How Billion-Dollar Investors Find Blue Ocean Deals | Peter Sack | EP 73

Summary

Podcast Summary: The Entrepreneur DNA Episode: How Billion-Dollar Investors Find Blue Ocean Deals | Peter Sack | EP 73
Release Date: May 26, 2025
Host: Justin Colby, Bleav
Guest: Peter Sack, CEO of Chicago Atlantic

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Introduction

In Episode 73 of The Entrepreneur DNA, host Justin Colby welcomes Peter Sack, CEO of Chicago Atlantic, to discuss innovative investment strategies that venture into untapped markets, often referred to as "blue ocean" deals. Peter brings his extensive experience in alternative investments, focusing on industries that traditional financial institutions typically avoid due to perceived risks and uncertainties.

Blue Ocean vs. Red Ocean Investing

Peter Sack introduces the concept of Blue Ocean versus Red Ocean strategies in investing. He explains that while Red Oceans are saturated markets with intense competition, Blue Oceans represent untapped, less competitive spaces offering greater opportunities for growth and higher returns.

Peter Sack [00:00]: "What's more important is finding a space that blue ocean where when we invest resources... are we going to be able to drive returns for our investors through that process?"

Justin echoes this sentiment, emphasizing the importance of identifying unique investment opportunities that stand out from the crowded markets.

Justin Colby [02:20]: "Blue ocean versus red ocean is just the start... are there ways to enter those blue oceans that mitigate the risk that keep others out?"

Focus on the Cannabis Industry

A significant portion of the discussion centers on Chicago Atlantic’s strategic investment in the U.S. cannabis industry. Peter highlights the sector's strong fundamentals and the company's differentiated approach to mitigating risks associated with this emerging market.

Peter Sack [05:22]: "We've done most, most demonstrably by investing in the US cannabis industry... we found a really unique space with strong industry fundamentals."

Justin delves deeper, asking Peter to break down why cannabis is a viable vertical for investment despite regulatory challenges.

Justin Colby [06:20]: "Why is this a vertical that you say, you know what, let's lean into this?"

Addressing Risks and Mitigation

Peter emphasizes that navigating the cannabis industry requires innovative risk mitigation strategies due to the complexities of federal versus state regulations and the cash-intensive nature of the business.

Peter Sack [07:21]: "By providing debt capital instead of equity capital, we're able to enter through an avenue that controls risk better... generates really strong differentiated returns at differentiated risk profiles."

He further explains how Chicago Atlantic focuses on debt capital to offer stability and downside protection for investors.

Evolution of the Cannabis Industry

The conversation shifts to the maturation of the cannabis industry. Peter discusses how initial exuberance has tempered, leading to a more stable and competitive market with numerous banks and credit unions now providing services to cannabis businesses.

Peter Sack [11:00]: "The industry is maturing over time... states that grew really fast have matured into stable marketplaces where competition creates winners and losers."

Chicago Atlantic’s Investment Strategies

Chicago Atlantic employs a disciplined approach, focusing on sectors that are underserved by traditional financial institutions. Peter outlines their methodology, which includes deep market understanding, diversified portfolios, and stringent downside protection measures.

Peter Sack [16:56]: "We're constantly raising capital and deploying... opportunities to deploy capital with really strong risk adjusted returns with some of the best operators in the industry."

Exploring Other Investment Verticals

Beyond cannabis, Peter touches on other potential investment areas such as digital currencies and ancillary businesses within the crypto ecosystem. He highlights Chicago Atlantic’s interest in stable, cash-generating services like cryptocurrency exchanges.

Peter Sack [17:26]: "There's a lot of ancillary businesses surrounding digital currencies today... provide real cash flow and profitability over the long term."

Downside Protection and Credit vs. Equity Investments

A critical theme in the discussion is the emphasis on downside protection. Peter contrasts credit investments with venture capital, explaining that while venture capital can tolerate higher losses with the hope of significant gains, credit investments require robust protection against losses.

Peter Sack [25:16]: "The fundamental principle for all definitions of debt should be downside protection."

He details how Chicago Atlantic structures its investments to ensure multiple avenues for recouping value, thereby safeguarding investor capital.

Peter Sack [28:17]: "Our weighted average returns are in the high teens for portfolios of first lien senior secured debt."

Preferred Clients and Investors

Peter outlines Chicago Atlantic’s ideal clientele, which includes high-net-worth individuals, family offices, and wealth advisors seeking exposure to unique, high-return investment opportunities.

Peter Sack [30:16]: "We spend a lot of time talking to family offices, high net worth individuals and wealth advisors."

Conclusion

The episode wraps up with Peter and Justin reiterating the importance of focus and deep market understanding in successful investing. Justin encourages listeners to reach out to Chicago Atlantic for potential investment opportunities and to follow Peter Sack on LinkedIn for further insights.

Peter Sack [33:14]: "We like talking to operators, regardless of what industry they're in, that are trying to do something different... and we want to see if there is a way that we can support that differently from other capital providers."

Justin Colby [33:42]: "Peter Sack, thank you for coming on Entrepreneur DNA."

Key Takeaways

• Blue Ocean Investing: Focus on untapped, less competitive markets to drive higher returns.
• Cannabis Industry: A prime example of a blue ocean with strong growth potential and evolving financial services.
• Risk Mitigation: Essential in alternative investments, especially in emerging industries with regulatory complexities.
• Diversified Portfolios: Emphasizing diversified debt investments to balance risk and reward.
• Investor Focus: Targeting high-net-worth individuals and family offices seeking unique investment avenues.

Notable Quotes

• Peter Sack [02:20]: "Blue ocean versus red ocean is just the start. Are there ways to enter those blue oceans that mitigate the risk that keep others out?"
• Justin Colby [05:22]: "We found a really unique space with strong industry fundamentals."
• Peter Sack [25:16]: "The fundamental principle for all definitions of debt should be downside protection."
• Peter Sack [28:17]: "Our weighted average returns are in the high teens for portfolios of first lien senior secured debt."

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For more insights and updates, visit ChicagoAtlantic.com or connect with Peter Sack on LinkedIn.

Transcript

[A]

What's more important is finding a space that blue ocean where when we invest resources in people in terms of originating to finding opportunities, in terms of underwriting, in terms of operating, are we going to be able to drive returns for our investors through that process? And it's not that easy to find sectors where the more you invest, the greater opportunities and the greater expertise and the greater returns you can drive. And that's what we've done most, most demonstrably by investing in the US cannabis industry. Yeah, that we've, we found a really unique space with strong industry fundamentals. And the key was finding a differentiated approach to investing in it.

[B]

What's up the entrepreneur DNA family Welcome back to another incredible episode. I have someone super cool, really smart and hyper successful in the investment space. He is the CEO of Chicago Atlantic. But they focus specifically on alternative style investments that a lot of people in a lot of industries are scared of. But they actually give huge returns, like equity ownership type returns. Peter Sack is here. What is up dude?

[A]

Thanks for having me.

[B]

Yeah, this is going to be fun. So you know, I come from the real estate space. I've done this for two decades. Returns, investments, this is my language, this is where I play. So for all of you watching this, make sure you first follow Peter Sack. But Chicago Atlantic is the company. Let's get into the first things first. What industries, what verticals? What are people kind of scared or companies and lending institutions, what are people kind of scared of? And then why are they scared of those things?

[A]

Many institutions are afraid of emerging industries mostly because they're different, because they're new, because they operate under different constructs, under different regulatory frameworks and different levels of uncertainty. And so if you can find, as an investor can find ways to mitigate a lot of those risks or uncertainties through different structuring, through different approaches, through finding the right avenues of entries into these industries that have that uncertainty, then you can find really exciting opportunity and really exciting risk reward. And that's what we focused on at Chicago Atlantic over the last six years, is finding ways to mitigate risk in industries that are underserved by the broader financial services industry.

[B]

I think one. Another way of saying it in my world is like red ocean versus blue ocean, right? You have found a blue ocean that most financial institutions don't go after, don't look at. Why do you like what makes those. Is it just the simple idea of this red ocean versus blue ocean, or is it. Why do you go after the, the verticals, the industries that other financial institutions go I don't want to play it in this game. Yeah.

[A]

Blue ocean versus red ocean is just the start. That's a, that's an first screen to understand could there be opportunity here? The key beyond that, I think is twofold. One, are there ways to enter those blue oceans that mitigate the risk that keep others out? Sometimes blue oceans are avoided because for very good reason.

[B]

Yeah.

[A]

And sometimes they're not. Or sometimes you just need to find the right avenue to. And the right approach in order to gain exposure to them that mitigates those risks that keep others out. The second piece that we focus on is this blue ocean. An area that is large enough, fragmented enough, underserved enough in the long term that the more that we, as a platform at Chicago Atlantic, invest in that space through resources, through expertise, through sourcing capabilities, can we drive greater alpha for our investors?

[B]

Now the, the thing that I'm hearing without you saying it specifically is getting a better understanding of some of these maybe misunderstood or just simply not understood. Not misunderstood, but not understood verticals or industries. And you're focusing on. Let me actually understand why. What do they have to offer? Why are they there? It's an industry that works and you guys really focus. Maybe I'm mishearing in, you know, reading into what you're saying, but like, sounds like you actually take the time to understand the industry first.

[A]

Focus is key.

[B]

Yeah.

[A]

Focus and deep understanding is irreplaceable.

[B]

Yeah.

[A]

We don't consider ourselves tourists in the spaces that we invest. When we invest, we want to go all in as a platform in understanding the space and becoming the leading expert in that space. And that's, that's the piece that's hardest to find. It's easy to find sectors of the economy that are underserved by the financial industry or are disfavored by the financial industry today. Yeah. Take for example, you could invest in commercial real estate today in major city centers and say, gosh, vacancy rates are high, it's difficult to find capital to develop. It's diff. Prices are going down. I should buy now. I should buy the dip.

[B]

Right? Right.

[A]

But I could spend the next 10 years doing only commercial real estate lending or commercial real estate investing in challenged areas. And I still wouldn't be a leading expert in the commercial real estate space because it's a crowded, extremely competitive investing and development world. It's the red ocean.

[B]

Yeah.

[A]

What's more important is finding a space that blue ocean where when we invest resources in people in terms of originating to finding opportunities in terms of underwriting in terms of operating, Are we going to be able to drive returns for our investors through that process?

[B]

Yeah.

[A]

And it's not that easy to find sectors where the more you invest, the greater opportunities and the greater expertise and the greater returns you can drive. And that's what we've done most, most demonstrably by investing in the US Cannabis industry.

[B]

Yeah.

[A]

That we. We found a really unique space with strong industry fundamentals. And the key was finding a differentiated approach to investing in it.

[B]

You'll say cannabis. I'll use the word weed. And I say that jokingly to bring a smile, like, for a lot of people out there. They might be users of said flower. And there's no judgment on my side. Trust me there, I just want people to understand is remove the title of who you are and what you do in running Chicago Atlantic. At the end of the day, you're an investor and you got to get the right type of returns in an industry or a vertical like weed. Cannabis Flower. We can name whatever. We wanted to say that that's exciting. There's. There's a vertical that didn't exist 15 years ago for any lenders, let alone business operators. Talk to us and maybe bring it down to the. The layman investor, someone who might not have Chicago Atlantic type of investment strategy. Why cannabis? Why marijuana? Why. Why is this a vertical that you say, you know what, let's lean into this.

[A]

Yeah. A couple key factors. One, fundamentally, it's a growing business with. With strong fundamentals. This is a sector with $32 billion in revenue. It's legal on a medical or adult use basis in close to 40 states and jurisdictions across the country.

[B]

It's legal in 40 states now on.

[A]

A recreational or a medical basis. A majority of Americans live in a. Live in a state where you can acquire cannabis legally. Yeah. But because of the conflict between federal and state law and regulation regarding the substance, very few institutional established capital providers will provide, in particular debt capital, but also in many cases, equity capital to cannabis companies.

[B]

You guys do both.

[A]

We primarily focus on providing debt capital to cannabis companies. And why debt capital? Because there's even a greater paucity of lenders that are willing to provide loans to cannabis companies. And that's the unique angle that's allowed us to enter this blue ocean.

[B]

Yeah.

[A]

It's that by providing debt capital instead of equity capital, we're able to enter through an avenue that controls risk better, allows us to mitigate the valuation risk. How much is this company worse? And allows us to underwrite and control risk Through a focus on hard collateral, through cash flow generation. And in the process, because there are very few operators providing debt capital to cannabis companies generate really strong differentiated returns at differentiated risk profiles.

[B]

So I've had several friends who talked about this offline who have done very, very well early in this game, right? There were some of the few, first few in California just crushed it, sold their company off to, I want to say a Canadian company. But the point being is there was a true build and sell opportunity. I think you guys are probably well aware of that, obviously. But let's talk about kind of the idea of the space of like so cash heavy. My understanding the challenges that they went through because they're some of my closest friends, it was just again, new enough, so cash heavy. So much federal versus state risk. But that is also why they got the multiple they got. I mean, it's insane how much money they made, right? Is insane. Like hundreds of millions of dollars. And now are we further enough down this road of the cannabis industry for companies like yourself to have comfort with the risk between federal and state, with the cash intensive side of this side type of thing with banking, like not many banks are willing to take in $200,000 every other day, right? In cash. Like, where do you stand with that? Maybe that's not you. You may not be a retail bank in that sense, it might just be lending. But how is that all kind of washed out, so to speak? As many of you know, I'm constantly on the move, juggling multiple businesses, traveling and ensuring I get my morning workouts in. Staying fresh isn't just a preference, it's a necessity. But let's face it, after back to back meetings, juggling two kids at home and the hustle and bustle of everyday life, body odor can become an issue. But here's the deal. Mando has revolutionized how I stay fresh. This isn't just another deodorant. It's clinically proven to control odor better than a shower alone with soap. My favorite scent, Bourbon Leather. It's fresh, is subtle and doesn't clash with my clone. And I was surprised by how well the solid stick works. Even after an intense morning workout. Mando starter pack is perfect for the new customer. It comes with a solid stick deodorant Cream tube Deodorant. Two free products of your choice like a mini body wash or a deodorant wipe. And free shipping as a special offer for listeners and new customers. You get $5 off a starter pack with our exclusive code that equates to over 40% of your starter pack. Use code [e-mail] that is s h o p m a n d o do.com Please support our show and tell them we sent you smell fresher, stay drier and boost your confidence from the head to the toe with Mando.

[A]

Yeah. The. The industry is maturing over time. Yeah. A lot of the irrational exuberance that drove people to, to exit at really big valuations early on in the development of the industry has gone away. And states that grew really fast have matured into stable marketplaces where competition creates winners and competition creates losers and creates a lot of challenges and a lot of opportunities. And the industry is going through the cycle of weeding out strong operators and weak operators as capital has become. As equity capital in particular has become more scarce and valuations have declined at the same time the business has normalized significantly. There's now close to 500 banks and credit unions across the country that provide ordinary commercial banking services for. For cannabis dispensary, for cannabis cultivation facilities. So finding a bank that will pick up your cash just like they pick up cash from a Starbucks a couple times a week now is ordinary. Course, it's certainly still more expensive.

[B]

Yeah.

[A]

Than ordinary. Than, than other than if you were a coffee shop.

[B]

Sure.

[A]

But a lot of those fundamental logistic problems have been ameliorated. I would say, though not, not gone altogether. There's straight word.

[B]

I don't even know what that word means. Let's, let's. The what is ameliorated have been lessened.

[A]

I've been lessened.

[B]

Right. I definitely just got schooled there. That was great. I'm saying that right? Ameliorated.

[A]

Yep. Yep.

[B]

Okay. My challenge to myself is today I need to use that word property. Somewhere somehow it just rolls off the tongue. Like reduced. Lessened. Ameliorated. Okay.

[A]

I sure hope I'm using it right, otherwise I'll just look like an idiot.

[B]

Yeah. So you guys aren't an institution that takes. You're not a bank in that sense where you would be. You're correct.

[A]

You're correct.

[B]

So you're a lending institution. Got it. So I just want to know framing wise when talking to you about this. So my friends had a very big challenge with that. Right. I mean it was like the classic like back room full of $15 million in cash because banks wouldn't do anything.

[A]

Yeah.

[B]

That has been ameliorated.

[A]

Yeah. And there's. Now, there's still, however, only a handful of lenders regularly providing debt capital to the cannabis industry. So you have dozens of publicly traded companies generating strong cash flows, strong equity backing. You have thousands of small and medium sized companies that are generating strong ebitda, strong equity backing, strong, strong collateral bases that can't get access to debt capital to grow or to buy a competitor or to build expand their cultivation facility or to build additional dispensaries, things that access to capital that if you were a coffee shop or a vertically integrated CPG company, you would be able to raise debt capital quite easily for sure. And in this space it's just simply not an option. And so we're one of the few providers that are regularly operating in this industry, making those debt investments, helping cannabis.

[B]

Companies grow, grow in, in the investment, really the borrower. Those companies are really borrowing for growth. Yeah, I mean that's the impetus of it all, is growth strategy. So and you, the lending side of it, you're collateralizing that loan against the current operation?

[A]

Against the current operations?

[B]

Yes.

[A]

Yep.

[B]

So they have one operation, I'm just going to say California. That's where I'm from. The experience I have with it. They have an operation in San Francisco, they're doing whatever X revenue, you guys underwrite the current operation. They want to open three more up in wherever the hell you say. Great. Based around your current revenue, based around your bank statements, based around this operation, we're willing to lend X. Yep. Standard stuff.

[A]

Yep.

[B]

Very same thing in the real estate space. I mean it's literally you're just looking at the business, you're looking at the piano of the business you say, based around the strength of that pnl. I'll lend you this money with the collateral of that piano. I mean this is the best part about this podcast, dude. I just having so many incredible guests like yourselves and just I'm getting just as much informed as the, the listeners are. Right. And it's so cool to me because I have experience because of how close I was to my friends of the alternate side of this, which is there were no Chicago Atlantics that did not exist. Their growth and expansion quite literally was private financing. Right. And so they would have to raise all this capital, give away equity, give away debt, and then they could go open up another shop and it was just a burden. Now they did very well. You know, they had a nine figure exit, but now they can play enough space with you to say, hey, I want to go open up five more shops at this type of revenue stream and it's a call away.

[A]

Yeah, exactly, exactly. And look, we are, we're Certainly expensive capital. We, we, we pull investors from high net worth individuals, family offices, RIAs, some pension funds that also look at this space as a big opportunity in a big white space in order to invest and be a, be a first mover driving really attractive risk adjusted rewards because there are so few lenders operating in the space.

[B]

Are you guys on the back end of this? Not for the operators, but for the investors, Your investors. Are you guys constantly raising capital? Have you filled that? Is that a constant work in progress also of if I have a handful of family offices I can connect you to, is that a direct like I'd be interested?

[A]

Absolutely. We're constantly raising capital and, and deploying. Yeah. And that's, that's the game. Raising capital and deploying and seeking to be able to be a, a more fulsome. A more fulsome partner to our clients in the space. Yeah, I think the lifeblood of what we do is opportunities to deploy capital with really strong risk adjusted returns with some of the best operators in the industry.

[B]

No doubt.

[A]

And we do that by managing a platform of investment funds such that when we have, when there's a really strong operator, we have a funding source to support what they're doing and make strong returns in the process.

[B]

Yeah. And so this is so incredible. Now the, the cannabis space is one vertical. I just use the word vertical for internal purposes, but like that's one industry. What else would be considered a riskier industry or maybe the more the blue ocean type industry. That there aren't a lot of people out there. That is an open lane, that is an open, you know, freeway to like hey, there's opportunity here. That's legitimate these days where five years ago this was not necessarily the case. What else are you guys looking at?

[A]

Yep, I think a lot of, A lot of, I think there's a lot of, there's a lot of ancillary businesses surrounding digital currencies today.

[B]

I was just gonna say like crypto was like five years ago crypto was like this isn't a thing. Now it's like the president's basically saying hey, the government's gonna have crypto. Right. Like we have come a long ways.

[A]

In five years and this is a space where you know, we're focused still on providing downside protection, yield investments that provide equity like returns with stability and downside protection. And so in the crypto space you don't, you don't get that by just buying cryptocurrency.

[B]

That's right. I mean look what it's done. I Mean, I don't, I'm not a crypto guy. Heavy. But like the actual market dropped 66%.

[A]

Yeah. That's the type of volatility that we're not looking to give our investors exposure to.

[B]

Right.

[A]

But we're looking for ancillary business that operate within that ecosystem that provide real services that can generate real cash flow and profitability over the long term.

[B]

Like a, like a. What's the word? Like coinbase. Right. Meaning they charge me every time I buy and sell. There's consistency, there's stability in that. Right. If I'm losing money, making money, I'm selling, I'm buying. Every time it's, oh, here's $8 goes to Coinbase.

[A]

Yeah.

[B]

$22 goes to Coinbase. I'm like, but that's the level of consistency. You guys are like that type of service, we can invest heavy into that because there's consistency in the security of it.

[A]

Exactly, exactly. And then there are other industries where we, we spend time looking to understand, looking to understand the fundamentals and understand why other institutional providers may or may not be providing capital. One example is a business who we gave a loan to that makes equipment for shooting ranges for the police in the military.

[B]

Okay.

[A]

And you know, this ordinary business makes equipment for shooting ranges, has a big backlog, has a long track record of success. Really challenging for them to find debt capital in particular because many institutional investors simply can't invest in the firearms industry. And we also don't invest in firearms manufacturing. But this is not firearms manufacturing. This is adjacent to that space range for training military and police. But still, because of that adjacency, they have trouble finding capital sources. And so that's an area where we see an opportunity like that and we want to lean in and we want to be their partner for growth.

[B]

So let's talk about some of that. That's fun to talk about. Like I want to talk to all investors you're looking at, basically I'm going to bring it to real estate just because it is my strong suit. But so you go to a Phoenix and it has been a mad house for the last eight years. Like everyone and their mother is investing in Phoenix. It is just overridden with investors, etc, but you go and do an adjacent city like a Tucson that doesn't have. Is that like, talk to the investors? Like, what should investors in a general sense, banks, institutions, family offices, doesn't matter. What, what is the secret to your success when looking at things? Is it this like adjacent structure where it's like you don't go after the big, everyone knows, red ocean thing. You go, where's the side, you know, alley that people don't really know about? The back door that is just rich, heavy and just people like. What's that philosophy that you guys run with?

[A]

Yeah. So if I'm looking at something like the Phoenix market, I want to see and appreciate what the market is driving. That could be a bubble, could be temporary, could be not. But if everyone's looking at the basics of the Phoenix market, I probably want to find something different from that. I want to find an angle into that space that other people aren't doing because it's more complex, because it carries more execution risk. Maybe that's a conversion. Maybe that's finding something that has zoning and entitlement complexity. Maybe this is a property where by adding an improvement like a drive through, I can make a lot more, I can create a lot more value for this commercial retail property than was before. But finding an avenue that justifies, that justifies our focus and justifies, justifies, justifies our efforts ultimately, particularly in the alternative asset management space. There are a lot of people pitching products and managing funds that are not differentiated and they make management fees and they earn incentive fees for doing something that, for creating risk reward, exposure to risk reward that you could get by buying ETFs, by buying publicly traded lending companies. And frankly, that's just not how I want to spend my life. I want to spend my life in the investing world creating something new, creating risk reward that is truly differentiated.

[B]

You're a true investor and I love that. Right. That's why this episode is here. This is why this, this podcast is because we talked about it offline. Like giving someone a guaranteed 5% is as boring and as basic and they sell themselves. Is, is the risk eliminator, right? That the downside risk, we're going to make sure you don't have it, you know, but man, is that not fun or sexy or. You have a big upside.

[A]

If you want a guaranteed 5%, you should buy treasury bond 10 year treasuries at 4 and a half percent yield and then never look at it for the next 10 years.

[B]

That's right.

[A]

And you don't need to pay anyone else to do that for you.

[B]

Yeah. Great suggestion, by the way, for all you guys that want a very secure, safe, steady now. I'm more risk, not averse. I'm. What's the right word I'm looking for? Like I'm into risk. I'm okay with risk. Right. I bought 4 apartments site unseen in Alabama. Right. Now, that comes with its own hurdles. I wouldn't suggest everyone to go do that kind of stuff. But having the risk is the bigger opportunity.

[A]

Yeah.

[B]

Your word focus means a lot to me. Right. I. My wife told me just a little while ago. Right. Is if you had a little bit less trust and a little bit more focus, you exponentially would grow your businesses and have multiple businesses. Right. So focus is a hard word.

[A]

Right.

[B]

Because how do I do these things? All at a high level and it's.

[A]

Easier said than done.

[B]

Yes, it is very easy for my wife to give me that advice and then for me to have to go execute on it.

[A]

Yeah, there's always a new shining shiny object. There's always a new opportunity. There's another, always a new vertical. But the discipline to say if I focus on the space, if I commit resources to it, I know the opportunity will come and I know I'm going to be better at it, a better executor at it as a result of that is, it's, it's, it's challenging to keep, to keep that over a long period of time.

[B]

How far in the red are you willing or able to go? And I don't want to speak to Chicago Atlantic, obviously, because this is a little bit different and it's much bigger. But like, I think most investments of any sort into your own business, into a property, into whatever, you got to have some level of like sustaining the pain, knowing that you're likely going to go in the red for a little bit. Because to you, you just said it. In a way, if you do it long enough, it can get that hockey stick you're looking for. But you might have to go down, not just kind of coast, but like go down first to come up. Right. How long do you think is the right time frame? Like, you can't just be foolish and torch money and torture time and torch. But you also have to be reasonable to do this. Right. You probably have to take some, I don't want to say losses, but you have to go in the red first to come up and find the green.

[A]

Yeah. I'd say yes and no. We focus on lending and debt, investments and debt. You can define debt in a dozen different ways. For me, the fundamental principle for all definitions of debt should be downside protection.

[B]

Okay.

[A]

And so when we're making an investment, we're trying to find multiple avenues of uncorrelated pathways where we can have downside protection. That could be because they have revenue streams coming from many Retail locations and cultivation and wholesale products across multiple states. A really broad diversified footprint. That could be because in addition to strong cash flows, the company has hard collateral. That could be because we have personal guarantees and pledges of assets outside of the business that provide us downside protection. And so we're looking for a number of different ways that if this part of the thesis goes wrong, we still get paid our interest in principal. If this part of the thesis goes wrong, we can still recoup value from this part of the business that's uncorrelated. And so we can feel really comfortable seeing underperformance in an investment on a consolidated basis if we have really strong conviction in our downside protection thesis. And that thesis of downside protection, that thesis of being able to recoup value may allow us to take risk or allow the business to take risk in a growth project that we wouldn't otherwise, because we have that margin of safety in our protection.

[B]

As an, as an investor at all levels, being able to understand and looking at where are my downsides, if I pull the trigger on this opportunity, this investment, this thing, I need to look at the landscape of like, here's a hole, here's a hole, here's a hole, here's a hole. And then how do we protect those holes?

[A]

Yeah.

[B]

If we fall in this hole over here, how do we make sure that we can come up over here? If we fall in this hole, how do we make sure this. Right. So you're, you're really looking at the entire landscape of your downside. So, you know, you can minimize it by having multiple, what I would call exit strategies.

[A]

Yeah. And. And credit. It is a different lens than equity and venture capital and new initiatives. In venture capital, you may be willing to lose all of your money on 2/3, 3/4, 90% of your portfolio. Because you're confident that 10%, you may not know which 10%, but 10% is going to 10x.

[B]

Yeah, yeah.

[A]

In credit, you can't do that. In credit, you have to have very strong downside protection and downside conviction on your investments because you can't sustain that many full losses. And if we've sustained losses of principle, then something has gone very wrong in our thesis.

[B]

That's right.

[A]

And that's the difference between. That's sort of what fixed income means. Fixed income means when you make an investment, there is a maximum amount of upside that you can get in most debt investments, and that could be your interest. That's fees, that's exit fees. But ultimately those are contained within A contract, you're going to make this percent return on the investment over this period of time. And so that's why that return could be really attractive in our case. In some of our vehicles, our weighted average returns are in the high teens for portfolios of first lien senior secured debt.

[B]

Wow, that's great.

[A]

And that's how we can create equity like returns in portfolios that have really strong downside protection. But that downside protection thesis is still very key. We gain additional upside by, in addition to fixed returns, also securing warrants or conversion features in some of our investments that can provide incremental upside. But that doesn't take the place of solving the question of downside protection first because our first goal is to provide principal protection for our investors and then on top of that provide a really attractive risk adjusted return.

[B]

So who's your preferred client? Like if, if there was someone listening or watching this on all these platforms, who would you say is your person that should be reaching out to you? Right. Whether it's a company industry. Go contact Chicago Atlantic. You may not get Peter, but reach Chicago. Like who are you talking to? Who, who should consider using you for financing?

[A]

Yeah, please. We in the cannabis space, we focus on states that have a limited license environment. So states that have issued a relatively small number of, whether that's retail licenses or cultivation licenses. We like those markets because those states create more barriers to entry for new entrants to come in. And that means that existing operators have more stability in their margins, more stability in their outlook. That's right. And when they make new investments, they can do that with greater certainty. And so we're spending a lot of time in Missouri, Ohio, New York. We've invested a lot here in Florida, Maryland, Illinois. These are markets that are stable, lots of profitable operators executing on theses to develop their space to provide more products, to provide more attractive products for the end customer and ultimately growing this industry by creating something that's more accessible.

[B]

No doubt. And then who would you like to talk to? So cannabis in general, that is your main put. If someone's out there in the cannabis space, period, in general, you guys are at least at like to have a conversation. Chicago Atlantic. Make sure you're looking up Chicago Atlantic. Is there a website or best place.

[A]

For them to Chicago Atlantic.com and you.

[B]

Can find me on LinkedIn and then LinkedIn. Peter Sack. So then let's go to the other side of your business if someone was interested. Like I like this, but I like the protection of having Chicago Atlantic have my money not me throwing a hundred grand at some operator. Who are you talking to in terms of the capital race? Who are you talking to? People small, large, big, family office style. Do they need to be a corporation? Is it, you know, debt arbitrator, like. So who are you talking to about people you would like to talk to specifically to finance some of this stuff?

[A]

We spend a lot of time talking to family offices, high net worth individuals and wealth advisors.

[B]

Yeah.

[A]

And we spend our time thinking about and talking about how our private credit offering is distinct from the broader private credit industry.

[B]

Yeah.

[A]

And we're never going to replace investments in some of the largest private credit funds out there. But we think that we, that we offer something, a really distinctive risk adjusted return in a really distinctive industry that investors probably don't have exposure to elsewhere in their portfolio.

[B]

I was going to say you give them an opportunity to get exposure to something that they don't have. Like they might have a friend, whatever. But again they, they risk mitigate by giving Chicago Atlantic their capital versus their friend that has a shop, if you will. Right.

[A]

And then investing in a diversified portfolio of debt investments versus what is, what's inherently more risky? Equity investments.

[B]

The word you use right there, portfolio. I love that word because I'm a real estate investor. But I look at my entire portfolio. It's not always puppy dogs and rainbows. If you individually look at every single asset I own. Right. I'm doing a flip right this second that, yes, transactional. So it's not in a portfolio play, but it's going to be a loser. But I can sustain that loss based around the portfolio's revenue that I generate. Right. The word portfolio to me is a, a much better word than diversification of what you're doing. Like if you can invest in something that has again, your downside risk, like this one crushes, this one's eh, this one's a loser. But this one's okay. Now you have this diversity, diversity within your downside risk. I think everyone needs to look at investing in that way.

[A]

Yeah. This, this is why you hire investment managers to focus on a space and make an aggregate of smart decisions of an aggregate of smart individual decisions that create a portfolio of risk reward.

[B]

Peter, this has been really informative for me.

[A]

This is fun.

[B]

What, what have we not covered about either the cannabis space, Chicago Atlantic that we want to. Because I kind of feel like I could go left with it. What, what else would we like to talk about here?

[A]

When we, when we think about the world, we think about what, what can we add to it. What's the different lens that we can apply that other people aren't doing? And, and we like talking to operators, regardless of what industry they're in, that are trying to do something different. And, and we want to hear that message, and we want to see is there a way that we can support that differently from other capital providers?

[B]

That's great. That is incredible. Peter Sack, thank you for coming on Entrepreneur DNA.

[A]

Thanks for having me. This is a blast.

[B]

Right on, guys. If this was pretty cool and you were interested in any of this, or you think someone should hear this, share this with two of your people. Make sure you check out Chicago Atlantic and Peter sack all over LinkedIn social media. And again, share this with two more people that might find this interesting. We'll see you on the next episode.