Windmill Capital Management does not have a direct stake in the legal cannabis industry. We do, however, see that cannabis and renewable energy have quite a bit in common. Notably, both industries are relatively new to institutional investors and are subject to broad misinformation. We also believe that both cannabis and alternative energy are important social justice issues that deserve attention and support. Finally, since electricity is one of the primary inputs in modern cannabis cultivation, the two industries can see mutual success.
Look at any alternative asset investment conference agenda today and your’e likely to see cannabis as a key topic. The industry has huge potential and notwithstanding federal legal considerations, institutional investors are considering how to participate. Likewise, though some segments of alternative and renewable energy (e.g., utility-scale and residential) have seen substantial institutional cash flows, the commercial middle market is still a relatively new opportunity. Institutional investors are right to examine both of these industries and understand the risks, potential returns and available investment structures. In alternative energy, for example, we believe direct project investment is a safer structure for predictable, out-sized returns.
Misinformation Working Against Growth
Both alternative energy and cannabis are subject to powerful misinformation campaigns from large competitors. Cannabis has long been known to alleviate pain, anxiety, nausea and appetite loss. Each of these conditions is typically treated with over-the-counter or prescription medication, which has made cannabis the target of Big Pharma. Alternative energy is a threat to the energy production and distribution status quo, which is dominated by the fossil fuel industry. Powerful interests have misled users and investors about alternative energy’s efficiency, reliability, durability and cost. These detractors are in addition to the entire industry of climate change deniers.
The facts are solidly behind cannabis and alternative energy. As the chart below shows, cannabis is a reliable substitute for prescription and over-the-counter medication. In addition, it’s likely cannabis will become a more common alternative to alcohol.
Likewise, alternative energy technology has proven to be reliable and durable. Solar and other distributed systems like cogeneration reduce peak stress on the grid, making the entire network safer. Alternative energy can be up to 80% more efficient than utility power, which reduces user cost as well as greenhouse gas emissions that are proven contributors to climate change.
Positive Social Impact
The positive environmental impact of alternative and renewable energy has been one of the drivers behind the growth of institutional investment in residential and utility-scale alternative energy. Indeed, many alternative energy investors have some ESG or impact mandate. We believe that both legal cannabis and renewable energy have the potential for substantial positive impact on social justice. Enforcement of cannabis use and possession laws have long been disproportionately enforces against communities of color. Similarly, pollution from the production and processing of fossil fuels and climate change have been shown to have a disproportionate impact on lower income households. Cannabis legalization and alternative energy have the potential to eliminate these disparities.
Alternative Energy and Cannabis
In addition to the commonalities discussed above, cannabis and alternative energy have a key intersection – electricity is the primary input cost in modern cannabis production and processing. Indoor cannabis grows require high intensity lighting, temperature and humidity control and ventilation. Processing requires a clean environment for high-tech extraction equipment that includes ovens, heating plates, pressure and vacuum pumps, condensers and evaporators, all of which is powered by electricity and can run 24/7.
The need for reliable, efficient power leads many cannabis producers to utilize distributed and alternative power systems. Not only is the power cheaper, cleaner and more more predictable, the user is able to fix their power cost and is no longer dependent on the grid. This intersection is an ideal solution for investors interested in participating in the cannabis economy but unable or unwilling to invest directly in a cannabis company. Excess returns are available for alternative power projects that serve the cannabis industry.
Windmill Capital Management’s mission is to enable access to high quality fixed asset investments, particularly alternative and renewable energy projects, to investors. The intersection of cannabis with alternative energy is particularly interesting to us, not only for the economic returns, but for the many positive societal impacts as well. We look forward to the opportunity to discuss our investing philosophy, as well as specific projects, with interested investors and investment managers.