the tentpoles have done, like Germany, for example. They've established a medical market, and they basically based it on the rails of EU GMP certification, which is what you would have for best practices and standards around pharmaceutical products or anything else you're really ingesting.
And so instead of reinventing the wheel, we've invested into companies that work along that entire supply chain. So we do have exposure in Colombia and Mexico and Western Europe. So it's something that we do like the global opportunity, but we really are focused on the United States today.
JULIE HYMAN: And in addition to your private funds, you guys have an ETF also, PSBN, is that it's not been immune to what we've seen in the market for sure. What's interesting, though, is I was looking at the components, and it's a lot of swaps. And as we were talking during the break, you were explaining to me this is a way of investing in some of the operators that-- sort of getting around the legalization issue. Explain that to our viewers.
EMILY PAXHIA: Yeah, so I mean, we are high conviction on US cannabis operators. And so the constituents of the ETFs are what we consider to be the top US MSOs, or multistate operators. And because the fact that they're listed on-- they're either in Canada and/or on the OTC markets, it's not something that we can invest in. We're a New York Stock Exchange traded ETF. And so in order to maintain that, we have to do it through these swaps because otherwise, it just all wouldn't work. And so that's the way-- it's kind of a workaround due to the federal situation and due to the fact that these companies are not listed on the exchanges.
JULIE HYMAN: Gotcha, OK. And it's an actively managed ETF, if I'm not mistaken. So does it-- how do you think about them, the active management of that ETF right now, especially given the more challenging-- I mean, your other funds are private, so you don't as much as you say have to worry about the public markets. That-- there you do. So how are you sort of navigating what we've been seeing?
EMILY PAXHIA: Again, for that ETF, it's really just about the underlying companies that we have strong belief in. And we've spent so many-- I mean, we've spent so many years working on this industry. We've really leaned in on it. And so we'll watch the market go. It is definitely not pleasant to experience it, but it's just, we just keep going back to that. And so in our active management, we do have the opportunity to apply leverage.
As of yesterday, I think it was 1.3 times at close of business. And then, you know, you can look at the weightings of the different companies because it kind of indicates how we have the different conviction in the different operators and who we think are the leaders. So those are the ways that we are actively managing it. And we're monitoring the industry and heavily involved. And so that's really how we drive our portfolio construction.
JULIE HYMAN: All right, Emily, thank you so much. Really interesting conversation and interesting stuff. Emily Paxhia, co-founder and managing partner of Poseidon Investment Management. Back to you guys.