Exclusive Interview with Altitude Investment Management Partner Roderick Stephan
Altitude Investment Management’s first cannabis fund includes a diverse collection of companies across multiple verticals. Now, the company is raising capital for its second fund and exploring opportunities in Europe through the acquisition vehicle Altitude Investment Management PLC. Partner Roderick Stephan spoke with New Cannabis Ventures about the firm’s investment strategy and what he sees for the future of cannabis investment. The audio of the entire conversation is available at the end of this written summary.
Stephan and his partners have been institutional fund managers for decades. Stephan, a CFA by training, has a background in distressed investments. He saw the cannabis business as an opportunity to understand a complex regulatory environment and apply his capital management skills.
Altitude’s other three partners are John Brecker, Michael Goldberg, and Jon Trauben. Brecker is an attorney with extensive experience in negotiations and documentation around private placements and distressed investments. Goldberg started his own fund before joining Altitude and brings his experience in investment banking to the table. Trauben has a background in real estate. Each partner’s niche comes together to create a strong leadership team.
Stephan and his partners had individual investments that were rolled into the firm’s first fund. Initially, Altitude focused on companies that did not touch the plant, but as the team gained a deeper understanding of the regulatory environment and the evolving market, the fund began to include plant-touching companies as well. Today, the firm’s portfolio touches virtually the entire supply chain, including cultivation, extraction, processing, manufacturing, distribution, and retail.
Some of the key companies in Altitude’s portfolio include Canndescent (a leading California flower provider), Grassroots (one of the largest U.S. MSOs), and BDS Analytics (a data aggregator and analysis company). Altitude also has companies focused on cultivation and genetics, including Segra in Canada and Front Range Biosciences in Colorado.
Synergistic opportunities are one of the factors considered during the investment vetting process. The partners consider how companies in their portfolio could work together. For example, a company that does distribution and marketing could help a company that manufactures a product (such as the portfolio company Sunderstorm, which makes a popular gummy). Similarly, Segra or Front Range Biosciences could be useful for companies that need genetic storage, genetic creation, and clone production.
Altitude has had some small exits thus far. Grassroots, one of the firm’s larger investments, has a pending acquisition by Curaleaf. In many cases, the firm’s equity is tied up for months, and the ultimate sale of those securities will be a function of market opportunity, according to Stephan.
Altitude’s first fund, closed at $30 million, largely includes high-net-worth individuals and individual family offices. As the firm raises capital for its second fund, there will be a higher net worth hurdle. There is a lot of interest from high-net-worth individuals, and other investors may include institutional family offices, multi-family offices, sovereigns, and pension funds, according to Stephan.
Vetting Potential Investments
Altitude fields 10 or even 20 investment opportunities each week, and it has a rigorous vetting process. The firm looks for 10 to 12 key characteristics, such as good management, whether or not a company is producing revenue, and whether or not there is a clear exit. After that, a potential opportunity goes through the first round of due diligence. The firm speaks with the company’s management team and digs deeper to weight the risk and reward for its potential investment. If a company passes this phase, an extensive write-up goes to Altitude’s investment committee for review.
If an opportunity moves forward, Stephan and his partners use their years of experience in private placement to structure the transaction.
The cannabis industry has been primarily equity-financed, but as the market evolves there will likely be more opportunity for debt financing, according to Stephan. Altitude’s preferred route is convertible notes, which helps to protect the firm in the early stages of a company. When later stage companies evolve toward equity, the firm seeks protection with mechanisms like debt limitation.
Altitude’s Second Fund
Altitude has made second and third-round investments in many of the companies included in its first fund. Now, the firm is targeting $150 million for its second fund. Winners are emerging in both the Canadian and U.S. markets, and as these companies grow, their capital needs are larger. Rather than smaller $1 to $3 million investments, like those in the company’s first fund, companies will need investments in the $5 to $15 million range, according to Stephan. Altitude is viewing this as a growth fund, rather than an early-stage fund for startup companies just beginning to generate revenue.
Opportunities in Europe
Earlier this year, the firm started a company to take advantage of opportunities in Europe: Altitude Investment Management PLC. The company is keen to explore the medical market (products distributed through pharmacies) and the CBD wellness market.
Given the Schedule I status of cannabis in the United States, European markets are far ahead of the U.S. in terms of medical research. Stephan points out that nearly all major universities in Europe have some sort of joint venture to explore medical cannabis research, backed by both public and private funds. Germany is one of the key medical markets in Europe, according to Stephan.
The company has invested in EMMAC Life Sciences, which is building a supply chain throughout Europe. In the European CBD wellness space, the company has invested in extraction company KannaSwiss.
Stephan sees Europe as such a significant opportunity because it will be approximately twice the size of the U.S. market with the legalization of recreational cannabis.
Looking at Market Opportunities
When looking at the value in the various segments of the cannabis supply chain, Stephan sees cultivation (similar to alcohol and tobacco industries) ultimately becoming a commodity. Right now, he sees a lot of value in the extraction and processing markets. Companies that are able to create trademarked brands, patentable pharmaceuticals, and maintain their client base will be the most successful, according to Stephan.
“As fiduciaries for our investors, we know there has never been a management set of projections we don’t love,” says Stephan. “It is extremely rare that a management team hits their projections.” When cannabis investors consider what metrics to track for potential investments, cash flow is essential. Can a company reach positive cash flow in a reasonable amount of time?
Stephan predicts that a number of companies will struggle to reach EBITDA-positive success in the next year or two. Companies are underestimating the cost of attracting and retaining customers, and many will experience a cash crunch as a result, he says.
To learn more, visit the Altitude Investment Management website. Listen to the entire interview: