Recording my decision to divest from this fund.
TPF was a real estate debt fund that I invested in from early 2020. TPF was not a typical real estate debt fund, but rather they specialize in cannbis related properties. They do not directly touch cannabis, for example lending directly to the cannabis businesses. Rather, they loan on the property that house cannabis businesses.
I went in hard on TPF, and in terms of dollar allocation, is the highest of my private investments at around $350K due to what I felt was a limited time opportunity for an outsized reward to risk ratio. At the time, the returns were in the 15% range when HML to commercial assets were in the 10% range. The difference was due to a supply/demand imbalance, since most institutions were not touching cannabis. In other words, they cannot just goto the bank and get a loan. Hence, there was a lot of demand for loans, and few lenders to supply.
The pathway to non-criminzation of cannabis Federally and legalization in States was already in motion in the US. The limited time frame aspect was due to that eventually, the trend would start to pull more institutional lenders in, and drive down the loan rates in this industry. At the time, I estimated 2–3 years “good” years as the rate of return approaches that of standard commercial HML returns.
The greatest risk I saw was that even though they tout at LTV of 50%, which on paper is very conservative, the “valuation” was based on cannabis related property, which was approximately double compared to a a comparable standard commericial property. There was also the black swan event that Federally, the US starts prosecuting cannabis businesses. Regardless, I felt the risk/reward tradeoff definitelly was there.
Now 3 years later, the yields have dropped, to the 11% range, which was expected. Furthermore, due to market conditions, there are more cannabis companies struggling, both public and private. There’s still about a 1–2% premium to commercial HML, but not like the 5% 3 years ago.
As a response, TPF has decided to get some debt for the fund. The way they went about it is ground breaking, and they’ve established themselves as a industry leader. They sold bonds rated as BBB+, which was previously unheard for anything related to cannabis. More recently, they securitized some loans for a CMBS, which was also a first for the industry. Nevertheless, from the investment perspective, this is effectively leveraging the fund, which TPF is doing since the yields have dropped to get back to the 15% yield.
With leverage comes additional risk. And my original thesis in investing is dwindling away, which admittedly was expected when I first made the investment… almost right on time.
So I have requested redemption to divest my exposure down to $100K. It may take awhile to redeem out, which I’m expecting about 1 year. I still like the sponsor a lot, and them setting themselves as an industry leader may bold well for the future, which is why I’m not doing a full redemption.
