In September 2018, the Constitutional Court of South Africa decriminalised the private use of cannabis. The South African government is also gradually becoming receptive to the growth of cannabis for the extraction of non-psychoactive components, such as cannabidiol (CBD).
South African investment firm SilverLeaf seeks to back promising companies in the cannabis industry. Buhle Ndweni spoke to SilverLeaf Investments’ joint CEO, Pierre van der Hoven, about investment opportunities in the sector.
What are some of the top investment opportunities in South Africa’s cannabis industry?
The key areas of investments are the cultivation of cannabis, followed by the extraction of oil from the plant, testing laboratories, and the retail and branding of CBD products. The emergence of CBD products in big South African retail pharmacies like Clicks and Dis-Chem has brought investment prospects at the retail end of the value chain. As the industry grows, there will be a demand for services such as greenhouses, nutrients, plant growers, quality control systems and software.
There are also investment opportunities in the manufacture of pharmaceutical cannabis products (not a well-developed area in South Africa), but this requires a licence from the South African Health Products Regulatory Authority (SAHPRA) and is a lengthy and expensive process.
Hemp – a cannabis plant used for fibre to make clothes – also presents a gap for investment.
In a nutshell, investment opportunities are in cultivation, processing and laboratories, then linking into brands and going backwards into manufacturing. For example, CBD capsules for good health can be manufactured on a large scale to supply local retailers and export to other markets. There is also a need for training and education.
Which areas of the cannabis sector would you be hesitant to invest in?
We will not invest in grey areas where people are trading illegally or in anything that borders on illegal. For example, cannabis grow clubs are a business model based on leasing private spaces in appropriate facilities for the growth of cannabis on behalf of clients. This is a great business opportunity but the matter is currently in the courts and we are waiting for government to pass certain legislation. We also avoid big manufacturing items requiring more capital than we have access to. However, we are partnering with some capital companies to overcome these hurdles. We are limited by our size but we will get there and eventually grow into a normal venture capital company.
In South Africa, the Constitutional Court legalised the use of cannabis in private spaces but it may not be traded, which is more lenient than most other countries. We are waiting for a change in legislation before moving into investing within that area of recreational use. It is one of those classic examples of great returns but the law has not yet caught up.
Are there any global trends you would be looking to follow in terms of investing?
The medicinal use of cannabis around the world is exploding and this requires high levels of production of cannabinoids extracted from the plant. There are some significant trends such as lesser-known cannabinoids CBN (cannabinol) and CBG (cannabigerol) which have specific applications in medicine that are being revealed through medical research.
The other area that is growing quite fast is edibles; a new market in Canada that includes beverages, beers and fruits, and other means of consuming cannabis that does not involve smoking. Edibles require the extraction of key ingredients or components and this is a huge growth area, especially for South African companies.
How developed is South Africa’s cannabis industry?
The Constitutional Court ruled that private consumption of cannabis is legal; however, it is still not legal to trade cannabis. It has created an anomaly because adult recreational use is restricted. However, anyone can apply for a licence with SAHPRA on an individual basis to get special permission to use cannabis for medicinal purposes.
We are waiting for permits for industrial hemp. Over the last two years, some permits were issued for hemp research and a few individuals planted hemp. The requirements are cheaper and there is a low barrier to entry. The hemp licence issuance was transferred to the Department of Agriculture and we are waiting for the legislation to come out during the last week of February 2021. This could be a big deal because once legalised, the industry can start planting hemp and making things like biofuel and hemp bricks, just to name a few things.
How many cannabis-related companies in South Africa would you say are investment ready?
I would estimate in excess of 100 companies; mostly cultivation businesses. About R5 billion ($334 million) has already been invested in the South African industry. Most businesses cultivate raw materials and extract cannabinoids such as CBD. This is manufactured according to pharmaceutical standards and exported for medicinal use.
Are you looking at companies producing cannabis products for the local market; or those using South Africa as a production base for exports?
Most of the medical side is exports, which is great because the spending is in rands and the earnings are in dollars. Europe is the biggest market in the world for cannabis exports. At this stage, the focus is on exporting; however, the local CBD market is attracting customers and retailers such as Dis-Chem and Clicks are now stocking products. In the long term, we must develop our local markets and branch into the rest of Africa. We do not have to rely on foreign opioids when we could produce a more affordable painkiller that comes from cannabis grown in Africa.