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HIGHLIGHTS
  1. Calgary-based Matco looks to U.S. for cannabis fund growth
  2. Matco launched first pot fund in late 2017
  3. Investors look to U.S. marijuana companies for fund growth

Matco Financial’s cannabis fund has attracted so much interest that it has spurred the privately-owned investment manager to take steps toward launching a second pot portfolio that could be launched this fall, when U.S. companies are expected to remain at a discount to their Canadian counterparts due to federal restrictions south of the border.

This potential new fund comes as companies flock toward the nascent industry after Canada legalized recreational cannabis, the U.S. government deregulated industrial hemp along with the crop’s popular CBD byproduct, and more than 30 states approved marijuana for either medical or recreational use.

On the last day of 2017, when medical pot had already been permitted in Canada for years but was still 10 months away from being legalized for recreational use, the Calgary-based investment manager launched the Matco Cannabis Investment Fund. With roughly half of the fund invested in U.S. companies and a 35-per-cent stake in Canadian companies, more than a third of its allocation is in the private sector.

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Portfolio manager Baron Lee said the aim for the potential “Fund 2,” which is currently in the marketing stage, will be similar to the structure of its first pot fund, with both private and publically traded U.S. companies offering growth potential due to the discount many of them hold to publically traded Canadian companies as long as adult-use cannabis remains federally illegal south of the border.

“People have a comfort level with investing in cannabis now,” said Mr. Lee, noting the stigma around pot is decreasing in Canada. He has seen clients go from feeling uncomfortable investing in the new industry to seeking exposure.

“The most common question is ‘Did I miss the trade?’ The answer is no.”

While Canadian cannabis companies are expected to see “massive” year-over-year quarterly growth over the next four reporting periods, Matco is not as bullish on Canadian companies because the country is a relatively small market compared with the United States and other high-population regions like Asia, where pot legalization could take place in the future.

“We’re going to see a lot of revenue growth. We’re going to see margin expansion. Because revenues are growing, we’re going to see some cash flow too. Those are some of the catalysts in Canada,” Mr. Lee said.

“For the last six months, we’ve been rotating from Canada to the U.S. Naturally the U.S. market is going to be around 10 times the size of Canada.”

Earlier this week, Eight Capital slashed its price targets for most of the Canadian licensed cannabis producers it covers as investor attention turns to the discount held by U.S. multi-state operators, which it calculates as a $275-billion arbitrage opportunity.

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While cannabis companies in the United States are trading at a discount to those in Canada, Mr. Lee said he expects these U.S. companies will shift to a premium when anticipated changes are made to the State Banking Act and federal legalization there.

“You have to believe the U.S. will eventually legalize cannabis. We believe it’s not if, it’s when, and that’s why we’re investing in the U.S.,” he said.

“The private [companies] are trading at even bigger discounts and that’s where we’re finding value. They don’t have anyone scrutinizing them so they can focus on building the business.”

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