Salveo Capital commits to cannabis as larger investors circle the market

The US firm has backed Flow Kana, a company closer to direct cannabis flower production than any of its previous investments. Managing partner Michael Gruber tells us why.

Salveo Capital has participated in a $22 million Series A funding round for Flow Kana, a Mendocino County, California-headquartered company focused on the provision of sun-grown cannabis.

The investment, the size of which was unspecified, marks the first in a company that will “touch the plant” for Salveo, an alternative investment firm based in Chicago that focuses on investments in cannabis-related businesses.

The funding round was led by Gotham Green Partners, a New York-headquartered private equity firm that invested $15 million in Flow Kana. Other investors in the round, which brought Flow Kana’s total funding to $50 million, included hedge fund Poseidon Asset Management and Elevation Partners founding partner Roger McNamee.

Capital for Salveo’s investment came from Salveo Fund I, the firm’s debut vehicle, which is seeking $25 million and had raised at least $1.7 million from 20 investors committing at least $10,000 as of January, according to a regulatory filing.

Headquartered on an 80-acre property in Mendocino County that was formerly operated as a winery, Flow Kana describes itself as a sun-grown cannabis brand that “embraces California values and the small independent farm ecosystem.”

The company is looking to create a supply chain by partnering with small-batch farmers cultivating boutique cannabis strains in the “Emerald Triangle,” a region encompassing the Southern Humboldt, Trinity and Mendocino counties of California that have long been centers of outdoor marijuana cultivation. It has established a unit, the Flow Cannabis Institute, which offers processing, co-packing, white-label and distribution services to the producers with whom Flow Kana has partnered.

‘Cannabis co-op’

While Flow Kana does not produce cannabis flowers itself, Salveo managing partner Michael Gruber told Agri Investor that the company hopes to play a role similar to that played by agricultural co-ops for other commodities.

Services that Flow Kana will offer producers, according to Gruber, range from help with necessary permitting and processing to marketing and decision-making regarding which products are devoted to which sub-sectors of the burgeoning cannabis market, which has come to include a roughly 50/50 split between traditional flowers and oil-based alternatives such as edibles and vaporizers.

“We continue to see a commoditization of this crop. It clearly has happened and for a lot of smaller-scale producers it gets very difficult to make money,” Gruber explained. “Flow Kana has developed a symbiotic relationship with outdoor growers in Humboldt and Mendocino to gain access to a very low cost of production for outdoor grows, while enabling the growers to be compliant and get their product to market. This enables a business model where Flow Kana can deliver very good margins without the responsibility to produce while relying on the expertise of these growers.”

“Those firms are looking at constructing new types of vehicles which would then allow them to get the right type of limited partner agreements”
Michael Gruber

Gruber said producers generally aim to bring their cost of production to around $1 per gram and that Salveo expects wholesale cannabis flower prices to continue their downward trajectory from as high as $4,000 per pound a few years ago to around $500 per pound.

While Salveo has already had investments that have come to be involved in some processing of cannabis through growth and acquisitions, it had previously described its focus as being largely in ancillary businesses that did not “touch the plant.” Gruber said that growing public support for marijuana legalization and signals regarding the likely future of the regulatory environment at both the state and federal levels helped make the investment in Flow Kana more attractive to Salveo.

“We’ve continued to get more and more feedback that there’s going to be sort of a ‘hands-off’ approach to the industry,” said Gruber. “That continues to make us comfortable with the ongoing regulatory nature [of the investment] and the ability for companies to freely operate as long as they comply with all the rules.”

Speed bump

Though complications stemming from the January roll-out of full adult-use legalization in California slowed fundraising slightly, according to Gruber, Salveo expects to close its fund on $25 million before the end of 2018.

Gruber declined to detail progress of Salveo’s fund, but a source familiar with the matter told Agri Investor that the vehicle has secured commitments of about $8 million thus far.

Gruber did say that developments of even the past three months, including the public listing to cannabis cultivators Green Thumb Industries and MedMen as well as a lessening of some initial confusion surrounding the crop’s legal status in California, have helped the firm increase its AUM “significantly.”

Those developments have also, according to Gruber, helped attract larger investors to the cannabis market. Gruber said that, while Salveo has fielded some preliminary interest from pensions, he judges investors to still be in the very early stages of educating themselves about the market, with  family offices hedge funds and private equity firms becoming much more active in the space.

“I continue to see that those [larger institutional investors like hedge funds and private equity funds] are getting more interested and those firms are looking at constructing new types of vehicles which would then allow them to get the right type of limited partner agreements set, which would allow them to participate,” he said, highlighting Tiger Global and Gotham Green as an example.