Joel Magerman brings Insight Into Cannabis Investing.
Joel Magerman of Emerald Park capital is a successful investor, principal and investment banker with over 30 years of experience. During the course of his career, he has been involved in closing over 150 deals representing a total transaction value in excess of $6 billion. Listen to this episode as Seth and Joel discuss: Why the cannabis industry has been neglected and underserved by capital providers. Why this may be the new ground floor of cannabis. The vetting process and due diligence in providing finance to the cannabis industry. Identifying bad risk in the cannabis industry. The most common challenges that these cannabis companies are facing other than access to debt … and much more.
More about Joel:
Joel Magerman is a successful investor, principal, and investment banker with over 30 years of experience. During the course of his career, he has been involved in closing over 150 deals, representing a total transaction value in excess of $6 billion.
For almost 20 years, Joel has been the CEO of Bryant Park Capital, where he has led clients and deal teams through complex financing and M&A processes, across both traditional and highly regulated industries. From 1995 until 2001 Joel was the President of Associated Venture Management where he oversaw a family office that invested and raised approximately $250 million of transactions for its portfolio companies. Portfolio investments included investments in the specialty finance, software, technology and healthcare services sectors. From 1991 to 1995 Joel was the Senior Vice President for FCA International, LTD (FCA:TSX), where he headed corporate development, M&A, and US sales, marketing and customer service. In that capacity he founded and was President of Structured Financial Capital, the second largest purchaser of structured settlements issued by the state of NJ. He also was a founder & operating partner with Reliant Partners, a firm that purchased over $1.5 billion of non-performing assets from the Resolution Trust Corporation.
Prior to FCA, Joel was one of the founders and board members of Odyssey Golf, the number one putter company in the world that was later sold to Callaway Golf. Earlier in his career, Joel was the Director of Finance and Technology for Citicorp Diners Club. Joel has his MS from the University of Pennsylvania and his BA from UCLA. He serves on the boards of ValueHealth LLC and Maccabi USA Sports for Israel, and has previously served on the boards of other for profit and not for profit organizations.
Seth Greene 0:00
Welcome to the podcast. This is your co host, Seth Green’s had the good fortune to be doing interviewing Joel Megaman of Emerald Park capital. He is a successful investor, principal and investment banker with over 30 years of experience. During the course of his career, he has been involved in closing approximately 150 deals representing a total transaction value in excess of $6 billion. Joel, thanks so much for joining us. Thanks for having me, Seth. So let’s go back in time a little bit, howdid you get started?
Joel Magerman 0:33
So long ago, I started working in on the business side of new business opportunities in the early 80s. And sort of saw how interesting it was in new business formation and sort of follow that path. circuitous route that followed it over the next, you know, few decades.
Seth Greene 0:53
I’m sure the longer version of that story could probably fill a book somewhere, if it hasn’t already. Tell us a little Europe, just some really interesting things. Tell us a little bit about Emerald Park.
Joel Magerman 1:04
Yeah, Emerald Park is a provider of capital predominantly debt, but also can provide equity as well in the cannabis sector. And it was very interesting does because it’s a sector that has been growing exponentially compound annual growth rate of 25 to 30%, over a 10 year period, but was significantly underserved in its access to capital. And we thought that created a unique opportunity for us to to raise a fund and actually be one of those capital providers.
Seth Greene 1:37
So why do you think for our folks who may not be aware Why do you think the cannabis industry has been neglected and underserved in this department?
Joel Magerman 1:47
Well, I think I think there are a number of reasons. Number one, there’s there was initially federal legislation that made people uncomfortable providing capital in the space, a number of things have happened over the last five to seven years, including 42, states that now consider it legal. And a number of things that have happened under under federal guidelines that provide greater comfort, but there’s some ambiguity in that. And that ambiguity has caused a number of companies and firms to be uncomfortable providing capital, they’re still, even though a increasing number of folks have continued to get comfortable and more and more capital is coming into the sector.
Seth Greene 2:32
And it’s not just debt. Right. It’s also that historically, there have been issues getting, you know, merchant processing, credit card processing bank accounts. Yeah, literally everything. Why do you think you’ve been quoted? Why do you think this is the new new ground floor of cannabis? Well, I mean, we’re, look, we’re
Joel Magerman 2:51
in the very early stages right there. There’s, if you sort of think of the evolution and think about alcohol that, you know, right after prohibition, by example, right, we’re in the early stages, because right now, there are states that it’s still legal, there are states where it’s legal, but only for medicinal purposes. And their states where it’s legal for medicinal and adult use recreational use. And so we’re still a long ways away from, you know, it being approved at a federal level, where can be used in every, every state across the union, based on each one of the state’s laws and the Fed, approving it. And so we’re, you know, we’re probably, you know, some number of years away from, you know, that happening, and then people need to get comfortable with the usage of it, like, like anything else, you know, when you have something that is, you know, initially, for example, approved for cancer patients, or there’s a number of drugs where cannabis is approved, it’s people still don’t necessarily understand it, and nor do you know, state and federal government. And so once everybody gets comfortable, I think there’ll be a continual growth in that.
Seth Greene 4:04
Absolutely. Now, you chose to predominantly focus on the loan, the debt part of the sector, why did you go in that direction, as opposed to you know, equity?
Joel Magerman 4:16
Again, I think it was of the, there are two reasons really, number one, I think it was more underserved. There was less access to capital on the debt side than the equity side. Um, number two, I think that our bias, our personal bias, and we have a lot of money in the fund is that we sort of liked the risk reward arbitrage on the debt side. You know, if you financed a non cannabis business that looks call it small to middle market between depending on what you’re financing, let’s say you’re financing real estate, you might get a 5% loan, and if you’re doing Junior debt, you may pay 15 percent in the cannabis sector to take that same economic risk, you’re probably getting three to five times your potential returns. And so we thought that was a great risk adjusted return profile for us. And it was an underserved spot in the marketplace. And so we thought it was a good place to be further underserved. And that being said, we’ve also made a couple equity investments as well. So we’re, we’re very supportive of helping companies grow, whether it be on the debt, or the equity side of the balance sheet, but we prefer debt.
Seth Greene 5:31
That makes total sense. Now, with there, it seems like every other day, there’s another company popping up, um, in some way, shape, or form in this space. Talk a little bit about your vetting process and your due diligence, because you’re kind of known for making really smart decisions.
Joel Magerman 5:49
Well, I mean, one of the things that, you know, being old means you have experience and seeing lots of things. So we’ve seen lots of deals and transactions over our lifetime. And we have certain things that we think are important to focus on. And we incorporate that in our vetting process. Today, we’ve seen in excess of 725 deals, we’ve invested made eight investments. So you know, that being said, we’ve probably bid on two to three times that number of transactions and for various reasons, either we learned something we didn’t like, or they maybe got better pricing, whatever the case might be, but we’ve you know, we’ve we have a pretty rigorous process, we want to make sure that we at our investors get our money back. And as a result of that, you know, hope is not a plan, right. And so if people don’t have the things, you need to be comfortable, we don’t want to just hope we get our money back, we really want to have analytics and comfort that says we’re going to get it back when we really, we really try to be thoughtful in our approach and understand the company well, which means you need to do a lot of work. And some of these companies didn’t have and don’t have the infrastructure, the people to support to give us the information and the data, we need to be comfortable.
Seth Greene 7:09
What our menu, if I heard you correctly, you had about a 1% rate in terms of the deals that you actually bid on an accepted. So what are some of the things that are warning signs to you to stay away?
Joel Magerman 7:26
Lack of internal controls is a is a major one. You know, people don’t have financial, financial, the appropriate financial systems, and that’s critical in this sector. That you mentioned banking, relationships, those are those are much less of an issue than people think. But some folks don’t have it. Very few folks have audited financials, which is a big deal for us, we want someone to have a third party review those financials and get comfortable with those. And you know, some of its the sophistication of management it you know, coming up with an idea and and so hot making this up but someone to say I want to build a chain of 50 dispensaries. Well building one and operating one dispensary does take some skill, but building an operating 15 centuries is a different skill set. And so some people are skilled in opening an operating number one, but they don’t have the wherewithal to open 50. And so some of it is just the breadth and depth of management.
Seth Greene 8:27
What are you finding are some of the most common challenges that these cannabis companies are facing other than access to debt?
Joel Magerman 8:40
Well, access to capital overall has has has been a concern, but it’s less of a concern now but still remains a concern. The markets are very geographic focused on a state by state basis. So there are certain states where the ability to grow is there’s there’s not enough licenses, it’s a Limited License state. There are hypothetically going to the state’s going to issue 50 licenses if you’re not one of the 50 you can’t play. So you know that’s a major hurdle. Having people that understand, right i mean if you think about cannabis as a particularly, it’s different types of uses, you know, you think about someone needs to understand how to cultivate and grow this and produce it in a large scale fashion. And, you know, just because someone grew it in their basement in college doesn’t mean that they actually know how to run a cultivation facility. So having people that are skilled and understand how to be a cultivator how to how to maximize you know the the efficiencies of the growing cycle and take advantage of that is another important is another important skill. And then once the business gets to the point where it’s thinking about growth in a meaningful way, how do you attract skilled management and You know, a lot of people think, Hey, I got it up and running on the entrepreneur. I don’t need other people, I know how to do it. But the reality of it is that, I mean, if you if you look at Bill Gates, he knew he needed to bring in Steve Ballmer on the business, he might have invented Microsoft, but he needed someone to run the day to day. A lot of these folks think they don’t need those people or they think just because someone worked at a big company, they have this skill set. And really, it’s it’s attracting the right kind of people the right kind of capital, and the right resources to really create a successful enterprise.
Seth Greene 10:35
That makes a lot of sense, your your passions obvious, what do you like best about what you do.
Unknown Speaker 10:41
Joel Magerman 10:42
I love working with passionate people that and I’m really trying to help them in their journey to to attain a much greater level of success. I mean, that’s, that’s what’s rewarding, right? It’s, it’s hard, you know, being successful with a new idea. And creating that new idea into a business that can be successful and rewarding is a lot harder than people think. And being part of that journey and helping an entrepreneur be successful. And that is something that we love to do.
Seth Greene 11:13
What has been some of the biggest lessons you’ve learned along the way in the 30 years of investment banking and m&a experience? Wow.
Joel Magerman 11:25
That’s a, that’s a big takeaway. I think the most important thing is don’t underestimate the importance of people. A great manager of a business can make a bad business successful, and a poor manager of a business can make a successful business failure. And so if you’re really investing in people, even though there’s a lot that goes around it, you’re all you’re ultimately investing in good people.
Seth Greene 11:52
What do you think the time horizon is for cannabis before it gets to the point where a lot of these hurdles that you’re benefiting from, you know, kind of get erased and VA becomes more commonplace? Um, we won’t call you.
Joel Magerman 12:07
I know, I think it’s, I think it’s a it’s a multi step process. Um, a lot of people thought when Biden was elected, that all these barriers going to be knocked down, and all of a sudden, a lot more capital came into the market, they thought all of a sudden there was going to be federal legalization. That didn’t happen. What everybody’s sort of learning is that’s going to be a process in and of itself, when they figure out federal legalization. It’s not going to be all of a sudden that things change. And there’s a magic wand, right? All of a sudden, all the federal agencies that now touch this are going to do what they do, right? If you’re a regulator Your job is to regulate. So you think about when hemp was federally approved, all of a sudden the FDA came out and said on March 19, of 2019, we’re going to tell you how what the regulation is to ingest a hemp derived product CBD effectively, we’re still waiting. almost two years later, we’re still waiting. So I don’t think people have realized that there I mean, totally comprehended that even federal legalization is going to require the federal, you know, arms of government, time to figure out what all that means. And until sort of all that gets cleared, I think we’re gonna have to see all that happen. Before you see a cannabis business look exactly like a consumer packaged goods company that’s selling sneakers. And we’re just so we’re some number of years away from that.
Seth Greene 13:38
You’ve achieved an immense amount of success and worked on some incredible deals over your career. What’s your biggest challenge now?
Joel Magerman 13:47
Actually, we have the same challenge that the companies have is access to capital. The biggest ones in cannabis would be deemed the most the tiniest funds in the non cannabis world. There are dozens and dozens and dozens of firms that are multi billion dollar funds in the regular world. There’s not a single one in the cannabis sector, a big fund is a few 100 million dollars. And so access to capital is is is an issue for process providers and capital, as well as for the companies and and all of that’s getting better. You know, but I think that, you know, until all the gates sort of open, it’s easier for someone to open a gate and write a check in many ways, other than maybe the top dozen companies to us because we can show an institutional track record. And they’re one step removed, let let us do our job. But you know, until that sort of goes up and down the whole life cycle, we’re we’ve still got a ways to go.
Seth Greene 14:54
What How are you attracting investment capital for your funds at this point?
Joel Magerman 15:00
We’re telling the story, we’re telling you the same story that, you know, we’re outlining to you it’s and people, people get it, right. It’s a, it’s a, they understand the size of the market, they understand, or hopefully they do after we speak. They understand what the opportunities are and the growth that’s happening. And they’re, they’re willing to take, effectively a little more risk for a greater return. And if they believe that risk reward quotient works the same way we do, then we’re lucky and we have we have investors and we’ve, we’ve been fortunate, we’ve been able to trust attract some great investors. And but we’re always looking for more.
Seth Greene 15:41
With all that you’ve shared, is there anything you want to share that I didn’t think to ask you yet? Um,
Joel Magerman 15:49
I guess, I mean, there are a couple things that I think are sort of interesting. I mean, you know, number one, I think a lot of folks sort of think about cannabis, and they, you know, they may try to tie it to alcohol. When you think about cannabis, the three major uses from all the surveys are out there or for pain, relief, anxiety, and sleep, they’re really much more medicinal than most people think about, Hey, I’m going to go get drunk, or I’m going to go get high. So number one, I mean, there’s a big medicinal aspect of this that I think is overlooked. And that’s what the vast majority of the products being used for number one. Number two, there’s a whole new world of pharmaceutical experimentation that’s going on using cannabinoids. And there are a number of drugs that are FDA approved from cannabis derived products that are incredibly successful. And there is 10s of millions of dollars being spent in research around the world, that I think we’re going to come out with some really exciting new drugs. And I think people don’t necessarily appreciate the the the medicinal and wellness benefits that the the actual cannabis plant represents. And so I think that’s worth noting.
Seth Greene 17:10
Absolutely. where can our folks who are interested in learning more about what you’re doing go to learn more.
Joel Magerman 17:16
So we have a website, Emerald Park capital, there’s contact information on there, they can also go to LinkedIn and look up Emerald Park capital or look me up, as well, but happy to talk to any interested parties. And we’d love the opportunity to share what we know.
Seth Greene 17:33
All right. Well, we greatly appreciate your time. We know it’s incredibly valuable. This has been Seth Green with Joel omegamon of Emerald Park capital. Joel, thanks so much for joining us. Thanks, Jeff. Have a good day. Thanks, everybody, for watching or listening. We’ll see you next time.
Unknown Speaker 17:45
Transcribed by https://otter.ai