Today's featured Cannabis Investor is Rod Stephan 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 Rod Stephan from Altitude Investment Management. 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 Rod Stephan - https://podconx.com/guests/rod-stephan Altitude Investment Management - https://www.altitudein.com/
Today's featured Cannabis Investor is Rod Stephan
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 Rod Stephan from Altitude Investment Management.
TWO12 - https://www.two12.co/
Raising Cannabis Capital - https://podconx.com/podcasts/raising-cannabis-capital
Dan Humiston - https://podconx.com/guests/dan-humiston
Rod Stephan - https://podconx.com/guests/rod-stephan
Altitude Investment Management - https://www.altitudein.com/
RC Altitude
[00:00:00]
Dan Humiston: Today on M cables podcast. We are continuing this year's cannabis investor series with rod Stephan, the partner at altitude investment management, rod. Welcome to the show.
Rod Stephan: Dan. Thanks very much for having.
Dan Humiston: Well, it was nice to meet you, and I'm glad you could do this today. I know from previous interviews I've had with your colleagues that you invest in both plant touching and non plant touching companies, but you're only invest in best of class foundational companies. And I thought to get things started, maybe you could define what it foundational cannabis company looks like.
Rod Stephan: Well, thank you for that introduction. Are following the evolution of the industry. Originally, it was pretty much a mom and pop industry due to regulatory challenges. And what's happened is. At this point in time, the industry has evolved to the stage where the winners are getting more easy to identify.
And we were fortunate enough to, to pick, for [00:01:00] instance, a couple of companies EMAC in Europe, which was recently purchased by cure leaf. And I'm a predecessor to cure leaf grass roots because they had best in class management and execution, which we were able to recognize early on. And um, the eminent.
Wave that's hitting the industry now has fortunately resulted in attractive returns for us.
Dan Humiston: That's really cool. like I've said this on other shows, if you look for a solid management team, that's had some experience, maybe some accidents in the past, that's usually a good indication that they're on the right track. Following that strategy, you seem to have built a very diverse portfolio Can you tell us a little bit about , your portfolio?
Rod Stephan: Yeah, as you alluded to, we have investments that touch the plant. I E highly regulated the THC as well as ancillary businesses that don't touch the plant. It could be seed to sale software. It could be genetics. Could be what's described in Europe as wellness, which is a cannabidiol or CBD, somewhat regulated, but not as highly [00:02:00] regulated as THC.
We have about 20 companies, probably around 60 million in market value right now. Some of which have had exits in the public markets or been acquired. Others are still continuing to evolve and build their business. But we do see this continued M and a surge that we've seen in 2021 as something that's going to only continue going for.
Dan Humiston: So a lot of the early investments that you made are now coming to the table as a possible M and a acquisition.
Rod Stephan: Yeah, I think as most industries evolve there was a lot of hype, when the taxi drivers are talking about it everybody starts getting involved. Anybody that gets a license thinks that they can print Bitcoin or something. The reality is that as any industry evolves, Cannabis is just like any other industry.
You have to start paying attention to cash flows and to being profitable. You can continue to finance growth if you can raise capital, but if you have excessive cost structures and [00:03:00] you have to continue to build, and all of a sudden the market window closes for capital raising, you can find yourself in a lot of.
yes, we see those companies that are being driven to M and a for cost savings for consolidation, for scale as something that's been happening in the industry and we'll continue that.
Dan Humiston: Yeah, I think that's fine. Like you said, it follows the same pattern that other industries have followed. I'm sure you get a lot of applications. What are two or three things that companies should. Include in their application so that.
it gets on your radar.
Rod Stephan: No, we get a ton of. Inquiries. We believe that the industry has evolved more and more. It's very hard for two guys and a piece of paper to start a new business. Most market niches have been filled. The competition is there and it's difficult. So it's no longer just angel money and seed money.
We're moving on to identifying those winners in series a series B series, CS financings, and bigger money. But we look [00:04:00] obviously, as you alluded to. A management team that has been successful with before the experience curve, even if it's outside of this industry is something that we know. I'd rather bet on the nut.
It's very important for us to, to know that there's a board of directors and that investors are represented at the management level at the board level. So for us, it's very important to have a say, generally speaking, we believe. In cross fertilization of ideas, of context, of best practices. So we like to be more involved in and less involved in helping our companies where we can.
And that gives in general, private equity and venture capital funds a leg up on the private investor. Who's just buying shares in a public company. For instance.
Dan Humiston: You make a good point there that it's getting really tricky. I know, I speak to a lot of individual investors and family offices are getting frustrated because most of the good deals sort of stay within this club [00:05:00] of cannabis and VCs. Is it pretty common for you to participate with other VCs on D.
Rod Stephan: it's very common. One of the things that we find isn't there as a club it's not just a closed club, but you'll partner with different private equity or venture cap firms on different deals. The amount of due diligence necessary to make a good investment cannot be overestimated.
And sometimes we may take the little. On behalf of another fund and they may take the lead for us on another deal. And in that respect, we're able to dig deeper. On each specific deal. And clearly there are some times where it helps to have majority control of a traunch of preferred equity or of convertible notes, so that you have more leverage with the company in terms of amendments and other issues that they might want to raise.
So I think it's very important to be able to work with other large investors. And that's something that we and other large funds are able to do.
Dan Humiston: And plus once you build [00:06:00] that relationship, you kind of trust where their strengths are. And you can say, these guys really understand this. If they've made the decision to invest, we don't need to do.
that extra due diligence. Is that.
Rod Stephan: Well, yes and no. We learned the strengths of our friends in the industry, as well as their weaknesses, but as fiduciaries, we still have to dot the I's and cross the T's. We do get to meet with management and every single case we kick the tires. And although we'll let someone else take the lead that's they take it 80% of the way.
And then everybody layers in before transactions.
Dan Humiston: Yeah. Yeah. I think that's. It's great. Being a fiduciary is other people's money that you really want to make sure that you can, you trust all the T's and dot all the I's. Let's talk about sectors that maybe have the big upside, as things have changed as the industry has evolved, there's probably some opportunities on the horizon.
What sectors do you see having the biggest upside over the next year or so?
Rod Stephan: Well, there are some [00:07:00] attractive catalysts that in the United States for the multi-state operators, the MSOC we've seen them start to consolidate and buy the smaller. Companies as they expand their geographic reach and try to get national footprints. I alluded to cure leaf earlier truly is one truly as well as Cresco and others.
And that scale allows them certain efficiencies that will allow them not only to cut costs through that acquisition, but to increase their return on equity and the cash flows. So MSLs, I think, are going to continue to be very attractive also. We do believe that the dominoes have fallen and it's very clear.
With the states that are legal, that recreational and adult use will be coming to the remaining states. It's just a matter of time. So I think the risk profile is a lot lower getting in. Now, maybe the returns will be somewhat lower than they were earlier from the risk takers, but the clear catalysts are their [00:08:00] earnings and profitability is going up because of the scale M and a is going to reduce costs, increase margins, and.
We have a growing addressable market with the legal market gaining from the illegal market and all these states as well.
Dan Humiston: that's golden goose everyone knows the money's there, it just needs to transition from the illicit market over to the legal market. Before we wrap, let's talk about if I'm an investor, what are some of the other advantages of working with altitude investment managers?
Rod Stephan: I, and my partners all come from the institutional side of the business. And as this industry grows to become more institutional, our backgrounds are very much aligned with the interests of the investor. We have managed a billions and billions of dollars before our back office how we process trades.
Risk monitoring is something that you don't see and you don't hear about it from other funds, but we've been there and we've done it before. That's one thing also, we have, most of us come from a distressed Yule liquid [00:09:00] environment in the past. We're used to dealing with the illiquidity that one faces sometimes in the cannabis industry.
And I think those two factors , will differentiate us a lot in this industry. And finally, I was , the head of research for the liquid assets for Citadel, a large hedge fund in Chicago or global hedge fund, and just the ability to dig deep and go through restructurings when necessary.
That's something that we have a ton of experience in, and I believe that that will endures the benefit of our members.
Dan Humiston: You're the first person that's ever said that to me about bad investments. And I couldn't agree with you more. I think just because they're not performing doesn't mean that. You just forget about them. I'm glad that you said that we have all of Altitude's contact information in the show notes.
So if you're a company that's looking for growth capital, or you're an investor that wants to consider working with altitude investment management, click the link. I'm sure somebody from Rod's team will be happy to speak with you, rod. It's been great getting to know you. Thanks for being on the show today.
Rod Stephan: Dan. Thanks very much. Look forward to catching up [00:10:00] again.