A group of Wall Street veterans just raised $250 million to chase down deals in the red-hot cannabis sector. Its CEO explains how it got Credit Suisse on board.

REUTERS/Chris Wattie

Silver Spike Capital last week raised $250 million for a cannabis-focused investment firm through a special purpose acquisition company or SPAC.
The firm is expected to raise additional capital over the next year for a direct lending arm, a private equity fund, and a hedge fund for public markets opportunities.
Credit Suisse acted as the sole book-runner on the SPAC, becoming the first bulge bracket investment bank to lead a US cannabis offering.
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Wall Street is turning to weed.

Silver Spike Capital, a new firm from a group of Wall Street veterans, last week raised $250 million through a special purpose acquisition company or SPAC. The firm will eventually include a direct lending arm, a hedge fund for public market opportunities, and a private equity fund, along with the recently-announced SPAC.

The firm is expecting to raise additional cash over the next 12-to-18 months, first for its direct lending and private equity funds and then for its public markets strategy, according to CEO Scott Gordon.

Gordon previously headed up Bank of America’s special situations group in the mid-2000s and ran the emerging markets groups of several large asset managers including Taconic Capital Advisors. The firm’s management team includes Bill Healy, an alum of Deutsche Bank and the blockchain fund Pantera Capital, as well as Mohammed Grimmeh and Greg Gentile, according to LinkedIn.

The cannabis industry is "approaching its moment of institutionalization," Gordon said in an interview with Business Insider, though it’s still early. "What we’re trying to do is stay a little bit ahead of the curve so that when it does happen, we’re operational and we’re not chasing it."

That said, the bulk of the firm’s initial capital will come from the traditional cannabis industry mix of high-net-worth individuals and family offices, said Gordon. Cannabis is federally illegal in the US so most big Wall Street investors shy away from the nascent industry.

Healy, who is handling much of the capital raising, said in an interview that endowments and foundations are "very interested."

"The appetite and demand from traditional institutional US investors to get exposure to this demographic tsunami that’s taking place in the health and wellness cannabis space is huge," said Healy. "That’s just one investment theme we’re trying to tap into."

The firm will start fundraising for the direct lending arm first — Gordon says lots of cannabis companies want to be able to borrow money — followed by its hedge fund and then its private equity fund. Most of the fuel available to build cannabis companies to date has been dilutive equity since most banks are unwilling to lend to startups in the industry because of federal prohibition.

"I think there’s a lot of interest from investors given the types of returns that you can generate from lending to invest in that [direct lending]," said Gordon.

Courtesy of Silver Spike Capital

Credit Suisse, SPACS, and cannabis

Silver Spike earlier this week went public through a NASDAQ-listed SPAC (special-purpose acquisition company) in which it raised $250 million. Credit Suisse First Boston acted as the sole book-runner for the offering, becoming the first bulge bracket bank to lead a cannabis IPO, according to a company spokesperson.

Credit Suisse declined to comment further to Business Insider.

Gordon said the SPAC will look at acquisitions for cannabis tech companies, Canadian cannabis producers, or hemp-derived CBD companies. The SPAC won’t be able to invest directly in plant-touching companies in the US, given federal prohibition.

While it’s still early, Gordon said the SPAC would likely focus on the growing "health and wellness tilt" of the cannabis industry.

Gordon said getting Credit Suisse comfortable with cannabis was about personal relationships. He first approached them with the idea two years ago, but the firm’s bankers told him it was premature. "We kept in touch, and of course the market evolved enormously," said Gordon.

About a year ago, through a senior contact of Gordon’s in Credit Suisse’s investment banking division, Gordon gave the bank’s consumer team a sort of "crash course in cannabis."

That meeting led to an ongoing conversation between Gordon, Healy, and Credit Suisse, which led to the bank’s involvement in the IPO.

Gordon brings some cannabis industry experience to the table as well. He was previously the chairman of Egg Rock Holdings, the parent company of the cannabis brand Papa and Barkley.

He said that investing in cannabis reminds him of his work in emerging markets. In 2013, after Colorado legalized recreational marijuana, Gordon said he started to "poke my nose into what was happening with the industry."

"It reminded me of my early days in emerging markets, just in terms of the nascent nature of the industry where it’s picking up a lot of momentum yet it’s still poorly understood," along with the regulatory complexity, lack of transparency, and high barriers to entry, said Gordon. "There’s a certain discipline and respect you pick up for markets being an emerging markets investor that has some interesting applications and overlay to the cannabis world."

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