Episode 50: Private Credit Opportunities in a Fast Growing Industry | Meet Altmore Co-founders Steve Ham and Patrick Kim Specialists with $300 Million in Cannabis Capital | “Meet the Boutique” Series

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Cannabis capital curious? Steve Ham and Patrick Kim of Altmore Capital are here to show you the way. 

Although it has advanced considerably over the past half-dozen years, the U.S. cannabis industry remains full of complexities as it rapidly matures.

That’s why today, Stacy and the Altmore team are covering: 

• The current cannabis capital landscape 

• Private credit’s prevalence in the industry 

• Altmore’s approach to countering the volatility that comes with the cannabis capital territory 

• How investing in this niche market can enhance an already diversified portfolio

• Their backstory – From leaving their high-profile jobs in private equity and law to co-founding Altmore 

This is part 1 of our Meet the Boutique Series, where we’ll take you behind the scenes to see how top asset managers innovate and thrive. 

Enjoy this episode? Hit subscribe! There are more exclusive webinars to come. 

About Steve Ham:

Steve Ham is Co-Founder and Managing Partner at Altmore Capital. He is an accomplished private equity investor and senior executive with over 20 years of experience in private equity, technology, and venture capital. Prior to Altmore Capital, he was with The Carlyle Group, RedZone Capital, Sterling Partners, Thomas Weisel, and Citigroup.

About Patrick Kim: 

Patrick Kim is Co-Founder and Managing Partner at Altmore Capital. He was a partner with the Williams & Connolly law firm in Washington D.C., which he left in 2018 to start Altmore Capital. At Williams & Connolly, Patrick represented a variety of major financial institutions and investment funds, including several top-tier PE firms, in a range of commercial litigation matters and government investigations.

TRANSCRIPT

Below is an AI-generated transcript and therefore it may contain errors.

[00:00:00] Steve Ham: Over the next two or three years and the industry grew from 800 million revenue to 4 billion to 10 billion to 15, 20 billion. Just to give everyone a sense of scale, beer in the United States is something like 105 billion. 2024 US cannabis is expected to be. So it's closing in on half the size of beer, but back in the early days, it wasn't close to that.

[00:00:25] Stacy Havener: Hey, my name is Stacey Havener. I'm obsessed with startups, stories, and sales. Storytelling has fueled my success as a female founder in the toughest boys club, Wall Street. I've raised over 8 billion that has led to 30 billion in follow on assets for investment boutiques. You could say against the odds, yeah.

[00:00:46] Stacy Havener: Understatement. I share stories of the people behind the portfolios while teaching you how to use story to shape outcomes. It's real talk here. Money, authenticity, growth, [00:01:00] setbacks, sales, and marketing are all topics we discuss. Think of this as the capital raising class you wish you had in college mixed with happy hour.

[00:01:10] Stacy Havener: Pull up a seat, grab your notebook and get ready to be inspired and challenged while you learn. This is the billion dollar backstory podcast.

[00:01:22] Stacy Havener: Welcome to our intro call. Thank you for being here. I'm Stacey Havener, founder and CEO of Havener Capital. We are Altmore's marketing partner, and I will be your host for today's call. So today we are going to open our minds. and challenge our biases as we explore a new frontier of investing, cannabis, and a new way of accessing that industry, private credit.

[00:01:51] Stacy Havener: This is what Altmore calls cannabis capital. I think we can all agree that cannabis presents an interesting opportunity, but when [00:02:00] something is new and when it's complicated, when it's polarizing, you need a guide. And you need the right guides. That's where today's guests come in. Steve Hamm and Pat Kim, co founders of Altmore Capital, are here with me today to talk about their backstories, how they founded the firm, what they specialize in at Altmore, how it's different, and, and I verified this with them in the, in the green room before the call.

[00:02:27] Stacy Havener: They are here to answer questions. Any questions that you might have about cannabis, nothing's off limits here. So there's no stupid questions, so to speak. You can ask anything about cannabis and I'm going to be asking questions too. So Steve, Patrick, thank you so much for being here with us. Thanks for

[00:02:45] Steve Ham: having us.

[00:02:45] Steve Ham: Definitely.

[00:02:46] Stacy Havener: Yeah. Before we kick things off, I want to start with backstories. It's my favorite part. And I think it gives so much context to the overall Altmoor story. So Steve, why don't we start with [00:03:00] you? Tell us a little bit about your journey to get to where you are today.

[00:03:04] Patrick Kim: Absolutely happy to do it.

[00:03:05] Patrick Kim: Steve Ham here. Before I founded Altmark Capital back in 2018 with Pat, I was in private equity for about two decades. I started my private equity career with the Carlyle Group. There I was one of the few generalists at the firm looking for alpha in different industries. So I was one of the founding members of Carlisle Asia and thereafter investing in also aerospace and defense industries in the U S as well.

[00:03:33] Patrick Kim: But I looked at many different industries, whether it was technology, aerospace and defense, whether it was entertainment or, or others, I was given the free reign to really look for that extra alpha in different industries. After Carlisle, I had an opportunity to start a private equity firm with an owner of an NFL football team.

[00:03:54] Patrick Kim: So I did that for a number of years and I came across cannabis in an opportune [00:04:00] way, which we'll go over in detail in a little bit.

[00:04:02] Stacy Havener: Awesome. Yeah. Tell more

[00:04:03] Steve Ham: about how the NFL manager.

[00:04:07] Patrick Kim: We'll have another, another chance to do it. But in short that NFL football team owner was really interested in buying a yacht, which he had sold earlier.

[00:04:17] Patrick Kim: So it was one of the very few, or actually I think it actually might be the only yacht than IMAX theater in it. So that had a. Pretty big impact on the funding as well as the interest to continue to invest.

[00:04:32] Steve Ham: So basically Steve worked for years to build up this fund so that the yacht could have an IMAX theater.

[00:04:38] Steve Ham: Oh

[00:04:38] Stacy Havener: my gosh. Sort of unintended consequences, if you will. And before we go to Pat, there's one other part of this story. I love that. We're all sort of asking each other questions that I wanted you to touch on if you could, because after you partnered with the NFL. Then you actually did a stint as a founder [00:05:00] yourself.

[00:05:00] Stacy Havener: Can you talk about that?

[00:05:01] Patrick Kim: Yeah, absolutely. So after that private equity firm, I obviously, one of my goals was to be an entrepreneur. So I made a quick, maybe not a detour, but really entree into operating companies was a nanotech company up in Boston. The application of that nanotechnology was really.

[00:05:19] Patrick Kim: Strengthening the carbon fiber that that's used in aerospace and other aeronautical applications. So given that it was a really lengthy and highly regulated industry, so I had a pretty deep understanding of what a highly regulated industry and creating demand in that type of environment was like. And to be honest with you, I think it was probably one of the.

[00:05:44] Patrick Kim: The most rewarding experience ever, because really understanding how difficult it is to run an operating company. I think that ultimately made me a much, much better investor being able to see really the both sides of investing as well as operating companies. [00:06:00]

[00:06:00] Stacy Havener: I love that last comment, and I bet it made you think back on all the deals that you had and founders you've worked with with a much different level of appreciation.

[00:06:10] Stacy Havener: So thank you for sharing that, Steve. Let's pull, especially kind of that regulation kind of Complexity legal thread forward. I think it's a great dovetail pat into your backstory. So it's your turn to be on the hot mic.

[00:06:24] Steve Ham: Sure. Thanks. Yeah.

[00:06:25] Steve Ham: So I have a law and business background and it's really over time been bouncing back and forth between law and business.

[00:06:32] Steve Ham: I hate to bring my parents into it, but much to their chagrin. So after, after law school, instead of practicing law and having this stable career and all that kind of stuff, I went into management consulting. Okay. So for five or six years, I was a management consultant in the New York office of McKinsey in a variety of industries.

[00:06:53] Steve Ham: And then towards the end, focusing on, um, on finance and financial institutions. Then I got married, moved [00:07:00] down to Washington, DC. Even I was. You know, why did I go to law school if I'm, if I'm never going to practice? So I thought I would try a law for a couple of years. And I joined Williams and Connolly was a fantastic firm.

[00:07:11] Steve Ham: It's probably a leading litigation law firm in the country. And my couple of years wound up being something like 16 years. I became a partner there, did great stuff, worked on like Enron and FIBA bribery cases and Rupert Murdoch phone hacking, a lot of really, really, really interesting stuff. And then kind of got a seminal call.

[00:07:32] Steve Ham: Back in the day from Steve and towards the end of the time that I was, I was at this law firm, I too had the entrepreneurial bug. And I remember doing the bucket list exercise and writing down, you know, on a piece of paper, what you've done on the top half and on the bottom half, what you, what you haven't done.

[00:07:50] Steve Ham: And I really thought I would spend the rest of my career in big law, but. Yeah. But one thing I kept circling was starting something, building something. And I remember this is maybe like a [00:08:00] year before Steve called me one day. And I remember I sort of socked that away and didn't really think about it again until we had that conversation.

[00:08:08] Stacy Havener: So good and such a cliffhanger. Okay, great. So let's take it. So backstory, backstory. Now we're going to bring them together. How did you end up deciding Baltimore and cannabis? How'd you go from private equity, nanotech and big law and come together and say, it's cannabis for us.

[00:08:26] Patrick Kim: Yeah, so I can give you a couple of minutes on that.

[00:08:28] Patrick Kim: So one day in Boston, I was at a dinner and ended up sitting next to a youngish guy who was a little bit cagey about what he did for a living. And, you know, it's typically people are very open and they kind of share what they do for a living. And it just, there's a, it's a nice small talk, but for some reason he wasn't.

[00:08:46] Patrick Kim: So to open that can of worm, I served him. Couple more drinks of wine and and he started sharing. Steve is,

[00:08:53] Steve Ham: Steve is really good with

[00:08:54] Patrick Kim: doing that. Sharing what he does for a living. I believe like relationship is where you find a lot of [00:09:00] really interesting, you know, investment opportunities. And, and, you know, I always kind of come back to that.

[00:09:04] Patrick Kim: Right. So how do you, how do you get the details of why he's. Ended up at this dinner party. And he eventually shared that he does real estate investing and he just did a 30 cap deal. And at that point, like maybe I served in one too many drinks. So you mean three cap deal? But he kept saying, no, it's a 30 cap deal.

[00:09:25] Patrick Kim: And I'm like, no, it doesn't exist. And that's when he finally shared that this is a real estate investment in cannabis industry. He said, Hey, I'm not joking. Why don't you come and visit me? So I literally booked a ticket next week and then visited his real estate opportunity. And really he did make a 30 cap investment.

[00:09:44] Patrick Kim: So he bought the plot, rezoned it, got a tenant in that was paying 30 cap. From his original investment amount, so that's, that's kind of when really the, the long and deep rabbit hole into looking into [00:10:00] cannabis as an investment opportunity came about and Pat and I have been friends for decades. So, as a trusted legal mind, my 1st call that Pat mentioned earlier.

[00:10:10] Patrick Kim: Was to Pat kind of figure out, Hey, if I were to put together a investment fund, can you help me think through some legal issues for pooling money together to invest in, into the industry? And

[00:10:23] Stacy Havener: of course, I'm always excited to get

[00:10:25] Patrick Kim: a new client. Yeah, that's right. So he was very excited that like, Oh, new client, but obviously I ended the call.

[00:10:32] Patrick Kim: You're going to do this for free, right? So that's how really the story started. I got

[00:10:38] Steve Ham: this call. Cannabis, this is back in 2017. Cannabis was kind of in the news. But not really. It had gone legal, adult use legal, in Washington State, Oregon, Colorado, at least in D. C. on the, on the East Coast. It was kind of a thing that was out there, but I put it this way.

[00:10:56] Steve Ham: I don't think at that point there was like 400 million of [00:11:00] revenue total in U. S. cannabis. Like right now there's 40 billion of revenue. So it was really nascent. And so first I helped Steve legally. Can he form a fund, what are the legal aspects with it with federal legality and all that kind of stuff.

[00:11:14] Steve Ham: Then I took off my legal hat and started helping him business plan it and we started bouncing powerpoint presentations back and back and forth like investor pitch decks. And for me, I think I knew pretty early. I've been working as a consultant during the first internet boom and also the second one.

[00:11:34] Steve Ham: And when this green wave hit and you could really feel it coming. Um, back then for me, I just thought back to the bucket list, life is short. This is an opportunity to build something and be really be there at ground zero. So eventually I, you know, Steve and I's wives are friends too. So eventually I went to my wife, I'm like, you know, and I'm thinking about joining Steve and she was completely supportive, although she will still kill you if this doesn't work out.

[00:11:59] Steve Ham: [00:12:00] I

[00:12:00] Patrick Kim: begged him not to do it. I begged him not to do it. But that

[00:12:05] Stacy Havener: is so great. What a fabulous story. What a fabulous story. So now it's real. So you're doing it. You've got this inspo of this dinner guest that you met. And so what's the plan? Like, what do you do from there? And kind of, I want to tie in, how did you get capital back then?

[00:12:23] Stacy Havener: Cause to your point, Pat, this is really a new frontier in 17. So I'll let you kind of take that in whatever direction you'd like, Steve. So, and let's work in your anchor investor who's still with you today.

[00:12:36] Patrick Kim: Yeah. So the very first iteration of our investment strategy really was focused on real estate investment in cannabis.

[00:12:45] Patrick Kim: We did for a second thought about investing in equity in cannabis, but certainly given my background, that was. Probably the easiest way to go about it, but sitting around and really discussing what is the best way to invest in this nascent, [00:13:00] but very dynamic and somewhat turbulent at that moment, 2017 was really early.

[00:13:05] Patrick Kim: So difficult to really kind of see around the corner, know who's going to be the winners and the losers. It's really difficult to do so. We came around to asset backed and we did do a real estate deal in cannabis. But one of our friends who is in the industry asked us, Hey, is there a way to really match the uses of the funds and the length of the capital that could support that use and came around to really looking into, or pioneering really the turnbone strategy with warrants.

[00:13:38] Patrick Kim: So this was back in 2017, and we did our first cannabis with warrant deal in 2018. And since then, we haven't looked back.

[00:13:47] Steve Ham: If I could add a little color to that.

[00:13:49] Stacy Havener: Yeah, please.

[00:13:49] Steve Ham: So if you are, this is back in the early days in 2017, 2018. If you want a license to, I don't know, do a cultivation facility, There were very, very limited [00:14:00] options for you to build out the cultivation facility.

[00:14:03] Steve Ham: And these things take a lot of capital, like 10 million, 20 million, 30 million of capital cultivation facility. And if you're lucky, you can pass around the hat to friends and family. The main way to do it back then, it was bizarre. But if you had some option to buy the property, From the owner for a regular price, whatever the property is worth, you could turn to a couple firms and say, well, you buy this 5 million property off of me for 20 and I'll use the 15 to build out the property and I'll sign up to your 20 year lease.

[00:14:39] Steve Ham: For 20 million dollars forever, and so you needed the 15 million bucks for like a year to build out the facility, but you've signed up for 20 years and what this guy had turned to us and said was, is there any way you can just loan me the money for 4 or 5 years? And that's when Steve and I. But I don't know.

[00:14:59] Steve Ham: [00:15:00] We got a bunch of lawyers and consultants and I think this was the first major private credit deal. We figured out how to do it with all the, you know, you can't go to federal bankruptcy. There's a license involved, all this kind of stuff. We figured out how to do it. Real estate rises in value. So we wanted some continued upside.

[00:15:18] Steve Ham: We would got we borrower and that. Structure is all we've been doing for the past six or seven years is that short term equity structure. Yep

[00:15:32] Stacy Havener: Are you an investment boutique looking to grow your business and need a little help If you feel like you're fighting for the spotlight and well still stuck in the shadows of the bigs join us in the boutique investment collective Havener's new membership community dedicated to the specialist in the investment community In the collective, we'll guide you through the billion dollar blueprint we've used to help boutiques add over 30 billion in AUM.

[00:15:55] Stacy Havener: You'll refine your story, focus on your ideal target market, and [00:16:00] practice your pitch. You'll rethink your marketing materials, rewrite your emails, and refresh your differentiators. We'll even help you step up your LinkedIn game and give your profile a makeover. You want to grow your biz. We've got your back.

[00:16:13] Stacy Havener: Learn more about the collective, the curriculum, and the amazing coaches who will help you on your journey. Visit Havenercapital. com slash collective high five. Hope to see you in a coaching session soon.

[00:16:33] Stacy Havener: Yeah. And I love that it was one of your operators that sort of gave you the idea. I mean, we always talk about like, you know, when you serve, A niche when you serve a target market, how do you help them get where they need to go? And this person gave you sort of like, here's what I need. And it turns out, of course, hindsight being 2020 to be brilliant.

[00:16:54] Steve Ham: To be clear, Steve and I usually take credit for the idea, but that guy might be on this podcast. [00:17:00] So we kind of, we got to be. Be truthful about it. Yeah. It was, it was technically, he said,

[00:17:05] Stacy Havener: this is what I need, right? This is what I need. And then your brilliance was how to figure that out. The person presumably needed it for a long time and couldn't figure out how to get there.

[00:17:15] Stacy Havener: Hence, why are the guides that we're all turning to? Okay. So now you've got the model, you know, you sort of made it, you made it up, you made it real. And now you need capital because, of course, this is private credit. And so let's then turn to the anchor investor and kind of bring them into the story.

[00:17:34] Steve Ham: So actually, right now, we have three anchor investors.

[00:17:36] Steve Ham: They're all fantastic. In hindsight, for us, Something that we didn't consider that much back in the day, but now that we look back on it makes a huge difference and is probably the sort of the overwhelming factor for us and who we partner up with is cultural fit at Altmore. We are collaborative, we talk things out if there's problems, we don't scream at each other, we sit around a table, [00:18:00] we kick around ideas, we use the whiteboards incessantly and that's exactly what our anchor investors are like the 1st and main anchor investor that we have.

[00:18:08] Steve Ham: We were introduced to them. Through somebody they made two cannabis investments back in the day, and this was a New York family office. The family had a really well known chain of sporting goods stores that they sold to a private equity firm, and then the family office kind of split into two arms. One was.

[00:18:28] Steve Ham: More alternative looking for alpha and the other was kind of more traditional diversified investments. And the anchor that we got is the arm that's the sort of alternative looking for alpha anchor. And way back in the day, they made two cannabis investments, one with a REIT that was doing that sale leaseback structure that I, that I mentioned, and the other with us.

[00:18:51] Steve Ham: And they are great. We really liked them. A lot of them are golden sacks, former people, and we don't hold that against them. We they're still great people. [00:19:00] And over time, they've been in every single one of our investments and they've anchored every single one of our funds over time, it got to the point where.

[00:19:10] Steve Ham: We were listed on their website and we would move up and then move up and then now I think we're the sort of first thing on their website and somebody might correct me that it's just that all more starts with an A. And that's the only significant.

[00:19:20] Stacy Havener: Yeah,

[00:19:22] Steve Ham: but we like to think it's because we're the most important.

[00:19:24] Steve Ham: I think at least as of last year, I think we were the largest position. Yeah, I

[00:19:28] Stacy Havener: think

[00:19:29] Steve Ham: we still are. So that's Kind of emblematic of who are early investors was really forward looking family office and high net worth individuals that are open to off the runway stuff. It's really changed over time.

[00:19:43] Steve Ham: Institutions really aren't Yet investing in cannabis and cannabis firms in a big way, investment funds in a big way, but the type of family offices has gotten much more institutional over the past five or six years as this industry has grown and [00:20:00] become much more like a real thriving any other industry sector.

[00:20:04] Steve Ham: So our last two anchor investors, like one of them, I don't want to name them, but it's. Got, I think, 30 investment professionals in an office and, you know, many billions of dollars under management. The family has a major business school, top 15 business school named after them. It's that kind of family office slash institution.

[00:20:25] Steve Ham: So it's, it's really changed over time and they, they've all been critical.

[00:20:28] Stacy Havener: That's really interesting to see it evolve. So I wanna stay on that evolution concept for a second because. The investor base is evolving. And of course, the industry of asset management companies focused on cannabis has gone through quite a transformation.

[00:20:48] Stacy Havener: And I wondered if you could just take us through that a little bit. I mean, you're an OG. I mean, you're both OGs just as people, but like, even as a firm, you're an OG in this [00:21:00] space. And so that's, you know, we could get like a little name tag for But can you just give us the, some of the evolution? And take us to today, you're still standing, which by the way, high five.

[00:21:11] Stacy Havener: Yeah.

[00:21:12] Steve Ham: So when Steve and I started, the industry was thousands of licensees, like people that had spent hundreds of thousands of dollars to win a license. There wasn't that much in the way of sales or revenues. Not yet. And then the sales and revenues came. Over the next two or three years, and the industry grew from 800 million revenue to 4 billion to 10 billion to 15, 20 billion, just to give everyone a sense of scale, beer in the United States is something like 105 billion.

[00:21:45] Steve Ham: 2024 US cannabis is expected to be 40, so it's closing in on half the size of beer, but back in the early days, it wasn't close to that. Then these cannabis operators started getting bigger instead of. One cultivation and two dispensary, [00:22:00] some of them started having five dispensaries, 10 dispensaries, 50 employees, 100 employees, 200 employees, they just got bigger and bigger.

[00:22:07] Steve Ham: And now some of them could go public in Canada and have OTC listings in the United States. Some of them are multi billion dollar companies. It's like a consumer package goes healthcare, multi billion dollars, there's actual sales. And bricks and mortar businesses underlying it, so it's really grown and we've at least for me, I think the most satisfying thing is the term is thrown around, especially in California.

[00:22:34] Steve Ham: And I remember this was maybe 6 or 9 months ago. I was in California. We're meeting with one of. Our borrowers, who's certainly a California OG, and there was another guy there, I mean, he had done a lot of stuff, including like, gone into ancillary business outside of cannabis, and I said something like, oh, like, you OGs in California cannabis, something, something, and one of them turned around and he said like, Pat, You're an OG [00:23:00] as well.

[00:23:01] Steve Ham: And out of all the different things I've done in my career and feedback I've gotten, they're like, Oh, we won the trial or whatever that might've been the most satisfying bit of feedback. I was like, Oh my God, Steve and I, we were there at the beginning. Yeah. It's respect.

[00:23:16] Stacy Havener: And so Steve. Anything you want to add to that, but also I'm curious just about that asset management piece, because, you know, there were maybe more players.

[00:23:25] Stacy Havener: I don't know. I defer to you, but it was a different composition of players that had capital to support. Cannabis companies then and can you kind of take that piece? Maybe?

[00:23:37] Patrick Kim: Yeah, absolutely. So in the beginning of the industry, as we mentioned earlier, cannabis is a fairly capital intensive business, right?

[00:23:46] Patrick Kim: So if you think about regular C. P. G. company, you have to Yeah, absolutely. Put together on manufacturing plant in cannabis case that's cultivation and then you need to process and manufacture that into a product that's packaged and ready to be [00:24:00] sold at a retail store in cannabis parlance that would be a dispenser.

[00:24:04] Patrick Kim: So, set all that stuff that that supply chain up. It takes a lot of capital. And what creates even more complication is each state has its own supply chain. So, it's not like Coca Cola who has one distribution center that distributes to multiple states. It's, it has to have a supply chain that's contained within a state.

[00:24:27] Patrick Kim: Whatever amount of cannabis is contained within a state, Produced in one state must be consumed within that state. So as a result of that, this requires a fair bit of a capital to get started. In the beginning, as we mentioned earlier, you know, it was a lot of past the head equity, a lot of friends and family around.

[00:24:44] Patrick Kim: And then there were some venture capital firms that came into the industry and invested a lot of money into what we call cannabis euphoria. So if you kind of look at the stock charts of some publicly traded cannabis companies in their. I would say [00:25:00] six, seven years ago, you are going to see some crazy high valuation, something akin to what we saw during the, the internet heyday back in the late 1990s.

[00:25:10] Patrick Kim: These companies were trading at 20, 30 X forward gravity. As I mentioned earlier, this is a highly regulated industry. And as a result of that does unfold much slower. Internet didn't have that issue. So, it took a lot longer for the legalization number 1 and number 2 for the supply chain in each state to get built out.

[00:25:30] Patrick Kim: So, some of that euphoria has gone the other way. So, there was a significant correction of the stock market. So. The excitement over equity has waned. I think it kind of played out in a way that we certainly didn't expect it, but really in our favor. So our investment strategy of asset backed senior secure debt with warrants strategy has really become a hit.

[00:25:54] Patrick Kim: The most favored capital source for the industry. And I would say maybe three, four [00:26:00] years ago, there were a few, a handful of capital providers in the industry. We have been extremely careful in which credits that we invest into. And if you look back, I think we funded less than 3 percent of the deals that we've screened, and these days it's significantly less than that.

[00:26:18] Patrick Kim: There were a few providers capital in the past that wasn't as picky and choosy those firms have exited the industry. So right now, in terms of amount of capital that's available from, you know, institutional players like us has been significantly diminished. And I think that provides for an extraordinary opportunity to generate some really, really incredible attacks.

[00:26:43] Steve Ham: The one piece of call I think I would add is Steve has been. Really adamant about our investment strategy from the get go after we landed on senior secured with, with warrants to operators that are doing well and growing, we never moved [00:27:00] off of that times. It seemed like we should. I distinctly remember we met these 22, 23 year olds.

[00:27:07] Steve Ham: They had just graduated from Suffolk university in Boston. We met him at a convention and they said something like, Oh, can you fund us? We just won this license. And we said, Oh, we don't fund startups, but why don't you let's exchange cards and like, let's stay in touch the next two or three years. And if you get up and running, maybe there's something there.

[00:27:25] Steve Ham: And we saw him six months later. I mean, it might not even have been six months at a different conference. And like, Hey, how's it going? How's the build out going? They're like, Oh, we sold those licenses. We're like, Oh, you did. And we're like, who'd you sell them to? Oh, we sold them to this company. We're like, Oh my God, we know those guys.

[00:27:42] Steve Ham: How much do you sell them for? They go 20 million. And so we talked and we said, congratulations. We walked away. And I remember turning to Steve. I'm like, Hey man, are we doing this the right way? Are we doing this the right way?

[00:27:57] Patrick Kim: And we've had, Very similar conversations and [00:28:00] situations that we've come across multiple times.

[00:28:03] Steve Ham: Yeah, we've really stuck with it. We have the conviction that in a high growth, but nascent and volatile industry, get the senior secured debt and then get some upside on the warrants. And it's really. There's been a lot of cycles in this market and right now it's, I think we go to conferences and people are like, Oh my God, I wish we had your investment strategy.

[00:28:25] Steve Ham: And you guys are so well positioned, et cetera, et cetera. And this is compared to the VCs compared to real estate investors compared to a lot of, a lot of different things. So we're really glad. And we're sticking with this investment strategy, continue to believe it's the best way, but there's definitely been ups and downs and times when it's been hard to even get meetings with borrowers because they're like, well, why should I take your money when I can go public in Canada and get 20 million?

[00:28:50] Steve Ham: And the answer is, and Steve and his team tell them this, the answer is you should go public in Canada. And then why don't you talk to us after that and grab that capital [00:29:00] first. And so it's been a road. Yeah, definitely.

[00:29:02] Stacy Havener: Fascinating. Steve, anything you want to add to that?

[00:29:04] Patrick Kim: I think only thing that I might add is the reason why I think right now is, is a really, really interesting and favorable environment is, is really because of in the face of this high growth, there is really a significant lack of capital.

[00:29:19] Patrick Kim: What I've seen over the last, you know, I would say this has been accelerating over the last, I would say three quarters or so. The amount of warrants, really the free equity that we're getting has significantly increased from call that a year, a year and a half. So that equity kicker that we think is an extremely valuable portion of our investment strategy is only getting better.

[00:29:41] Stacy Havener: So let's talk about that. I usually don't go too much into process or kind of structuring and save that for people who want to dive deeper with you, but I just think that this is so different that it might be good to spend a moment on it because private credit, there's a lot of capital going after private [00:30:00] credit, just as an asset class because of the dynamics there, but you're adding in something really interesting.

[00:30:07] Stacy Havener: So can you kind of just Tell us what, what that deal looks like.

[00:30:11] Patrick Kim: Yes. I can give you a really interesting example. So about six months ago, we helped an operator in Maryland by acquire a dispenser because there is a lot of, well, number one, We've done a really great job of creating a really a partnership.

[00:30:28] Patrick Kim: That's number one. So with that trust with our partner, we are able to structure some really unique investment opportunities. And that investment opportunity went something like this. We provided them the acquisition financing for that dispensary. And this was right before Maryland went adult use legal.

[00:30:48] Patrick Kim: So we were able to fire that business for on a trailing 12 months basis. But typically what happens is when a state goes from medical to adult use [00:31:00] legal, the market typically grows anywhere between two to three X. So we knew that there was a lot of revenue for opportunity for revenue growth. So we financed that acquisition, but we also asked for about 50 percent of the equity as well.

[00:31:15] Stacy Havener: Five

[00:31:15] Patrick Kim: zero. Five zero. Okay.

[00:31:18] Steve Ham: So it was, by the way, at the time, I thought Steve and Mike and the biz dev team were crazy for asking for that amount, but they said like, look, it's, it makes sense for the borrower. They have no other option.

[00:31:34] Patrick Kim: Yeah. So I mean, it really, for, I like to call them our partners for that partner is a very binary for them. Right. It was whether they actually could plug this into their ecosystem or they lose the deal. And, um, obviously for them, it was worth it. Right. So that deal is incredible. It's going to be one of our home runs that the loan that we provided has already paid down approximately 35, 40%, uh, [00:32:00] within six months.

[00:32:01] Patrick Kim: So we'll be fully out of that loan facility in about a year. And we'll have a perpetual dividend, about 50 percent of the dividend in perpetuity.

[00:32:10] Steve Ham: And it's been really good for them. Borrowers, well, I've expanded their footprint. They grew the business. It's strategic for them. And it was either get it or don't get it.

[00:32:20] Steve Ham: It's kind of, that's the lack of capital. I was just going to

[00:32:23] Stacy Havener: say the same thing. Okay, so clarifying question for me. So in order to get the 50, what was the rate? Are you horse trading rate? For warrants or how how does that work?

[00:32:35] Patrick Kim: That's a really good question. Yes There are a few levers that we can pull and adjust the total return So we're a cash flow lender at the end of the day, right?

[00:32:45] Patrick Kim: Because we're we're a debt fund that distributes on a quarterly basis. So that's kind of our basis from there We adjust on oids or origination fees or other fees and the equity I'm not going to be here telling everybody that [00:33:00] this is a kind of a usual deal. This is like a special set, right? This is a special set that we were able to kind of uncover because of the environment in which that we operate in.

[00:33:12] Patrick Kim: I think there are still several of these deals that we can do. And this is why I'm very bullish for the next, at least 12 to 18 months, that this fund that we're raising for is going to be an extraordinary vintage.

[00:33:25] Steve Ham: I mean 50 is unusual. That is a special situation. But yeah, like as an example our current fund I think has seven or eight investments And if you look at the warrants that steve and his team have been able to negotiate for each like five or ten million dollar loan, it's like he gets 1 percent of the company's equity, 3 percent of the company's equity, 5 percent of the company's equity, 2 percent of the company's just comes with these loans.

[00:33:49] Steve Ham: So it really aligns us. And then it gives us a kicker to look forward to when there's eventual federal legalization and all that kind of stuff. Yeah.

[00:33:57] Stacy Havener: Yeah. I mean, I think that's great. [00:34:00] I'm so glad we talked about that. It's such a capital Starved market now that it puts you I mean, even though I can only imagine like when you're a founder and you meet other founders who are just ringing the register and you're like, I'm killing myself and this 20 year old is just getting 20 million bucks for blinking.

[00:34:20] Stacy Havener: It's so hard. But now here you are today. You're playing the long game because you're, you're standing, you're an og, you have money, you have an institutional investors behind you, and it's just like all the stars are aligning for something really special here for you and your, your investors, but also for your operators because they don't have.

[00:34:44] Stacy Havener: A capital source, like you said, they're out of business if they can't get the funding to keep going. So it's an incredible story. I'm watching. We're getting some questions, which is fabulous. 1 of the questions. That's come up. [00:35:00] Is it okay? I want to switch to questions because now we've got more coming. I'm watching.

[00:35:04] Stacy Havener: Bring it on team. How are you collateralizing these deals? I mean, you said, Steve, you're basically cash flow lenders. Do you want to just elaborate on that a little bit?

[00:35:14] Steve Ham: We try to be 30, 40, 50 percent loan to value. So if we do a 5 million loan, we honestly, 10 million of collateral, 10, 20, and so on and so on.

[00:35:24] Steve Ham: Our collateral is the operating assets of the business. Let me give you a good example. We did a loan in Las Vegas. It was a small to medium sized vertical cannabis operator. In Las Vegas, it had a great group of equity investors, like the two former mayors of Las Vegas, and it really kind of all starts with like 40 or 50 million have been put into that business.

[00:35:48] Steve Ham: And we loaned them 15. Million dollars for a lot of reasons, the business was never as profitable as we thought it should be. And I think as most people thought it should be, [00:36:00] so it got to the point where they couldn't pay the interest anymore. And they asked us to forebear and we go through a lot of decision making when we're in this circumstance.

[00:36:07] Steve Ham: Sometimes we can get everybody around the table and recapitalize the business, you know, lean on equity. Sometimes we go all the way down and sell off all the different operating assets. Sometimes we, we take a more active role and we look for buyers ourselves. In this particular case, this company had three assets at a dispensary.

[00:36:26] Steve Ham: It had a great manufacturing facility and a cultivation facility. We essentially sold the dispensary and the manufacturing facility and got all of our money back.

[00:36:36] Stacy Havener: Nice.

[00:36:36] Steve Ham: The cultivation facility, which, you know, investors had put in something like 15 million to build out, we decided to keep. Mm hmm. And one of our other borrowers, or one of our other portfolio companies, It was a little bit happenstance, really wanted to come into the Las Vegas market.

[00:36:54] Steve Ham: It's a great place to launch your brand nationally because of all the tourists and we work with them [00:37:00] and we basically took the cultivation facility and we think that there can be a perpetual dividend for our first debt fund from that. And that's kind of how we think about it. It's the operating asset level.

[00:37:13] Steve Ham: How many dispensaries do you have? How many other facilities do you have?

[00:37:16] Stacy Havener: Steve, that's great, Patrick, and thanks for bringing it to life with a story. Steve, anything to add to that one?

[00:37:23] Patrick Kim: Yeah, so I think just from a, an underwriting perspective, I think collateralizing really kind of at the asset level is really the right way of looking at it.

[00:37:31] Patrick Kim: And then, you know, I think if we are in a situation and in a workout, we are going to sell these operations separately, most likely, or we could sell it as a whole, but we have seen that the best way to maximize the value is to perhaps sell it at a separately. Just so that people can get some context as to how we underwrite on a leverage basis.

[00:37:55] Patrick Kim: We're typically between one to two X EBITDA. We're really [00:38:00] trending closer to one X EBITDA these days. And really on a asset coverage basis, we're really somewhere between, we're probably cover anywhere between two to three X. We're really kind of trending toward three X coverage these days.

[00:38:14] Stacy Havener: Okay. That's super helpful.

[00:38:16] Stacy Havener: Thank you. And Michael, I hope that helps answer your question. But if you have other questions, please pop them into the chat. Okay, this is a question I'm sure is on the mind of a lot of people. What will federal legalization do to your business model slash investment structure?

[00:38:34] Steve Ham: It's an overwhelmingly positive event.

[00:38:38] Steve Ham: For both our borrowers and the operators as well as all the key is why is it overwhelmingly positive? And there's a little bit inside baseball here. It's overwhelmingly positive because of tax. Um, Yeah, right now cannabis operators Get taxed on because of the controlled substances act and the federal [00:39:00] illegality.

[00:39:00] Steve Ham: They get taxed on gross margin so they've got really enormous tax burdens the What federal legalization, especially even federal rescheduling, which is, I think, the most likely thing that's going to happen in the next, uh, if it happens in the next two or three months, what that would do is it would get rid of this provision of the IRS tax code 280 that causes that.

[00:39:20] Steve Ham: So for us, instantaneously, our borrowers, their credit improves. Instead of all this 10 or 15 percent of their money going to Uncle Sam, it stays in the business. The universe of potential borrowers that are cashflow positive that we might do a future deal with improves. I think it would spur some more capital to come into the industry.

[00:39:43] Steve Ham: And then for us, It would also open up lines of capital, lines of credit, and also some other stuff. Maybe make our warrants. We've collected this war chest of equity and warrants. Maybe get those to liquidity events. The other common thing people ask with this question is, won't all the banks [00:40:00] come in and drive down your interest rates from, you know, you guys are getting on average, like 16 to 18 percent interest.

[00:40:06] Steve Ham: Wouldn't that, you know, go all the way down to like 7, 8, 9%. That we're much, much less worried about. Just in general, in private credit. The banks have really receded over the last 25 years, and it's become kind of a private credit debt firm dominated industry. So banks really are doing much less of that.

[00:40:26] Steve Ham: And the other thing that kind of very commonly gets overlooked with cannabis is it's a really weird industry. It's half medical. It's also half vice in the same way that alcohol or tobacco or gambling and stuff is in most banks won't do vice. It's a really hard industry to finance. So when you factor in the banks were seating on a private credit, and it's a vice industry, it's hard to see the banks come in and mass, especially the big money center banks.

[00:40:55] Steve Ham: But I mean, don't get me wrong. Even if it does happen, we would welcome it. We really, really [00:41:00] need more capital in the industry. Our borrowers could use more capital. The industry should be twice as big as what it is right now. It's really sad to see people win licenses with great projects and they just can't get it funded.

[00:41:13] Steve Ham: Some people even have to give back their licenses because they can't get funding.

[00:41:16] Stacy Havener: Wow. And it would change the. Ability for some LPs to come in too, right? If it became federal legal, because there's certain institutions that can't allocate until that pivot tipping point. Yeah, that's right. Yeah, absolutely

[00:41:31] Patrick Kim: right.

[00:41:32] Stacy Havener: Steve, anything to add to this conversation around legalization?

[00:41:35] Patrick Kim: Yeah, I think one thing that I would add is I think the ability for the industry to add additional leverage will certainly go up, right? So if we think about a total addressable market for industry leverage, you know, I would, Kind of calculate that as somewhere between 8 to 9, dollars currently, maybe even up to 10, 000, 000, 000 dollars in the middle [00:42:00] market that we are lending to, but with legalization, you know, and with 288 going away that.

[00:42:06] Patrick Kim: That total addressable market would about double, right? So we're looking at 16 to 20 billion of industry leverage for the middle market companies in the cannabis industry. So yes, some new investors may come in, but certainly we have, and people who have been in the industry will have a, an inside track into gaining this portion of amount out that increased in the TAM.

[00:42:33] Patrick Kim: And also I think the amount of Underwriting that needs to be done for cannabis industry is pretty different from other underwriting. So for example, each regulation in each state is very different from one another, right? So if a cannabis company has operations in three different states that we as an underwriting principle We do essentially three different underwriting for three [00:43:00] different states, right?

[00:43:01] Patrick Kim: So the reason we do that is recovery and workout in each state is different You So, if the borrowers of our loan goes into default, then we're going to have to figure out how to do workouts in each state separately. So, it does require a lot more work. Yes, we have higher returns than perhaps other private credit lenders, but we feel like we earned that because upfront underwriting is significantly more complex and difficult than some others out there.

[00:43:32] Stacy Havener: Yeah, great point. I want to, again, I don't normally ask this, but I think just given where you are in your cycle and having that, that inside scoop, so you have a fund in the market right now, can you just kind of tell us where you are just in terms of your capital raising and available opportunities?

[00:43:52] Stacy Havener: Because I think there are people who would like to continue this conversation. I just want to scope it for them.

[00:43:58] Steve Ham: Yeah. So we have a series [00:44:00] of private funds. They're closed end funds. The industry is, is high growth, I think most people know, but it's also pretty volatile. So we sort of intentionally structured this as, as a set life fund where we can work things out if we have to within the fund.

[00:44:15] Steve Ham: And we've grown by doing a series of these. The first, I think, eight or nine were single deal funds.

[00:44:22] Stacy Havener: Okay.

[00:44:23] Steve Ham: Then we did a larger diversified fund. It had something like 139 million AUM. And then we're on the process of closing our second. Fund and it's roughly going to be about the same size

[00:44:36] Stacy Havener: and so and that's closing is there still room for people to get into that?

[00:44:39] Stacy Havener: Or is this like setting up for fun? Three? There's still room and fun to

[00:44:43] Steve Ham: there's still room and we're going to close in the end of next month.

[00:44:46] Stacy Havener: Okay. Okay. Great. I am watching the time. Let me just see. I think there's 1 question. That's probably better for following up. After, and somebody is asking a question [00:45:00] about the NFL owner and some research,

[00:45:04] Steve Ham: he, he, who must not be named is the NFL, his name, we're based in Washington, DC.

[00:45:11] Steve Ham: Oh,

[00:45:12] Stacy Havener: good. I mean, this is what makes it fun. Is there anything that you'd like to leave people with? Like questions that you typically get asked that maybe we didn't cover today?

[00:45:20] Patrick Kim: You've done an amazing job.

[00:45:22] Stacy Havener: Yeah.

[00:45:23] Steve Ham: I mean, look at us question. I think the thing I would leave people with is cannabis is such a fascinating industry.

[00:45:29] Steve Ham: For a lot of different reasons. And there's been a lot of great headlines about it. There's been a lot of negative headlines about it. To some extent, it's kind of polarizing the press reflects that. But what I would say that we see on a day to day basis is there's just a tremendous amount of people working in the industry.

[00:45:46] Steve Ham: It's really becoming ubiquitous across the United States. It's really becoming professional. I recently read a statistic that last year. But one of the highest growth segments of U. S. cannabis is women. And last year, it [00:46:00] reached the point where one in three women in the United States have tried cannabis last year, at least once.

[00:46:05] Steve Ham: And that's just a startling statistic that about how prevalent it's gotten. And I think it's just going to continue to go upwards from here. And it really is going to rival the size of beer pretty soon. For the next seven or eight years.

[00:46:18] Stacy Havener: It's a great point and I think it also speaks to like the delivery of it because now there's so many different ways for people to access cannabis as a connoisseur or I don't know what the right term is, right?

[00:46:30] Stacy Havener: You don't just have to like, I don't know. Can you say roll up a joint? I don't know. Whatever. You don't have to smoke it. You can. There's other ways to access it besides that. And I think that has probably changed the demographics of the users pretty significantly.

[00:46:43] Patrick Kim: That's exactly right. I mean, if I could it.

[00:46:45] Patrick Kim: Picture 10 years into the future, I think what I would see is going to a house party and really picturing two separate buckets, right? So one bucket for a beer. With alcohol and [00:47:00] another bucket with a cannabis infused drink, and if the trend that I'm seeing is any indication of the future, I would think that more younger people now will fast forward 10 years will gravitate toward more cannabis based beverages, really, because it has significantly less, I guess, impact in terms of hangover.

[00:47:22] Patrick Kim: Less calories. And the last call that several surveys that I've seen 30 and under significantly prefer cannabis over alcohol. And that's, that's an interesting trend.

[00:47:34] Stacy Havener: Very interesting. Gosh, what a fascinating conversation you guys should have a podcast or something. So this has been wonderful. If people would like to get more information or continue this conversation, should they reach out to Ryan?

[00:47:49] Patrick Kim: Yeah. Yep. Yeah, absolutely.

[00:47:51] Stacy Havener: Okay. So reach out to Ryan. I don't know. Alicia, if you have Ryan's email address handy, maybe you could pop it in the chat in closing. Thank you [00:48:00] everyone for being here. We certainly look forward to more conversations with you. We're going to run this through the necessary compliance channels.

[00:48:08] Stacy Havener: We will get a replay out to you in case you want to share that with colleagues. Again, feel free to connect with the team on LinkedIn. And it has been just a joy. I love the stories and appreciate you both. So thank you everyone for today. Really awesome.

[00:48:24] Patrick Kim: Thanks for joining. Thank you for having us. Really appreciate it.

[00:48:26] Patrick Kim: Okay. Very good time.

[00:48:28] Stacy Havener: Hi everyone. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. The information is not an offer, solicitation or recommendation of any of the funds, services or products, or to adopt any investment strategy. Investment values may fluctuate and past performance is not a guide to future performance.

[00:48:48] Stacy Havener: All opinions expressed by guests on the show are solely their own opinion and do not necessarily reflect those at their firm. Manager's appearance on the show does not constitute an endorsement by Stacey Havener or [00:49:00] Havener Capital Partners.

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