Investment Firm Uses SPACs to ‘Bet Big’ on Pot Companies

By Willis Jacobson
Oct 23, 2020

Michael Auerbach said he “made a big bet on cannabis” when he launched investment firm Subversive Capital seven years ago.

That bet appears to now be paying off.

Subversive, which focuses on real estate investments, has emerged this year as a major investor for the cannabis industry, thanks in large part to its use of Special Purpose Acquisition Companies (SPACs), publicly traded firms established strictly for raising capital to acquire other companies.

SPACs, which are also referred to as blank-check companies, are gaining in popularity within the cannabis industry as traditional venture capital and private equity investors have shown a reluctance to invest in the space.

This month, Subversive announced that its first-of-its-kind Real Estate Investment Trust (REIT) SPAC was on track to close on nearly $183M in transactions by the end of October. That’s in addition to a separate SPAC organized by the company that raised about $575M in its initial public offering (IPO), the largest SPAC IPO in Canadian history. (Because of marijuana’s federal illegality in the U.S., Subversive is listed on the Canadian NEO exchange. )

The goal of the REIT SPAC is to acquire “high-quality real estate assets tenanted by leading cannabis operators” in the U.S., according to the company. The company’s other SPAC will merge with one or more operating companies, Auerbach said. SPACs must devote 80% of their funds to a single transaction.

Auerbach, who helped steer the investments, said he considers SPACs to be a great tool for the current cannabis industry, which still faces legal barriers to capital. He suggested that would change within the next two years, however, as he anticipates federal legalization will arrive and make that access to capital much easier.

“I actually predict that I’ll be only one of two or maybe three of the 10 SPACs [currently] out there for cannabis that will do cannabis,” he said. “I think most of my competitors will end up doing non-cannabis targets.”

Rise in popularity

Auerbach said he intends to remain in the cannabis space for the same reason that initially brought him to it: Its potential.

“It was more fun last year when things were going a little better for the industry, but I’m still 100% behind this industry and think that there’s no other industry currently out there that has the growth potential of the cannabis industry,” he said. “So I couldn’t think of a better sector to put my capital and my time in.”

In addition to his role with Subversive Capital, Auerbach is a senior vice president at Albright Stonebridge Group, a consulting firm chaired by former U.S. Secretary of State Madeleine Albright. The mission of Subversive, according to its website, is to invest “in radical companies whose core missions subvert the status quo and require sophisticated government and regulatory strategies for success.”

SPACs, which typically have a two-year timeline to invest the capital they raise, have proven beneficial for several other industries, besides cannabis, that fit that description. DraftKings, a sports betting company unaffiliated with cannabis or Subversive, is among non-cannabis businesses that have raised capital through SPACs.

In the cannabis space, there are around a dozen major SPACs. Several of them are closely tied to large multi-state operators and essentially serve as investment arms of those businesses. 

Notable cannabis-related SPACs, in addition to Subversive, include Silver Spike Acquisitions, Collective Growth Corp., and Stable Road Acquisitions. Those three firms raised a combined $550M in IPOs since 2019.

The total number of SPAC IPOs in the U.S. increased from 59 in 2019 to 160 so far this year, according to SPAC Research. The total amount raised went from $13.6B last year to $59.2B this year.

Auerbach said Subversive Capital will concentrate on urban industrial manufacturing and retail properties. Those properties, he noted, can be converted for other uses if regulatory changes disrupt cannabis operations and new tenants are needed.

An urban cannabis manufacturing facility, for instance, can be reasonably transitioned into a pharmaceutical facility or Amazon warehouse, he said.

“We evaluate the real estate first and then the cannabis credit second,” he said. “We’re not going to underwrite real estate because we like the credit; we’re going to underwrite real estate because it’s good, quality real estate.”

‘Time to buy is now’

Auerbach said the federal illegality of cannabis, which he expects to soon end, has the industry currently being valued “at a massive discount.”

Once the regulatory uncertainty goes away with legalization, he said, cannabis firms will be traded on a level similar to other established industries, like pharmaceuticals and technology. 

“The real economic benefit is a couple years out,” he said, “so the best time to buy is now.”

After federal legalization, he predicts California will emerge as the most important market for the industry. He based that on an expectation that the West Coast, and particularly California, will grow much of the nation’s supply.

Auerbach said his firm has invested in a lot of industries, but none of them excite him in the same way the cannabis industry does.

“It’s the first time in our lifetimes we’ll see something go from illicit to licit, so everything that goes along with that – in terms of state, local and federal regulations – it’s fascinating,” he said. “I’m happy to play a small part in trying to shape what that looks like.”

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