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We sat with George Mancheril, CEO of Bespoke Financial, a boutique commercial lender that works with cannabis companies.
George is a graduate of New York University’s Stern School of Business and a former trader at Goldman Sachs.
He spent years in traditional corporate finance before finding himself drawn to the opportunities in the marijuana industry.
His firm works with scores of cannabis companies of all sizes. Bespoke is based in Los Angeles but lends to operators across the country.
How did you get involved in this business?
I worked on Wall Street for 11 or 12 years in a variety of capacities but primarily focused on lending and debt, especially when looking at some of the more illiquid spaces in the market – secured credit, asset-backed securitization – and really cut my teeth looking at deals where you had to have a fundamental understanding of … the underlying collateral … and then structuring deals that made sense from a risk-return perspective.
In 2013, I moved from New York to L.A., and obviously that was my first experience with any form of a legal cannabis market. Back then, it was purely medicinal.
When recreational turned on in California in 2018, it just jumped out at me as a very exciting opportunity, both from a business standpoint and in terms of challenging myself.
I think it’s very rare for an entrepreneur to become involved with any industry from the ground floor. One thing that jumped out looking at the cannabis space, especially in 2018, is that debt didn’t exist for this industry that was forecast to have tremendous growth ahead of it.
Our core thesis here at Bespoke and mine from Day One is that cannabis will ultimately mature and operate like any other established, mature, consumer-product focused industry.
People compare it to alcohol, they compare it to tobacco, they compare it to pharma – and any one of those comparisons is legitimate. All those industries are very reliant on having functioning debt and capital markets available to the companies in that space.
There has to be a debt-financing solution in place. So the idea was to be a first-mover in the space.
It’s been off to the races ever since.
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Like any industry that starts from square one, there are growing pains. There are challenges and things the industry has had to figure out, often on the fly. I think it’s an industry that has effectively had at least one if not two hands tied behind its back whether you look at lack of access to data or lack of access to services that any other business would be able to access, like a lack of access to banking.
The fact that the industry has been able to spread across the country in spite of all the challenges – I think that just makes us more bullish.
It’s been a lot of blood, sweat and tears to get us where we are today. We just think the prospects are only getting better.
How are you different from a traditional bank?
Our focus is on providing nondilutive debt financing to the cannabis industry.
The vast majority of the cannabis industry in the U.S., regardless of what state you are talking about, is comprised of small to midsized businesses. These are oftentimes companies that haven’t publicly listed in Canada.
They don’t have access to a ton of VC money; they’ve bootstrapped their businesses through their own capital or friends and family.
They don’t have an entire finance team out there checking to see what capital sources are available to them and don’t have a liquid market telling them what the terms of the run-of-the-mill financing would be for a company of their size.
You have an industry that is resource-starved and doesn’t really have the bandwidth between their day jobs and focusing on the business to really get ahead of this and find the tools and resources, especially capital, to grow.
So, on the one side, you have these companies that are really focused on their operations and can’t devote time to raising more money.
On the other side, you have the institutional financing world where you have pools of capital and institutional investors who, in any other normal circumstances or industry, would be really excited, especially in today’s macroeconomic environment, to find an industry that’s really uncorrelated to a lot of the volatility we’ve seen recently and offers really tremendous returns for investors that are able to find good operators.
A lot of traditional lenders really don’t ascribe value to the assets that these companies have.
They don’t have a good understanding of the economy and (industry) values: How do I value someone sitting on X amount of biomass? How do I value that intellectual property? The license they had to get issued?
We act as a bridge between those two spheres.
What advice would you give to smaller companies seeking capital? What’s available to these people who may not even know they have borrowing options?
Since recreational really started taking off in the U.S., the vast majority of the financing that was available to any of these companies was through equity investors, either VCs, publicly listing in Canada or through finding high-net-worth individuals that really wanted to get involved with the growth story.
The challenge was I think everyone’s expectations about how quickly this industry would scale. They were far too optimistic.
What you saw in the second part of 2019 was investors really did get disillusioned with the problem that came up, with the lack of growth, a real underperformance from these companies. They couldn’t reach the goals they set for themselves.
That part of the market has, to a large degree, retreated and has never really come back. That left these companies without a lot of options.
If you look specifically at debt, I think the most liquid and most developed part of the cannabis financial market is definitely commercial real estate.
If you own a property, you can finance it. You’re probably going to pay a slight premium to a non-cannabis company in terms of the mortgage, but a lot of these companies don’t own property. They lease.
It becomes a big filter for these companies that can’t tap capital markets.
The market values cannabis businesses at less than half the valuation of a typical S&P 500 enterprise. What’s the deal?
Assets valuation has been volatile. I think there’s a certain amount of reluctance to really put a ton of capital into these operations.
Also, because each state is its own economy, for any multistate operator you’re not looking at one business line in one market, you’re oftentimes looking at four of five markets, and their economics vary wildly.
So, from an investor standpoint, there really isn’t a clear thesis or a clear story that they can point to.
What we’ve seen is a lot of write-downs. A lot of losses. A push toward getting efficient and not burning more money than they’re bringing in.
Until investors really get a degree of confidence that the federal question is going to get out of the way, until there’s clarity on tax, on regulation, that’s really what I think will be the go-ahead sign for a lot of these investors to deploy more capital to this space and have a greater degree of confidence.
What advice to do you have for potential borrowers?
If you don’t have a good handle on your bookkeeping, you are selling yourself short and cutting off opportunity to growth.
There are a lot of resources – short of hiring a CFO – that are beneficial. Lenders are going to want to see good operational controls.
It’s all about preparation and getting your ducks in a row.
Andy Obermueller can be reached at email@example.com.