Co-founder, chairman, and acting CEO Bruce Linton introduces viewers to Canopy Rivers Corporation, a development of Canopy Growth Corporation (TSE:WEED) (NYSE:CGC) (FRA:11L1). The company delivers capital and expertise partnerships to emerging companies with leverage potential for Canopy Rivers. Canopy Rivers is an investment platform that attracted significant institutional investment in its last round of financing because of its experience operating in jurisdictions where cannabis is legal. Linton explains that with Canopy Rivers the goal is multiple investments that show and/or yield upside on total asset equity value. As a result, Canopy Rivers is both about realizing a rate of return for investors while exploring new techniques and technology that could benefit its parent company, Canopy Growth.

Transcript:

James West: Welcome back to Midas Letter Live. My guest this segment is somebody who you think you know but it’s not going to be in the capacity that you think you know it as. Bruce Linton is here in his capacity as co-founder, chairman, acting CEO of the yet-to-go-public Canopy Rivers.

Bruce Linton: Wow, good intro, James. Well done. Very well done.

James West: Yeah, I can’t believe I got all that through.

Bruce Linton: Yeah, I know.

James West: So Bruce, Canopy Rivers is essentially an offshoot of Canopy Growth, but it has its own thing – and what is it?

Bruce Linton: So, how many deals a week do you think we get presented to us that say, ‘We’d like you to participate. We want you to take a chunk, we want you to be helpful, we want your money, we want your expertise, but we don’t want to get purchased.’ All the time. And so that pattern started probably three, four years ago, and over the last couple years we worked through, what are we going to do about that? And the what to do about it was to set up Rivers so that it can take minority interests, deliver capital and expertise, and depending on the circumstance, there will be some leverage. You know, we put up, whether you’re thinking about HVAC or extraction, whatever Canopy does well, we put up a skill set, and in those circumstances, we expect to have a first look. A chance to maybe buy them at a good price. In other ones, it may be just economic investments that make a lot of sense, but in Canopy, I don’t want to be in the business and growth, directly, of trying to make bets on stocks and buying and selling. In Rivers, we want to be in that business.

And so what was structured was, you know, a bit of a control on it, because we’re not just putting cash in; we’re putting intellectual skills and expertise. And so what we said is, you know, there’ll be like a 20:1 voting right in favour of us, we started it. We brought in a first tranche, quickly got through deploying that, and we expect by the end of this week to have our second tranche, which is north of 100 million, released into there. And when you look at it, you say, this is a really well-staffed, efficient in terms of overhead burn, picked some great horses already, bet it goes well.

James West: Okay. So what does the opening portfolio look like right now?

Bruce Linton: We’ve got about 11 investments, couple of countries. We’ve been active looking at a few continents. We started off with craft grow because it kind of made sense; then we got up to mega-grow, and that’s sort of a Leamington operation. We’ve looked around and gotten involved in things like Civilized, where we start saying, where’s the book of business come from? How do we play in this section? And so, you know, when you put all that together, it starts to look like a portfolio, which is why it made sense to scoop away guys from banking and from OMERS and from places like that, so that we’re actually running a portfolio strategy to create a global mix of all things we think are going to show a lot of value and acceleration.

James West: Interesting. So what won’t Canopy Rivers do?

Bruce Linton: Break laws generally. So we’re not big fans of criminal operations; we also don’t have, like, overreaching rights to buy criminal operations yet in the US. So you know, we’re not doing that shuffle. What we’re doing is, we’re going where it’s legal, how we can go, and that’s probably why a lot of institutional investors who would never normally participate in either a private investment or a cannabis investment were in our last round, because they understand that we’re staying between the guardrails, and that if and when it becomes lawful anywhere, of course the best will accelerate the fastest, but there’s no sense in getting a head start that could leave you offside with a bunch of entities.

James West: Sure. So how many opportunities do come your way every month?

Bruce Linton: I should count them. This morning I’ve had two pitched to me. And so what I do is, I forward them on, you know, to Eddie and Peter and Sean and Daniel and say ‘guys’, and then they sift them. And there’s a process, right? You know in this sector, everybody wants to be in, but not everybody wants to do the work. I think it’s, one of the lines that I like to say is, I think there are a lot more companies in this sector than there are businesses. We’re looking for businesses. We want people who actually want to create value and understand shareholders are not there to be victims.

James West: And so, of all of the things that cross the transom, how many of them actually make it to the next look?

Bruce Linton: I would say everybody gets a first look. So that means that we’re not signing an NDA, but we do want to hear your pitch and your position. It’s pretty quick, right? After you’ve been at this…so Sean and Peter started inside our shop, in a sense. They were our in-house M&A advisors for the last two years, which means we got really good at that pattern recognition of what’s this about, where does it fit. Because, you know, Sean, he’s kind of been around with the history of the sector; he was one of the first people to invest in the space back in 2013. Peter followed on after that; Daniel’s been an analyst for probably four or five years in the space, so we kind of know the makeup of a lot of the Canadian international pieces. So when it’s time to make an investment, you can pretty quickly go from ‘maybe’ to ‘yes’ or ‘no’.

James West: Sure, okay. And in terms of the targeted portfolio performance, is it more about realizing a rate of return? Or is it more about making investments that pay off while having first look at technologies you might want to acquire for the mother ship?

Bruce Linton: Well, it’s kind of great, because it’s both, right? So we have made a bunch of investments that are about either the equity gain or the yield off the asset, and those are nice, because you can say, look at this thing: it actually doesn’t lose money, and it’s in the marijuana space, and it’s growing rapidly. And then there are going to be pieces which, if we have to lean in as growth, and actually put quite a lot of expertise on the table and bring skills and everything from genetics through, those will be ones where we need to have a first look because we can’t let our tech or expertise run away from us, but we’re not looking for a deal; what we’re looking is for certainty.

And so the Rivers investors and the entrepreneur all know there’s a lot of upside if we execute, and we’re happy to push in and see EBITDA grow, or whatever the metric is, because you know, at the end of the day, in Growth we want 100 percent control of what we do. In Rivers, we want a lot of investments that show yield and/or upside on total asset equity value, and that kind of works well, because one starts at a 10 or 20 percent participation, and the other finishes at 100 percent control. And so to me, it seems like your other option would be to say, well, do nothing. People almost never get in trouble for doing nothing on an opportunity that nobody knew about.

And so we could have sat at the side and said bye-bye, bye-bye to everything that comes by, but that seemed wasteful. So, start this up, give it focus, give it capital and give it discipline, and I think it kind of juggles benefits for everybody.

James West: Sure. I heard it described as ‘Google ventures for the cannabis space’, and Google Ventures implies a rather large capital access pool. And so is that the same kind of way that we should be thinking about Canopy Rivers, is that this is essentially the investment platform that will or could be funded by Canopy Growth Corp., and/or its partners?

Bruce Linton: Yeah, so I think you’ll see us making our pro rata position for every raise going forward. That’s our current platform, and that as we need more capital, you can imagine that there will be quite a lot of capital that might be interested in participating in Rivers because you have those dual outcomes. You have some depth of global coverage and you have a deal flow that is unequaled.

So I think that the access to capital won’t be a question; what we’re really looking is, how do we structure it so it’s not too impactful on the shareholders. So you start to look at things like there’s probably going to be debt instruments that are going to be available, because we’re stepping in first, which means when you’re in a Rivers investment, we’re at the top of the heap. We’re not suborning down on an equity stack; typically, we want to actually have a strong position. Now, sometimes we might have to, but because we’re not just showing up with money. So there’s a way that you can start to put sources of capital together that think make the potential yield for investors in this one better than the dilutive model that we’ve all had to live through over the last five or six years.

James West: Sure. All right, Bruce, that’s a great introduction. We’ll leave it there for now; we’ll come back to you after it’s been public for a while, if you’re still the acting CEO.

Bruce Linton: Well, you know, I’ve got to have a few part-time jobs, right? Like, you know, tomorrow –

James West: Because you don’t have enough to do.

Bruce Linton: Well, tomorrow morning, Martello – remember I was coming here for a long time, for six years I was CEO, over the last six years, until December, I was CEO of –

James West: A software company.

Bruce Linton: Yeah, a software company called Martello, which goes public tomorrow morning. We got this one coming up on the 20th, and there’s a small meeting on the 26th of September which is called our AGM, which is in Smiths Falls, for Growth, and I don’t know, I expect somewhere between 500 and 700 people to show up, because the visitors’ centre is open and we’d like to be a good host. So September is an active month, and there seems to be some significant events happening in October that we should be ready for as well.

James West: Well then, we’ll have to have you back sooner rather than later. Thanks for joining me today.

Bruce Linton: Sounds good, man. Thanks.

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