In this episode of The Legal Lunch Byte we have an insightful discussion on cannabis financing with Eduardo Diaz Rivera, founder of Alta Fund based in Mexico City. Join us as we unravel his journey into the world of cannabis finance and Alta Fund’s unique approach.

Introduction to Cannabis Financing

Eduardo Diaz Rivera, with a background in economics and extensive experience in investment banking, particularly in structured credit, shares his journey into the cannabis industry. He highlights the appeal of this burgeoning sector driven by the dynamics of supply and demand within a regulated framework, primarily focusing on the US market.

 Alta Fund’s Approach

Alta Fund distinguishes itself by providing capital through real estate to regulated cannabis operators across the United States. This strategic approach ensures investment security by leveraging real estate assets while avoiding direct operational involvement in the cannabis business.

State Insights and Investments

Starting with California, Eduardo discusses Alta Fund’s initial forays into the cannabis real estate market, emphasizing their strategy of adapting to regulatory landscapes in various states.  Alta Fund has expanded its portfolio to include investments in Maine, Washington, Connecticut, Ohio, Pennsylvania, Michigan, and Colorado, carefully selecting states based on rigorous regulatory due diligence.

Cannabis Market Dynamics and Challenges

Eduardo sheds light on the evolving dynamics within each state’s cannabis market, noting common challenges such as initial high prices, market consolidation, and the persistent influence of the black market. He underscores the importance of proactive planning and solid capital structures for long-term sustainability amidst fluctuating regulatory environments.

Future Outlook and Industry Trends

Looking ahead, Eduardo shares insights into Alta Fund’s future plans, including the launch of Fund Two, echoing their commitment to supporting robust cannabis operators with sustainable growth strategies. He discusses anticipated regulatory changes, potential federal reforms, and the industry’s resilience despite ongoing political complexities.

Closing Thoughts

In conclusion, Eduardo reaffirms Alta Fund’s dedication to partnering with cannabis operators who exhibit strong business fundamentals and a clear vision for growth. He emphasizes the importance of understanding regulatory nuances and maintaining a resilient capital base to navigate the challenges and opportunities within the dynamic cannabis industry.

Glossary of terms discussed:

  • Cannabis Financing: The provision of capital to businesses within the cannabis industry.
  • Regulatory Nuances: The subtle and complex aspects of regulations that can affect business operations.
  • Capital Structures: The composition of a company’s liabilities and equity used to finance its operations and growth.
  • Market Consolidation: The process where fewer entities control the majority of market share.
  • Operational Integrity: Maintaining ethical and efficient operations within legal and regulatory guidelines.

(00:01) hello everyone thank you for joining us again on legal lunch by today I’m thrilled to welcome my good friend and client Eduardo Diaz Rivera who’s the founder of the Ala fund located in Mexico City Eduardo always a pleasure to to meet you here in the US or in Mexico or wherever we may be in the world HK thank you John for for having me and uh pleasure is mine so let’s start out with an introduction I I know you very well but please tell everyone your your background in finance what led you into the the world of cannabis and and then

(00:31) we’ll talk about what Alta Fund is doing sure so um I mean I’m Eduardo I was born and raised in Mexico City and uh my professional I have a major in economics but my professional career I did in Investment Banking mostly uh at UBS and and credit SS mostly out of Mexico City uh covering Latin America and and and very focused on the on the structured credit side of things right um and then while at credit s around what is it 2017 2018 or so I started you know following the the Cannabis industry in the US

(01:08) exclusively and uh caught caught my attention because it was a new industry where the the underline it’s a it’s a commodity which is a plant and it’s driven by supply and demand and and we thought that the demand was there while at the same time it’s like the you know the biggest and most dynamic economy in the world which is the US economy and at least compared to Latin America the rule of law works right so with my structured credit haton we wanted to find a way to invest in this very you know new industry where there was a lot

(01:46) of potential to to grow but we wanted to invest knowing our limitations in the sense that I mean we know real estate we know Investment Banking we know credit but we don’t know anything about operating at cannabis business nor we want to right or we wanted to so with that in mind also finding a way to invest that um if things went South how do we preserve Capital right uh and I think uh throughout is that we we found this opportunity which is uh in the end what Alta does is Provide Capital through real estate to regulated

(02:24) cannabis operators in the US that’s a great great summary and that and I met probably around 2019 2020 when I started working with you in a couple of different states so let’s talk about the states that you’ve been particularly interested in so far you have a really interesting bird’s eye view because like you said you’re not investing in The Operators you’re investing in the underlying real estate as a means to to help fund the operations so which states are uh which states were the earliest

(02:52) ones that you looked at so the the first state that we got into was California right it was you know back in 2 16 they voted to regulate it on a from a wreck standpoint and then it’s the biggest market and uh our first Investments were there uh the first two we actually sold right uh in the end the tenant that we we we owned a couple of industrial Light industrial properties mainly warehouses and our tenant was a distribut distributor in Cali and unfortunately their business didn’t work out but with

(03:27) the structure that we had in place um I think the thesis got validated in the sense that we were able to keep the properties even though we didn’t have a tenant in place and and sell them to a non-cannabis buyer and and we didn’t make you know the the base case returns or the expected ones but under a downside scenario we we we got uh an okay return so California was our first one then in fund one which has closed closed in December 2023 we have investments in eight states uh we have uh in Maine you helped us with that one

(04:04) uh in uh Washington um as well uh we have in um Connecticut and in Ohio Pennsylvania Michigan and Colorado right uh and um even though you you mentioned we don’t invest in The Operators we in a way we do invest I mean our the the type of investment or the type of client that we look for is a private company not necessarily an MSO we’d rather have them focus on their own Market uh because of you know how how tough it is to to to get capital and and because of the Federal Regulations We Believe like stretching out and being a having

(04:42) multiple operations in different states it’s just not that efficient unless you have a a big amount to to access to Capital which is not the case in in in in for most operators right so um so that’s that’s what we did in fund one we’re agnostic as to where we invest in any given state but what will drive the decision is we’ll diligence the regulatory market and and and try and understand if for a fund like ours investing in that specific State given the regulations Mak sense or not so that’s are you are you seeing a

(05:17) lot of differences across those States and I haven’t been involved in a lot of your uh deals in the midwest what are you seeing um you know do the deals feel pretty similar as more states have been coming online with cannabis regulations or do you find you’re running into strange quirks in different states now I think one constant and and you see it in every in any given Market where whenever any Market opens up right there’s a lot of you know a lot of noise around it and and and and suddenly prices in the end

(05:45) as I said it’s a commodity right so prices per pound start very high there’s not a lot of players in the market a lot of players are just getting their licenses active and and putting the infrastructure in place so when when it each state in the beginning of each cycle when each States opens up you know everybody’s doing it’s a good business right but in the end what you’ve seen especially the western states and then all the way to the Midwest and the Eastern side of things is these markets

(06:15) start to consolidate right um there’s more players coming in prices starts to to come down then you have the variable of the black market which is always there and then other states for example Colorado was one of the first markets so from a tourism standpoint a lot of people went there but now all the adjacent states have opened up so all of those variables you need to take into account and what we’ve seen it’s like a copy paste in every state where think prices start you know very high people are very bullish and they don’t

(06:46) necessarily plan ahead and say hey we know that prices are going to come down we know that taxes are high we know that our access to Capital is is very scarce so we need to plan for that so when the market consolidates we’re in a good position with a solid capital structure behind us but unfortunately that’s not the case everywhere so what we’ve seen I would say a constant no matter if it’s a limited or unlimited license State I think that’s that’s a constant um and then the fact that you know taxes in in

(07:19) a lot of states are just ridiculously high because of how the regulations were set and then the other constant is the lack of access to capital for these operators but to give you one example in Ohio we have an investment relatively small uh it’s a processing and distribution facility there and now Ohio was one of the I think it’s one of the six states with with I don’t know 12 million people right so it’s one of the biggest states in the US and now they decided to you know like FASTT track recreational activity and and that was a

(07:55) positive but our investment that our partners who run that facility they they plan planned ahead they were in every store and they knew that they weren’t vertically integrated so they started for example getting their hands on a lot of product and having I don’t know up to two years of inventory so because since you’re you could be caught in the middle since you’re not a cultivator not a retailer you’re just on the processing distribution side of things so I mentioned that because Ohio moved fast

(08:23) from medical to rec it’s a big big Market it has Michigan on the side Pennsylvania which apparently is going bre Etc but if you plan ahead and understand those variables and treat it just like any other business I would say that’s when maybe there’s a formula for Success it’s very been very interesting when I talked to people about the Cannabis industry I mentioned people like you who come from very experienced professional industry into the Cannabis industry and it’s this merger of uh you

(08:52) know people like you and then people who have been Gorilla Grow Growers for their lives you know coming in and meeting in the middle it’s a it’s a very interesting uh set of dynamics that that come together and I’m sure every state is is different what are you seeing as you’re looking ahead to the next three to five years you know what states are you particularly keeping an eye on and and what do you see about the industry generally in the next three to five years so basically I mean as I mentioned

(09:18) I mean fund one closed uh in December 2023 we just set up uh fund two with the exact same thesis um we just uh finished our first closing and in the then what we’re seeing is I mean you see rescheduling supposed to happen no before the year end uh most of the people that we talk to you know lawyers Consultants Etc they believe it’s going to happen but in the end I mean they would be a great step in the right direction because of sentiment and then because of 28 and the impact it would have on the operators themselves

(09:54) but then at the same time it seems to me it’s more of a political driven decision where once it happens then it’s going to stay there for a while and it could take longer for the industry to actually open up at the federal LEL no so but with that in mind is I would say the the the scarcity of capital will be there I think the the industry is is very very young I mean Colorado legalized in 2012 but sales started in 2014 so it’s only 10 years so I think we will continue to see consolidation in in every Market I

(10:28) mean the western state are still consolidating I mean Colorado California Oregon Etc and at some point they has to there has to they have to find a balance and at some point the the Black Market has to lose power or or or it’s punch so it becomes obsolete but I think that’s going to take time and then I think we’ll start seeing that in the newer States you know Ohio Pennsylvania which are opening uh New Jersey New York which is take they’re taking their time but in the end if if you ask me next 3 five

(11:00) years I think the opportunity is still there right I mean the regulations maybe a federal reform banking reform will happen safer or whatever but it’s going to take time it’s become too political and as long and my view is if the industry continues to grow the more it’s going to get more political even so right so for example take a look at the hemp situation going on right I mean that is that is you know that’s been a major issue for regul the Cannabis operators but at the same time it’s

(11:31) under you know Farm Bill I’m no expert but there’s other interests in place there so I don’t know it’s going to be interesting to to to to see how that plays out but on our end we stick to our thesis we want to find solid operators that not only go as you say like hey I want to buy this product at the highest rate possible and then we’ll see what happens and then just take money out of the company but more so hey this is a strong business there’s a massive growth opportunity let’s just do it right understanding the

(12:02) challenges ahead and and on our end as ala we I guess the message is we we’ll be your partner even though we’re only providing Capital but we want to be your partner and help you grow and and the more we get to know your business the better we’re going to be able to you know if there’s a downside case or a downside situation we’ll be able to discuss it and and help you restructured and and and come out ahead or if things are going well will will help you grow no so um I think the industry is not going

(12:32) anywhere um it’s a tough industry it’s highly regulated so a lot of people say it’s regulated so that’s great it is great but then you need to know the understand the regulations because if you don’t understand them well then it cannot be so great right it can affect you and it’s something indirectly that you don’t necessarily control and then I think the challenges of you know finding a good operator with the right thought process of having a a robust uh business with a strong capital

(13:00) structure and understanding that the cost of capital is tight and that you know hopefully if 280 doesn’t happen I tell everyone is don’t plan for rescheduling just operate your business as it is now and then if it happens it’s all gravy know so finding those type of Partners clients it’s tough but I think it has worked so far so I think the industry is it’s there we want to continue you know growing within it and that’s why we set up fun to and tell me what the sizes are what was what was fund one and what’s the size of

(13:33) fund two so fund one we ended up deploying 70 million across 14 transactions um in those eight states uh we have zero debt it’s all Equity it’s all private Equity from our uh network of LPS uh and fun two the target is to to to make it uh larger than 100 but the way we worked I don’t know if you recall when we first met we we we set up the fund and then we gradually raise equity which is in line with our pipeline uh of of of investment opportunities so that way whenever we have Capital available

(14:08) we put it to work um faster so from an investor return perspective I think it’s it becomes more efficient and then we’re my view is again fun two we just raised the first 20 million we’re we’re deploying it between now and and September and then we don’t want to take on any debt again my background is structured credit I I think I know how debt works and it’s I mean unless you really understand it it can become Troublesome so for a fun life course which is cannabis at least indirectly

(14:40) right the the the the the debt that we’re able to obtain it’s not necessarily where I would want it to be so for us the strategies to continue raising Capital uh putting it to work with the I guess the driver behind all of this is capital preservation if things if the Cannabis industry were to disappear or if things you know suddenly turn very south and our our portfolio companies stop playing we want to make sure that we have a robust our investment is well protected and that’s why real estate is the main driver

(15:13) but making sure also that we diligence the market diligence our clients from a financial perspective and uh and uh I would say if if if things work out fine it’s going to be a great investment or a great asset from a portfolio investment perspective but again the main driver is if things don’t work out as we want them to or as planned we want to make sure that we we have a the right structure behind it so we preserve capital for for our capital and for our investors’ Capital perfect thank you Eduardo it’s

(15:46) been excellent we’re at time and really appreciate catching up with you it’s always fun to hear your perspective your expertise and uh look forward to catching up with you again soon let’s do it anytime and thank you for having me guys thank you