Two banking pioneers during Russia’s chaotic lurch toward capitalism a quarter century ago think they’ve finally found another emerging market that can give them the same buzz.
Boris Jordan, a Credit Suisse First Boston alum who co-founded Renaissance Capital more than two decades ago, and Bernie Sucher, who left Goldman Sachs to help start Troika Dialog, say the U.S. marijuana industry will generate the kind of returns they reaped from the rubble of communism.
“It’s just like Russia in the 1990s,” said Jordan, who backed the controversial privatization programs of the Boris Yeltsin era that turned well-connected speculators into oligarchs almost overnight. “We’re talking about an industry in its infancy that needs to be built up from scratch, legislation and all.”
While still illegal under federal law, state-approved cannabis sales have skyrocketed since California let doctors prescribe the drug in 1996. Twenty-eight states followed suit, with eight legalizing even recreational use in the past five years. Despite opposition from Donald Trump’s administration, legal annual purchases could reach $50 billion within a decade from last year’s record $6 billion, according to New York financial firm Cowen & Co.
Jordan said his Sputnik Group, a private equity firm based in Moscow, and its partners have spent more than $100 million to prepare PalliaTech Inc. to become a national chain of dispensaries since he first invested in the Massachusetts maker of medical devices four years ago. The company, which Sputnik took over in 2015, now grows its own crops and plans to open outlets in at least 13 states.
“Our dispensaries look like Walgreens,” the 51-year-old Russian-American said in an interview in Moscow. “They’re filled with oils, pills and creams.” Jordan, a Council of Foreign Relations member in New York, said he’s also on track to meet his goal of raising $200 million for a new fund to invest in other opportunities in the industry, though he declined to identify his partners.
Sucher, 57, a former head of Bank of America Merrill Lynch’s Russian operations, is the co-owner and chief executive of Tikun Olam USA, a venture with Israel’s largest supplier of medicinal pot. The company, which is active in Delaware, Nevada and Washington state, has invested $9.3 million to license and market its proprietary strains of cannabis to local growers.
“The only thing that qualified me to be CEO was my Russian experience of taking an idea and building it into a real business in volatile, even anarchistic conditions,” Sucher, a Michigan native, said by phone from Miami.
Tikun Olam, which means Repair the World in Hebrew, is also a partner of MedReleaf, a publicly traded Canadian grower. The Israeli company specializes in biogenetics, producing trademarked brands that target specific ailments, from chronic pain to post-traumatic stress disorder, or PTSD.
Sucher and Jordan helped form Russia’s capital markets after the Soviet Union disbanded in 1991 and remained active investors for more than two decades.
It wasn’t all caviar. Both got burned by Russia’s domestic debt default in 1998. But unlike Goldman Sachs, which pulled out of the country in the subsequent crash, they stuck around Moscow and capitalized on the commodities-driven boom that accompanied President Vladimir Putin’s rise to power.
With international sanctions and depressed oil prices prolonging Russia’s recovery from the longest recession this century, they looked for an edge in American pot.
“There are very few groups that we know of in the cannabis industry that are raising or have on their books over $100 million,” Phillips said.
Less Painful
The two Americans aren’t the only western veterans of Moscow markets embracing cannabis as the next big thing. The British head of equities at Bank of America Corp. in Russia, Will Abbott, quit last year and is now investing in a $20 million facility in Arizona that started producing in March.
“The fact that it’s so hard to invest in proves the emerging markets analogy,” Abbott said by phone from London. “With regulations and other hurdles, there’s a very high barrier to entry.”
The biggest obstacle is the federal ban, which has led to punitive tax rates and makes interstate trade impossible, raising costs for businesses that operate in multiple states. It also encourages big banks and credit card companies to avoid the industry, forcing most merchants to deal only in cash.
But Sucher said with support for pot growing, early investors stand to gain a first-mover advantage. Ninety-four percent of Americans believe cannabis should be allowed for medical reasons, while 61 percent back full legalization, according to an Aug. 3 Quinnipiac University poll.
“It’s a modern-day gold rush,” Sucher said. “It makes me nostalgic for what it was like starting Troika 25 years ago. But this time nobody’s getting hurt.”
credit:420intel.com