Exclusive Interview with John Mazarakis from Chicago Atlantic
Could you please tell us a little bit about Chicago Atlantic and your work in the cannabis industry?
Chicago Atlantic is an opportunistic credit-oriented investing platform seeking to capitalize on North American investment opportunities that are time-sensitive, complex, or in dislocated markets, where risk is fundamentally mispriced. Basically, we’re a direct lending fund and we finance every aspect of the cannabis industry. Our primary collateral base is land and real estate like warehouse, cultivation and retail space. That is about 75% of our fund and the other 25% is equipment and receivables. We evaluate an asset, pre-screen, go through the appraisal process, develop the underwriting memo, negotiate loan documents, file mortgages and fund the loan. Defaults, although rare, can happen, but coming up with potential exit strategies is a part of our underwriting. We’d be well-positioned if that happens to work with an operator to help them exit or sell or recoup collateral and liquidate it for value.
How long have you been in the cannabis industry?
We started thinking about this back in 2018 when one of the funds my partner was working for said they wouldn’t touch cannabis. We saw it as an emerging industry with a lot of opportunity, did our research and officially launched Chicago Atlantic in January 2019.
What is driving your success to date?
Capital has dried up in the industry. Some institutions that were ready to deploy private equity and were heavy-handed with investments have pulled back resulting in a huge capital shortage. From a point of entry to now, investors are better off seeking debt. Funds similar to ours would probably be riskier in any other industry and deliver 7 – 8 %; we can deliver 13-15% net of fees. Even after taking a small piece of equity from the company and a little upside, it’s still a lot cheaper for the borrower than straight equity or convertible debt.
What are your thoughts on the current financial state of public companies in the industry and what’s your advice for companies that want to go public?
My advice to the companies that want to go public is if their fundamentals are near the standard for an IPO in other industries, they will likely benefit. However, most companies don’t have strong fundamentals; the revenue just isn‘t there to justify their valuation. Companies can no longer rely on the same rational exuberance that existed a year ago. So, just like any other capital raise, companies need to have a very solid path forward and a very solid track record before trying to go public.
What are the trends you expect to see in cannabis in 2020?
I think we need to see modest consolidation to turn things around financially in the industry but that takes capital. We are not seeing what you would expect in a normal industry; there’s a lot of smaller assets changing hands. Smaller players are seeking a better platform on which to operate. Even larger players are looking for other larger players with whom they can merge and share the cost of growth.
We’re also seeing the East Coast move closer and closer to adult-use as the status quo or accepted state of affairs. We’re very happy that Illinois turned recreational because we’re based there and do a lot of business locally. There’s tremendous growth coming from the East and many states will have recreational cannabis on the ballot for 2020. I’m excited to see the East maturing slowly and embracing adult use; it gives new states an opportunity to learn from what’s worked and what hasn’t on the West Coast. For example, California is facing a lot of headwinds, so we’re reluctant to push hard into that state and instead are looking to states like Virginia, where there are a lot of investment opportunities. Virginia might surprise everyone and go recreational before Maryland or New Jersey.
Do you think companies on the East Coast will have an advantage?
Yes. In limited license states with more regulation, there is less competition which allows companies to master their operations, learn from what’s happening on the West Coast to be more successful and become cash flow positive sooner. The learning curve should be easier on the East Coast to help companies close the gap more quickly; and while prices for consumers will remain higher at first, eventually it will all be commoditized which will allow for more competition.
We’re excited to have you at the CPIS in Florida, what’s your goal in participating this year?