LEAFY Tunnel has officially had the first closing of its Guernsey-based investment fund in an important step that it believes will encourage more institutional capital to enter the industry.
The early stage venture capital firm, investing in medical cannabis and psychedelics companies, announced the first closing of Leafy Tunnel Fund 1 (a $30 million target fund) on the 31st of January 2022.
For Leafy Tunnel, this enables it to push ahead with its investment strategy, the first of its kind in Europe, with vindication that investors are ready and willing to put their cash behind it.
For the burgeoning European cannabis industry, it brings sorely needed institutional capital to keep positive momentum and accelerate growth with an outlook on Big Pharma companies to follow suit.
“With this milestone, we envisage the entry of more institutional capital in Europe within these sectors that will serve as a catalyst for Big Pharma companies to penetrate the space further,” Leafy Tunnel’s Co-Founding Partner Bek Muslimov told BusinessCann.
A first closing is a significant milestone in the life cycle of any investment fund, representing the first time at which investors commit to providing their capital.
A fund can have any number of closings depending on its progress towards the targeted size (in Leafy Tunnel’s case, this is $30 million), with each closing bringing the fund closer to its ‘final close’, at which point the fund will not accept any new capital commitments from investors.
The first closing is so important for funds as it provides a ‘proof of concept’, or validation to the market that people are willing to back the fund’s investment thesis.
This is especially significant for Leafy Tunnel, as it is the first investment fund of its kind in Europe to have built its strategy entirely around the medical cannabis and psychedelics sectors, meaning the fund’s regulatory approval process took longer than that of a traditional fund.
“Our team at Leafy Tunnel has worked together for a long time and invested in the most exciting and fast-growing technology as well as life science companies,” Mr Muslimov continued.
“The first closing marked a point in our professional lives where our skills, experience and strong team spirit have come together to deliver on the mission.”
For many funds, first closings often also mark the point at which they finally have access to capital to begin investing in companies. This is not the case with Leafy Tunnel, which has already invested in seven companies to date, which forms almost 50% of the fund’s total anticipated portfolio.
It will, however, enable Leafy Tunnel to widen the scope of its investment opportunities moving forward, allowing it to consider more companies, deploy more cash into existing investments and even donate to scientific and educational institutions conducting research in the alternative medicine space.
“This is an important step for the fund but also for us as a team. Having the robust regulatory framework in place, we can now focus on what we do best, i.e. sourcing new investments and concentrating on the fund management, but most importantly delivering returns to our LPs (Limited Partners),” said Co-Founding Partner Nikolay Tretiyakov.
Following an initial frenzy of investment in the first half of 2021 after the LSE opened its doors to the cannabis industry for the first time, European cannabis stocks have struggled to maintain any kind of momentum.
This is mainly due to the lack of institutional capital, leaving the door open for retail investors to flood the market, in turn causing volatility, less liquidity, and even more reasons for major institutions to avoid putting their money at risk.
Leafy Tunnel believes its first closing can set a precedent in the industry and prove to other institutions that cannabis investments can be both legitimate and financially lucrative.
“We believe that this is an essential step for the industry as a whole as one of the main drawbacks behind many investors and other players entering the space is consistently said to be the lack of institutional capital.
“We have therefore set out to change this stigma and, with the fund’s first closing, prove to the various stakeholders in these sectors that you can create a properly structured and regulated fund in this space whilst investing in highly regulated companies dealing with alternative medicines,” Mr Tretiyakov continued.
Not only will this ‘add a greater level of legitimacy’ to the medical cannabis sector as an opportunity, but could help pave the way for more major pharmaceutical companies to invest.
“With this, we hope that the entry of more institutional capital in Europe within these sectors will serve as a catalyst for Big Pharma companies to penetrate the space further.”
Leafy Tunnel is a spin-out from Blue Wire Capital, an early stage venture capital firm founded in 2013.
The Co-Founding Partners of Leafy Tunnel, Mr Tretiyakov and Mr Muslimov have worked together for over a decade. During their seven years at Blue Wire Capital (investment firm), they built a robust portfolio of investments in technology and finance companies, including Monzo and Deliveroo.
In 2012, when the pair were setting up Blue Wire, they also invested in a US cannabis company, a move dubbed ‘crazy’ by their peers at the time.
After pledging the ‘first institutional capital’ into the company, it went on to become ‘one of the largest multi-state operators’ in the US.
“In 2018, when the company did an IPO, it became a phenomenal success story. Participating in the company from its very early stages and seeing how the company is now a leader in the US cannabis space represents a truly remarkable journey. 2018 was a pivotal year as we started incubating the new investment strategy within Blue Wire Capital,” commented Mr Muslimov.
In 2019, whilst still at Blue Wire Capital, the company invested in the leading psychedelics company ATAI Life Sciences, which was listed on the NASDAQ in June 2021.
Mr Muslimov said that this investment “solidified our interest, and we have started building a strategic portfolio of companies operating in the cannabis and psychedelics space”.Following the most recent investment in Tetra Pharm, a Danish cannabis biotech company, Leafy Tunnel has now invested in seven companies, including Beckley Psytech, Iuvo Therapeutics, Maya Health, Prohibition Partners, Tactogen and Ceretype.