Today's featured Cannabis Investor is Nico Richardson The Cannabis Investor Series Sponsored by TWO12 is back for the Fourth year. This year, the Series will feature eighteen of the cannabis industry's top investors, reviewing the previous 12-months and sharing their 2022 investment strategies. On today's episode Dan Humiston is joined by Nico Richardson co-founder of AFI Capital Partners. Produced by PodConX TWO12 - https://www.two12.co/ Raising Cannabis Capital - https://podconx.com/podcasts/raising-cannabis-capital Dan Humiston - https://podconx.com/guests/dan-humiston Nico Richardson - https://podconx.com/guests/nico-richardson FI Capital Partners - https://www.aficapitalpartners.com/
Today's featured Cannabis Investor is Nico Richardson
The Cannabis Investor Series Sponsored by TWO12 is back for the Fourth year. This year, the Series will feature eighteen of the cannabis industry's top investors, reviewing the previous 12-months and sharing their 2022 investment strategies. On today's episode Dan Humiston is joined by Nico Richardson co-founder of AFI Capital Partners.
TWO12 - https://www.two12.co/
Raising Cannabis Capital - https://podconx.com/podcasts/raising-cannabis-capital
Dan Humiston - https://podconx.com/guests/dan-humiston
Nico Richardson - https://podconx.com/guests/nico-richardson
AFI Capital Partners - https://www.aficapitalpartners.com/
RC CI4 AFI
Dan Humiston: [00:00:00] Today on MJ bulls, we are continuing, this is two 12 cannabis investor series with Nico Richardson, the managing director at capital partners. Nico. Welcome to the.
Nico Richardson: That's great to be here. Thanks for having me, Dan.
Dan Humiston: Well, I'm glad you could join us today. Most cannabis investors have a specific sector or a specific stage that they like to invest in. For instance, some like plant touching and some like non plant touching and some like early stage and some like invest in later stage companies. Do you have a specific cannabis sector and a specific deal stage that you like to invest in?
Nico Richardson: We've put enough guardrails around ourselves in?
the sense that we don't really operate in other industries. We really do just focus on cannabis as our expertise. And because of that, , we've really played along the life cycle of multiple companies and also in the ancillary and plant touching spaces.
when we first started AFI capital partners in 2018 and our first fund, we had a core focus in ancillary companies. [00:01:00] And then we utilized a sidecar alongside our fund to invest in some plant touching opportunities for our investors.
Over time because we have, a pretty broad approach to cannabis. We've been able to flex into some plant touching opportunities for our second fund, really, because we see great opportunity in how the market's setting up right now.
Dan Humiston: How about the stages , do you prefer early stage or again, does it just depend.
Nico Richardson: Yeah. On the ancillary side, we really do go primarily early stage. , our first fund was much more set up as a venture fund in plant touching. . We are earlier stage, we'll put it that way. So we tend to fit , pretty well within the growth equity bucket.
we're not doing series D series E for late stage private companies going into, public companies. We don't do any sort of secondary public companies for the most part. Unless there's a very unique circumstance, , but typically we're not playing in that sphere.
We're looking. Series seed series, a bleeding into B on plant touching opportunities as well.
Dan Humiston: Okay. You mentioned this sidecar [00:02:00] maybe you can explain that a little bit further. Cause I think you're one of the few companies that actually employ that.
Nico Richardson: We've used it differently for different periods and what we're investing in. So really with our first fund, we used it as an opportunity for our investors to get looks at plant touching opportunities. Our first fund was really ancillary only yet. We were still doing , some individual investments in plant touching opportunities.
And we found over time that we had a pretty strong demand from our investor base , to get optionality into those opportunities. And so we created a serial LLC alongside of our fund where people could invest through that single one-off opportunities. We've continued with that strategy in our second fund.
So our second fund is all plant touching opportunities. It's all really single state, licensed private companies. And what we do at sidecar and in this opportunity now is we allow our investors , to maximize their optionality and to lean into investments. They really like within the portfolio.
And really we find that family offices that invest with us tend [00:03:00] to exercise that optionality in the sidecar quite a bit to the point where sometimes they'll leverage more capital , into the side car than they do into the fund itself. And , what it allows G and I to do and what it allows AFI to do it.
For a relatively smaller size fund, we can punch above our weight and end up leading much larger rounds with much larger check sizes. So you know, our last deal that we did was a Texas original out of Texas. The ratio of fun to sidecar was actually more like one to three than one-to-one. , it, because we have great partnerships with our investors whereby we can structure these deals with them in mind and they can lean into those little.
Dan Humiston: I mean, that's, that's interesting that they have that option to add on, you mentioned that you do a lot of single state single license. Deals. , do you do any deals prior to the license being issued? Like for people that are for a license or are all the deals once the license has been issued?
Nico Richardson: , we've viewed that a little more. Like buying a lottery ticket. That's not quite what we do, right. [00:04:00] Really what we do , is coming in, in the early stages , and, help bring expertise that we've seen from around both our portfolio of ancillary businesses, but also our plant touching ones and help new.
Licensed businesses sort of avoid the early pitfalls of new markets. And so the licensing opportunity, if you hit it, , it's great. , people will have phenomenal returns on those, but We view it a little bit more like a lottery ticket, your probability of failure is quite high.
And we like to avoid zeros. We're , squarely in that kind of three to five and up range is where we want to be in world war. We'll avoid taking on necessarily risk to do so.
Dan Humiston: Yeah, it's just, I just was curious because I'm sure there's a lot of demand for that. That's for sure.
Nico Richardson: Where we'd like to be is sort of this last investment in Texas, they'd been licensed since 2017. We came in and gave them growth equity funding in 2021 for them, it was still very nascent period because the Texas market hadn't really opened up yet. Now it's really blossoming and going quite quickly.
But there was a lot of know-how that we could bring to the [00:05:00] table and help them along. And. Okay. So they had a great operation beforehand. They're going to have a great operation afterwards with, or without our capital, but we feel like we gave him a little bit of , a headstart within the market script.
Dan Humiston: , it makes sense. There's no doubt about it.
You mentioned that you do some deals that are with bigger check size, but I also noticed that you do a lot of co-investing.
Are you in a network with other investors too, that you have these opportunities. Is that how they materialize.
Nico Richardson: honestly it really is just building out your network over time. So I've been in the industry since 2014, which is relatively early. And yet you end up spending a lot of time with a lot of other investors in the space. you say co-investing, I call it, putting club deals together.
So early on, that was a way for us to upsize our influence within checks that we were writing in the growth equity and venture spaces is you could lead rounds like we did with headset, with deciding we've done a lot of work well, can a number of other firms in this space that we like I guess in the early days, it's, it's ways to be scrappy.
And later on, we found ways [00:06:00] where we're, like I said, we can sort of upsize our checks through co-investment within our own LP base, rather than having to go out to market with other players. We still love doing deals with other private equity funds in the space that we work well with.
So that's never something that we write off.
Dan Humiston: Yeah, it gives you a huge advantage over individual investor. Who's just trying to pick winners because you are also getting approached by your peers saying, Hey, we've done some deals together in the past. an opportunity. Do you want in where, an individual investor doesn't even see those deals?
Nico Richardson: That's right. And especially from a governance perspective, you find other professional investors in the space that you work Well with. Then you sit on boards together and that really cements those relationships, which is I'd like to have Nico, or I'd like to actually sitting on this board of me because they bring something to the table.
They're going to roll up their sleeves. They do the work and vice versa. We have. Plenty of other investors. We love sitting on boards with. Cause they bring a ton to the table and to your point, it allows you , to not only bring additional capital to the table, but really bring additional expertise to the [00:07:00] table.
And that's probably the more important part in the end because a lot of this industry is built on relationships. It's not just who's the best operator, although that's very important.
Dan Humiston: Well most businesses really , boils down to relationships. It's just how it is. Talking about businesses, other investors that we've spoken to have commented that , the quality of the companies, looking for investment has improved substantially over the last 18 months.
Are you seeing.
Nico Richardson: Absolutely. If I roll back to our first fund, there were a number of reasons we did an ancillary only fund. One of them was that there wasn't enough track record in the operating sphere for plant touching businesses where you were confident that you were going to invest in a very strong operator.
That was part of it. Part of it was valuations back in 18, like late 18 were pretty wild. A fraction of where they were today on an actual evaluation basis, but from a multiple standpoint, we're talking 20 plus current year revenue multiples, which the current year [00:08:00] projections were again pretty well.
So. You've had a lot of time , since 2018, in any other industry, that's a blink of an eye and in cannabis that yawns, frankly to really suss out good operators. And because of that, you gain inertia within the industry. And as you've had better operators come to the forefront and prove that they can not only drive you out through their businesses because that's less meaningful.
It's actually cashflow to the businesses after two 80, once you've seen that and people have gotten to a point where they can, supplement external capital with organic growth with organic capital coming through the business. I think you've been able to pull in some really strong operators from outside the industry as well.
And it's that marriage of talent, which is really creating a new pool of, earlier stage companies and mid stage companies right now are far more grounded, far less pie in the sky than years fast.
Dan Humiston: before I let you go, I want to make sure that we talk about this. It's harder to invest as a, just a one-off individual investor. the valuations are more reasonable.
They're like you said, they're more grounded. The [00:09:00] companies, the management team, everything seems to be more professional and better. What are some of the advantages for investors to invest with AFI capital that we haven't talked about? What are some of the other advantages to jump in now?
Because this seems like the time you want to be jumping in.
Nico Richardson: What I would say is. We have a different approach for different times in the market. And we transitioned a little bit, our strategy towards fund two, which is what we're doing now, which is all, like I said, all private, single state operators. And then we have a sidecar where people can lean in with call investment.
I'd say why we think that's the best approach to take right now
is we see pretty big inflection points happening. Anywhere from a couple of months to a couple of years, both at the federal level and state level, across the country, pretty much. And where we play in sort of private, single state operators.
And what we're looking at is pretty massive, multiple arbitrage evaluation from where they sit and where your typical public MSO sits anywhere from five to seven on the current year [00:10:00] multiples Republic, MSO is from top tier, no bleeding down to fours, maybe. Up as high as 10, we're talking to anywhere between one and 2.5 on private, single state operators.
So being able to find good deals in that space and viewing this pretty wide arbitrage that's happening between. Private and public. We see, multiple expansion and growth coming out of . These deals is something that's quite likely over the next couple of years as those top tier MSOC, we expect them to load up their balance sheets.
Once we start approaching legalization again, and we have a March towards more federal change, we'd expect them to load up their balance sheets as their valuations start to climb, which we fully expect will happen. It's the easiest path to capital right now in the industry is investing in top tier MSLs.
And they're going to have to deploy that capital across the country in order to continue their path to growth. it's not to say they're not still going to have, limited license markets that they can tap into where they can win licenses. It's just, there's a lot fewer of those opportunities left.
Right. If, if we see them coming across [00:11:00] the country, they have to dip into markets like Texas. They probably have to acquire their way in there. They'll probably eventually have to acquire their way into California. The penetration of MSLs in that market is very light. The valuations are very suppressed at the moment for a single state operators that are private and yet, how can you be a national brand without having good exposure within that market?
Can't, you have to go through there. So we really focus on unique assets that we think are well positioned for consolidation with these broader national trends that we're seeing now. And we place our bets there and then we help those businesses grow. The next one that I talk about after that would be, grass stores, our delivery service out of Southern California, which is really a mobile retailer.
And the reason we liked that so much as it gives great data for any sort of MSO that we would want to enter that. Customer level data, it's an incredible tech platform. So you'd be looking into both acquiring penetration within California, and also acquiring a tech asset that you could potentially roll out across the rest of the country.
It's [00:12:00] those types of assets within the portfolio It's not quick returns, but we're expecting them to be necessary pieces of the puzzle as MSO start to work the way across the county.
Dan Humiston: I'm excited listening to that , it just feels like that's the direction everything's going and you guys seem like you're going to be positioned perfectly for that. We have the links to AFI capital in the show notes.
So if you're a company looking for some growth capital, or you're an investor that wants to talk to the gang over there about letting them manage your cannabis and investment, I'm sure somebody from Nico's team would be happy to speak with you, Nico. Appreciate you being on the show today. This was a lot of fun.
Nico Richardson: Dan. Thank you. I really appreciate it.