An investor makes a case for funding sex, drugs and other socially taboo products

Christian Tooley argues that institutional investors' vice clauses, which restrict investments in sectors like sex and substances, cause them to miss out on significant innovation and returns. He highlights the potential of the sex tech market, projected to reach nearly $200 billion by 2032, and suggests that smaller LPs and family offices can capitalize on the lack of competition from institutional funds hesitant due to legal and reputational concerns. Tooley emphasizes that addressing the stigma around these areas could lead to advancements in health and social benefits, citing the success of previously controversial areas like menstruation tracking.

Analysis

Christian Tooley's argument highlights a potential arbitrage opportunity in 'vice' sectors, such as sex tech and substances, which he contends are systematically undervalued and underfunded by institutional capital due to restrictive 'vice clauses' rather than a lack of intrinsic merit or market potential. The sex tech market, for instance, is projected to reach nearly $200 billion by 2032, yet typically receives only modest venture capital inflows, exemplified by the struggles of even highly profitable entities like OnlyFans to secure mainstream investment. Tooley suggests that these sectors offer compelling characteristics: sex tech presents high volume, consumer-facing models with lower upfront capital needs, while substances may offer moderate-to-long ROI with higher ultimate payoffs. The primary barriers—social stigma, undefined legal frameworks (e.g., state-by-state cannabis legality), and potential reputational harm—deter large institutional investors, thereby creating a less competitive environment potentially advantageous for smaller limited partners, family offices, and specialized or progressive funds. The thesis posits that investing in these areas can yield not only financial returns but also drive innovation towards positive health and social outcomes, drawing a parallel to the destigmatization and subsequent venture-backed success of previously controversial femtech categories.

Key Decisions for Investors

• Consider allocating a niche portion of an alternative investment strategy to 'vice' sectors, particularly for investors with a higher risk tolerance and fewer constraints from traditional Limited Partner Agreement clauses, to capture potential alpha from under-capitalized markets.
• Prioritize extensive due diligence on the specific legal, regulatory, and reputational risks associated with each venture, given the evolving and often ambiguous frameworks governing these industries, such as cannabis or adult content platforms.
• Monitor evolving societal norms and legislative changes relevant to these sectors, as shifts towards greater acceptance or clearer regulation could significantly de-risk investments and unlock substantial market growth.
• For impact-focused mandates, evaluate opportunities within these 'vice' categories that also present clear pathways to positive societal outcomes, such as advancements in sexual health or therapeutic applications of controlled substances, to align financial objectives with measurable social benefits.