🎙️ Podcast: Harborside Co-CEO / Entourage Effect Capital Managing Partner, Matt Hawkins

M&A, Rerating, California, Verticalization, and Investing.

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Matt Hawkins. Matt brings an extensive background in building large alternative investment firms and scaling the companies he invests in. In 2014, Matt had a vision to create the leading private equity firm focused specifically on investing in the legalized cannabis industry. Previously, he was Partner and President at Tucson Capital Partners, where he focused on multifamily residential and self-storage assets. Between 2008 and 2013, the company completed more than 55 bank-direct acquisitions, deploying over $500M of capital. He successfully exited in 2013. Prior to that, he was Principal & Co-founder of Adjacent Capital, where he oversaw the sourcing, origination, structuring and closing of over 60 transactions in a 3 year period. He also became a turnaround specialist through his time at Treadstone Partners and San Jacinto Partners.


Highlights from my conversation with Matt Hawkins:

M&A / Finding a Permanent CEO

One of the pending acquisitions for Harborside will bring with it a CEO that would replace Matt (he didn’t give any clues). The company also has another two acquisitions (retail) that it hopes to announce in the coming months. Previously, the company had acquired Sublime (June 2021), which helped to round out their vertical-integration strategy (added manufacturing and one of the top pre-roll brands). The Company is also looking to add additional cultivation and manufacturing as well to scale to a $200-300M top-line business that it hopes to attract M&A interest from MSOs who want to enter California. While Matt didn’t give too many hints, it seems like the retail acquisitions will help Harborside increase its positioning in Southern California. Following these acquisitions, 70% of revenue is expected to come from retail.

Focused on California and Verticalization

California is too big (2-3 states in one) and there is still ample opportunity to go deeper here. Entourage Effect Capital has 10+ investments in California, and the firm will recuse itself in situations where Harborside is looking to acquire a company in which it is already invested in. Harborside had been working with Sublime for several years as a Retailer/Brand, so the firm didn’t need to introduce the two parties. Matt acknowledged that Cannabis is a cottage industry, and for good or bad, most everyone already knows each other. The Company has been focused on becoming a strong vertical player (SSO) in California in order to improve margins by selling approximately 50% of owned brands in their dispensaries.

Debt & Banking

The company recently raised a $12M senior secured revolving credit facility with a floor of 5.75% (interest based on prime + a premium). As the company grows through acquisitions, Harborside plans to use that asset base in order to raise more debt. On a related note, Matt believes that SAFE Banking passes in Q1 2022.

Rerating

Matt believes that for Harborside, the stock should rerate 1) based on the M&A activity the company is undertaking right now (Scale) and 2) institutional capital should be able to enter the space in the next two to three years (Billions+). He believes that building scale before rerating happens is key to returns (a thesis that he and his partners have at Entourage Effect Capital III). Matt wants the Company to become a Tier I/Tier II MSO as scale matters to public investors.

Delivery

The company built out its own delivery business but uses Jane to power its menu. The decision to do so was independent of anything Matt might have seen through his position at Entourage Effect Capital, which has yet to make an investment in the space.

Entourage Effect Capital

Entourage Effect Capital has already made five investments in Fund III— with a focus on Single State Operators (SSO) that could use capital to expand to additional states and Cannabis Technology companies (Fyllo, Hound Labs). Matt sees the firm continuing this mix of Cannabis and Cannabis Technology companies. Specifically, he called out looking at opportunities that have scale potential, as he believes those will create the most attractive exits via M&A. With regards to States that interest him, he mentioned the Midwest, Mid-Atltantic, and Northeast. EEC is looking closely at states that could go from Medical to Recreational in the near-term, such as Missouri. The Company won’t invest in a cultivation-only business, but rather target companies that operate in at least two types of businesses.


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