Cannabis and the Institutional Question: Why Allocators May Need to Reconsider the Sector

By Daniel Firtel

For most of the past decade, cannabis has been easy for institutional investors to ignore.

Not because the market lacked size or growth, but because it lacked the structural conditions that serious capital requires. The regulatory backdrop was unstable, access to banking and capital markets was constrained, governance standards were inconsistent, and early public market performance left a long trail of losses that reinforced skepticism. For many allocators, cannabis became less an emerging asset class and more a cautionary tale—an example of what happens when capital runs ahead of structure.

That framing, however, may now be outdated.

What is happening in cannabis today is not a resurgence of speculative enthusiasm, nor is it a sudden regulatory breakthrough. It is something quieter, but potentially more important: the early stages of institutional normalization. The signals are not coming from retail flows or speculative IPOs, but from strategic capital, adjacent industries, and policymakers. For allocators, the question is no longer whether cannabis is investable today. The more relevant question is whether the conditions that historically kept institutional capital on the sidelines are beginning to shift in a way that warrants renewed attention.

One of the clearest signals of that shift comes from a transaction that, at first glance, might appear technical, but on closer inspection reflects a meaningful change in how sophisticated capital is approaching the sector.

In March 2026, Charlotte’s Web announced that British American Tobacco (BAT) would convert an existing convertible debenture into equity while also committing an additional $10 million of new capital. The conversion removed a substantial liability from Charlotte’s Web’s balance sheet and increased BAT’s ownership stake in the company. This was not a passive restructuring. It was a decision to move from optionality to ownership.

That distinction matters.

Convertible debt, particularly in uncertain or emerging sectors, is often used as a way to maintain exposure while preserving downside protection. It reflects interest, but not necessarily conviction. By converting that position into equity, BAT made a different statement. It signaled that the long-term value of the business justified full participation in its upside, even at the cost of relinquishing creditor protections.

More importantly, this was not an isolated move. BAT has been building exposure to cannabinoid-related businesses for years as part of a broader effort to expand beyond traditional tobacco. The Charlotte’s Web transaction is best understood as a continuation of that strategy—a doubling down by a global, highly regulated operator with deep experience navigating complex consumer and regulatory environments.

For allocators, the relevance is not Charlotte’s Web itself. It is the behavior of the capital behind it.

Institutional capital rarely leads in sectors like this. It follows signals from credible operators—those with scale, regulatory experience, and long-term capital allocation discipline. When those actors begin increasing exposure rather than reducing it, it suggests that the underlying risk profile of the sector may be evolving.

At the same time, it is important to understand what this transaction does not represent. Charlotte’s Web is not a U.S.-listed marijuana operator on a major exchange. It is listed in Canada and trades over-the-counter in the United States, and its business is focused on hemp-derived CBD rather than federally illegal cannabis. In many ways, it exists in a regulatory gray zone that has allowed it to operate where others cannot.

That gray zone, however, is now under pressure—and that may ultimately be a positive development for institutional investors.

The origin of that gray zone traces back to the 2018 Farm Bill, which legalized hemp and, by extension, opened the door for a wave of hemp-derived cannabinoid products. Over time, this created what has become known as the “Farm Bill loophole,” allowing products like Delta-8 and hemp-derived THC beverages to proliferate outside the stricter regulatory framework applied to marijuana.

For several years, this loophole enabled rapid product innovation and market expansion, but it also introduced inconsistency, uneven enforcement, and a lack of clear standards—conditions that are fundamentally incompatible with institutional capital. Markets built on regulatory ambiguity can grow quickly, but they are difficult to underwrite.

Now, that environment is beginning to change.

Policymakers are increasingly focused on closing or narrowing the Farm Bill loophole, particularly around intoxicating hemp-derived products. At the same time, industry participants—including alcohol companies—are pushing not for prohibition, but for regulation. That distinction is critical. The conversation is shifting from whether these products should exist to how they should be governed.

For allocators, this is exactly the kind of transition that matters.

Closing the loophole does not necessarily shrink the market—it formalizes it. It replaces regulatory arbitrage with regulatory clarity. And while that may create short-term disruption for certain operators, it ultimately strengthens the foundation for institutional participation.

This is where the role of the alcohol industry becomes particularly relevant.

Rather than opposing cannabis, alcohol companies are increasingly engaging with it, particularly in the emerging category of hemp-derived THC beverages. Industry groups have begun advocating for a regulated framework that would allow these products to exist within a clear, enforceable system. That is not defensive behavior. It is strategic positioning.

Alcohol companies understand regulated consumer markets. They understand distribution, compliance, and taxation. And perhaps most importantly, they understand how categories evolve when new products are introduced in controlled ways. Their involvement suggests that cannabis—especially in consumable formats—is moving toward integration with existing consumer infrastructure rather than remaining a parallel, fragmented market.

For allocators, that shift carries weight.

These are not early-stage venture investors experimenting at the margins. They are established operators with global scale and long-term planning horizons. Their willingness to engage, and to advocate for regulatory clarity rather than avoidance, is a form of validation that the sector is maturing.

At the same time, broader policy developments are reinforcing that trajectory.

The proposed rescheduling of cannabis from Schedule I to Schedule III remains one of the most significant potential catalysts for the sector. While it falls short of legalization, it would materially change the economics of cannabis businesses, particularly by eliminating the tax constraints imposed by Section 280E. That change alone could improve profitability, strengthen balance sheets, and allow operators to be evaluated using more conventional financial metrics.

But here again, the importance lies not in a single policy outcome, but in the direction of travel.

Cannabis is moving—incrementally—from a prohibited substance to a regulated industry. From a capital markets perspective, that transition is more important than any individual milestone. Institutional capital does not require perfection, but it does require trajectory. It requires confidence that the rules of the game are becoming more stable, not less.

What makes the current moment particularly interesting is that multiple aspects of that trajectory are converging at once. Strategic capital is deepening its involvement. Policymakers are addressing both taxation and classification. And regulatory gray areas, such as the Farm Bill loophole, are being reevaluated in ways that could ultimately bring more of the market into a formal framework.

For allocators, this creates a different type of opportunity set.

Cannabis is not a single asset class. It is an ecosystem, with segments that are likely to institutionalize at different speeds. Hemp-derived products may continue to serve as an entry point for public markets. Canadian operators provide a more established, though imperfect, structure. U.S. plant-touching businesses remain constrained but potentially offer significant upside if regulatory barriers continue to fall. And a growing layer of ancillary businesses provides exposure without direct regulatory risk.

The key is not to treat cannabis as a binary decision, but as a spectrum.

That perspective allows allocators to engage selectively, to underwrite specific opportunities rather than broad themes, and to position themselves ahead of broader institutional flows without taking on unnecessary risk.

None of this suggests that cannabis is ready to become a core allocation for most portfolios. The sector remains complex, and in many cases, difficult to access within traditional mandates. Regulatory uncertainty has not disappeared, and governance standards continue to vary.

But the threshold for consideration is changing.

For allocators with flexibility and a willingness to engage with evolving sectors, cannabis is beginning to present a different question. Not whether it is investable today, but whether the process of becoming investable is already underway—and whether waiting for full clarity means missing the most asymmetric part of that transition.

That is ultimately the allocator’s dilemma.

In most asset classes, capital arrives after risk has been reduced and returns have been compressed. In emerging sectors, the opportunity lies in recognizing when the nature of the risk is changing, even if it has not yet disappeared.

Cannabis may now be entering that phase.

The BAT and Charlotte’s Web transaction suggests that sophisticated capital is willing to increase exposure. The push to regulate rather than prohibit hemp-derived products suggests that policymakers and industry participants are converging on a more structured market. And the gradual closing of regulatory loopholes suggests that the sector is moving away from ambiguity and toward clarity.

For institutional investors, those are the signals that matter.

They do not demand immediate allocation. But they do suggest that the cost of ignoring the sector entirely is increasing.

And in a market where true diversification and differentiated return streams are increasingly difficult to find, that alone may be enough to justify a closer look.

Daniel Firtel
Co-Founder and President
TRP Co

Founded in 2019, TRP is a retail, cultivation, and distribution platform purpose-built to solve the challenges of regulated cannabis. We combine decades of investment, legal, regulatory and real estate experience with knowhow from long standing cannabis operators.

Our footprint in 14 states and 2 countries exclusively produces and sells the most recognized brands including Cookies, Dr. Greenthumb’s, Insane, and more.