Read the letter announcing Navy Capital's shutdown

Editor’s note: Navy Capital, a cannabis investment firm, wound down operations in November after Florida’s failed legalization vote. Below is the letter sent to investors announcing the firm’s shut down, as well as a follow-up letter on January 31 discussing founder Sean Stiefel’s view of the cannabis market and why profits have remained elusive. These letters were shared with Cultivated.

November 15, 2024

Dear Investors,

We wanted to provide an update on the state of the Navy Capital Green Fund, LP and the cannabis industry in general in the wake of the historic events that took place on Election Day, and to notify you that, after careful consideration, we have decided to commence an orderly liquidation and winding up of Navy Capital Green Fund, LP pursuant to the Limited Partnership Agreement. November 5th marked a significant moment in time for cannabis. When we launched the Green Fund in May 2017, we had a simple thesis: cannabis was a nascent, underinvested, potentially enormous industry with diverse opportunities cutting across over the counter medical, pharmaceutical and recreational use cases. In North America alone (beginning in Canada but ultimately driven by the US market), cannabis appeared poised for historic growth with Canada legalizing the industry in 2018 and the US market expanding rapidly as more and more states legalized medical, and then recreational, cannabis. Our hope and assumption were that these state level developments would ultimately require the federal government to address the conflict between state and federal law, with national legalization becoming the inevitable solution once the majority of states had legalized medical and/or recreational cannabis. As one of the first institutional investment firms focusing exclusively on cannabis investments, we believed we would have a competitive advantage which we could leverage to identify and invest in well-positioned companies, getting in early and potentially earning outsized returns. We understood that the industry remained unsophisticated, and that political change would be slow and difficult to predict, creating unavoidable risks, but we anticipated that however slow the path to full legalization, the exponential growth of the industry, even at the state level, would create opportunities for attractive returns. As we sit here today, two things have become clear. First, while the industry has indeed grown significantly from where it was when we started the Green Fund in 2017, that growth has been accompanied by rapid price degradation as the industry has commoditized far more quickly than anticipated. This development has been exacerbated by the regulatory framework in the states where cannabis has been legalized, making it increasingly difficult for the regulated industry to compete effectively with the illicit market as onerous regulations have hamstrung even the more sophisticated operators and made it very difficult for legal companies to attain the scale and/or operating efficiencies that would have enabled them to outcompete the illicit market and build sustainable competitive moats. Second, the path to national legalization, along with banking and capital markets access, has proven more difficult and slower to develop than expected, and, significantly, over time has become seen by investors as a mandatory precondition to make the cannabis industry investable.

In light of these facts and as mentioned above, we have made the decision to formally initiate the process for winding down the Navy Capital Green Fund, LP. With our personnel having invested many of the prime years of their careers and significant personal capital building and investing in the Green Fund, this is a decision that is particularly painful for all of us. Returning to Election Day, two things happened on November 5th which we believe tipped the scales for this decision to liquidate. First, the ballot initiative that would have officially legalized recreational cannabis in Florida failed. The threshold for passage was 60% and the vote in favor came in at 56%. The fundamental impact of this result is that one of the largest growth markets was effectively cut off. The failure to pass was particularly disappointing because we viewed Florida as one of the most opportunistic structures for participants in the country, as we believed around $4B of revenue would potentially accrue to the publicly traded stocks and also create a substantial growth and profitability narrative in the sector. Additionally, had Florida gone recreational, it would have likely pressured neighboring Southern states such as Georgia to follow suit. Perhaps most disappointing about Florida’s failure is the fact that when residents were polled and asked whether they supported recreational legalization, roughly ~70% were in favor. Nevertheless, Governor DeSantis spent significant resources fighting recreational legalization, running ads arguing that the bill wasn’t about legalization but rather about smoking in public, or a bill written to enrich corporations and encourage monopolies. The deep pockets of the hemp, pharmaceutical and alcohol industries seemed to prevail in muddying the waters enough to kill the bill. The Governor earlier this year vetoed a bill that would have limited the sale of THC-infused hemp products. So, in Florida, you can now go to a gas station or an ice cream shop and buy a THC product, because that THC is derived from a hemp plant, but you cannot buy fully tested, legal, and arguably safer THC products outside of a medical dispensary. The Florida result made clear that the cannabis industry simply doesn’t have the resources to fight the alcohol, pharmaceutical and Big Ag industries. The second thing that happened on Election Day and the days that followed was that the Republican Party regained control of the House of Representatives, the Senate and the White House, giving them complete control of the federal government for at least the next two years. While President Trump has signaled that he is in favor of letting states decide on the question of legalization (note he came out in support of Amendment 3 in Florida), it is not at all clear if Trump will be willing to spend any time or political capital on the issue given that the old guard Republican Senators in leadership positions are hardline opponents of cannabis. The fact that President Trump has nominated Matt Gaetz as Attorney General, Robert F. Kennedy as head of Health and Human Services and is being closely advised by Elon Musk, does create an opening as all three are explicitly in favor of cannabis legalization. We hope that their voices will prevail over the deep pockets of the industries that will oppose it. We remain of the personal view that several cannabis companies, including Trulieve and Green Thumb, are extremely cheap, but without clarity on (i) the path towards up-listing to US exchanges, (ii) when investors might be able to custody the shares at traditional US prime brokers, and (iii) the path or timeline for national legalization, it is difficult to underwrite the securities with large sums of capital and/or attract new institutional capital into the space. As such, we have made the decision to sell the public securities we are able to monetize and for the Green Fund to take whatever tax losses it can in an orderly manner. The state of the industry means that private companies may need to be managed for a longer period of time. Chetan Gulati, a principal of the Investment Manager, has experience in both private equity and private corporate restructurings, and will manage the portfolio of private companies until appropriate liquidity opportunities have been identified for these investments. Sean Stiefel will remain available in a consulting capacity, and Kevin McLaughlin will continue to provide back-office support. We are planning a more comprehensive investor update in January at which time we will update you with more detailed thoughts on the future prospects for the industry, where there might be opportunities to invest, the portfolio of companies that remain and the details around what you can expect going forward. We thank you all for your support and partnership over the last 7 years.

Sincerely,

Sean Stiefel, on behalf of the General Partner

And read selected excerpts from the January 31 update: