Grow Your Cashflow Podcast

Pascal Wagner (00:00)
Private credit is exploding and a few firms sit at the intersection of both public and private capital quite like Chicago Atlantic. And in this episode of the Passive Income Playbook on the Best Ever CRE Show, I sit down with Peter Sack, managing partner of Chicago Atlantic to explore how his firm has deployed over $2 billion across private credit, cannabis lending,

and institutional grade real estate assets through a mix of both private and public funds. They've got two tickers on the NASDAQ. So in this episode, we'll break down private credit and how cannabis lending is a part of that for them. The differences between investing in a private fund, a REIT and maybe a business development company, how Chicago Atlantic Structures deals with borrowers.

and what LPs need to understand about underwriting this kind of asset class. So if you're exploring how to diversify with, you know, credit and you want to understand ⁓ how these different public and private offerings compare, this conversation will be a good one to dive into. Now, before we dive in, if you are serious about becoming a better LP,

Mark your calendar for the best ever conference happening on February 18th through the 20th next year in 2026 in Salt Lake City. I will be there teaching an LP focused workshop. And this is one of the top events in the country for learning from different operators and connecting with other high net worth investors. And tickets are $695 right now.

but I guarantee you prices ⁓ are gonna continue to go up. I've seen them north of a thousand and even $2,000 for different packages, even just last year. So if you wanna learn, network and level up your investing, go grab your ticket before the price goes up. I would love to see you there. But with that, let's welcome our guest, Peter. Welcome, excited to have you on the show.

Peter Sack (02:00)
Thanks for having me. What a pleasure.

Pascal Wagner (02:01)
Yeah, man. So,

yeah, so I would love to kind of start us out with for our listeners who are new to Chicago Atlantic, what does your firm do at a high level?

Peter Sack (02:13)
We're a private credit platform focused on investing in underserved, underbanked areas of the private credit market that allow us to originate and deploy into really idiosyncratic and unique risk reward opportunities.

Pascal Wagner (02:27)
I like it. So tell me, there are all different types of credit out there. You can be a first position loan. You can provide a mortgage. You can provide bridge lending. You could ⁓ provide lending to private companies versus assets. What makes your approach to private credit maybe different from

traditional lenders or other funds out there in the space.

Peter Sack (02:56)
You know, we need to find a significant reason for existence on every opportunity that we see. generally, that means that we're focusing in areas that are not served by the broader financial services industry. The area in which we found the most opportunity and have grown the most since our inception in 2019 has been in lending to the US cannabis industry, as an example, among others.

The U.S. cannabis industry is an industry with $34 billion in retail revenue across the country. It's legal in 40 states. Cannabis companies have extremely hard time finding debt capital. There's only two or three lenders in the entire country that are regularly making loans to cannabis companies north of $10 million. And so that means that we can structure a risk reward that is both, in our view, lower risk, as defined by a multiple of

earnings to debt and much higher return profile than the broader private credit space. And it's driven by two really simple theses. One is that in an area of less competition, you can drive much better terms, both in terms of risk and reward. And that's not rocket science. And that the more that we focus on an industry like this and develop the best industry expertise,

the best originations team, the best underwriting team, a dedicated real estate diligence team, a dedicated analytics team. The more we focus and and drive differentiation in this industry, the greater returns that we can drive for our investors. And that's really unique in private credit space because most private credit funds seek to build lots of diversification across the economy. And that has significant benefits for any one fund. We've taken a different approach. We see that

Diversification also means no expertise in anything you're doing. And so we'd rather be the best in cannabis, provide a really special niche, unique product to our investors. And our investors can find diversification elsewhere. Our investors can build their own diversified portfolios. And the fact is we're never going to replace like a diversified giant private credit fund that focuses on sponsor finance. And that's okay.

You can go to Gallup, you can go to Aries, you can go to Goldman Sachs, you could go buy a bunch of other public options that I'm sure we'll talk about. What we want to provide is a unique form of alpha within an investor's private credit portfolio.

Pascal Wagner (05:15)
Yeah, I love that. so typically, the moment you hear about investing in cannabis, alarm bells go off if you're not familiar with this niche or this this industry. And the same thing happened for me. And I've also invested in this niche. So I'm very familiar with it. But I know when you're new to it, it's the alarm bells go off. And I like to say that risk comes

from not knowing what you're doing. And I would love to kind of like use this time to really understand what's happening here. So typically when an investor comes to you, are the big misconceptions that you have around doing this type of investing and lending to cannabis operators?

Peter Sack (05:57)
I think one of the biggest misconceptions is the very existence of a U.S. cannabis market. There is no U.S. cannabis market. Cannabis is still federally illegal in this country. That means that the product can't travel across state lines legally. And so that means that all the product that's legally grown in Missouri is sold in Missouri. All the product that's legally grown in Illinois is sold in Illinois.

All the product that's sold in Florida is grown in Florida. And so we can talk about the quote unquote U S cannabis market, but as, if it exists, but I don't invest in the U S cannabis market. I invest in specific States, specific markets that have specific in particularly, particularly strong credit dynamics. And that is why do I think credit versus equity, downside protection and the biggest driver.

of any cannabis operator's profitability, no matter what type of product they have, no matter where they sit in the supply chain, is driven by competitive dynamics, how much competition they have. And how much competition they have is driven by how many licenses the state issues for that part of the supply chain, whether it's cultivation licenses or dispenser licenses. And so investing in a state in a cultivator in Illinois is an example.

where there's only 24 cultivation licenses, large scale cultivation licenses in the entire state, is a very big different proposition than investing, especially a loan, in a cultivation facility in California, where there's thousands of cultivation licenses and thousands of cultivators. And so particularly from a credit angle, we look for downside protection. And there is some inherent strong regulatory moat.

investing in an operator in Illinois where there's only 24 cultivation licenses versus one in California. Now you may say, that California operator, they've got these amazing brands. They've got this great sex appeal. They're going to be huge and they're going to be in 30 and they're going to be in 39 other states within the next two years. What great upside potential. That may be true, but I'm a credit investor. And in most cases,

I'm making the same return if the company triples its revenue or if the company increases its revenue by one and a half. And so I need to focus on what are the most, what are the downside protections and what's the risk level of my specific investments relative to this specific company. And to do that in the cannabis space, we focus on diligence in every single market in which we're investing, understanding the regulatory dynamics, the competitive dynamics.

and focusing on those markets, in particular with really strong regulatory modes. So that when I'm making a loan that's one or two times EBITDA, and when I say EBITDA, one or two times it's earnings. So if I'm giving a loan that's $20 million, I need that company to be generating at least 10 to $15 million of earnings. I know that that earning stream is relatively dependable because it exists and operates within an oligopoly that prevents a lot of competition from entering in a short amount of time.

And so to answer your question directly, the biggest conception about the cannabis industry is that it's such a fragmented state by state market. And that lends itself particular for investors that want to be experts in each of those markets and invest the time and resources to be experts in each of those markets.

Pascal Wagner (09:04)
I get that. I mean, at its core, this is, this is lending. So, you know, just like you would maybe lend on a house or a building, you are lending to a grower or a warehouse facility that just happens to be in cannabis. Do I have that right?

Peter Sack (09:22)
or retailer, but we're lending to businesses that have assets and generate cash flows. And we're looking to underwrite the value and the resiliency and the diversity of those assets and cash flows.

Pascal Wagner (09:35)
And so correct me if I'm wrong here, but my understanding of this and why there's a real opportunity in this space. And I think as an investor or as an LP, you need to think about what makes this opportunity interesting or why does it exist? And in what timeframe will this exist and when will it not exist anymore? when I think about this is a traditional

let's call it a cannabis retail or a grow facility, they cannot get a federal loan because it is federally illegal across the United States to have cannabis. so because of that, these owners are buying these big 20, 30, 50, maybe even $100 million facilities to grow their product. But

⁓ they don't have access to those same traditional loans that, that, ⁓ maybe it's just an industrial warehouse operator, you know, might have access to. And so that's what creates the opportunity for private firms like yours to come in and say, Hey, we are willing to underwrite this risk. and come in, do I have that right?

Peter Sack (10:48)
Yeah, yeah, basically right. There's just very few firms that are willing to underwrite this risk from a debt capital perspective. it's less about banks, it's really about the whole financial system. Since the Dodd-Frankett Act passed in the wake of the great financial crisis, commercial banks and commercial bank lending has decreased from the vast majority of the lending market in the US.

Pascal Wagner (10:56)
And so.

Peter Sack (11:12)
to now a small minority of the lending market in the US. that banks withdrew from the commercial lending market, lending to small and medium sized businesses and even large businesses in some cases, because the Dodd-Frank Act put particular regulatory pressure on banks that made it much more difficult to do this type of lending. And out of that spawned what people call today the private credit industry, the non-bank lending industry.

that's now grown to be a huge part of lending in this country. And it's led by firms like Gullab, Aries, Blackstone, a number of business development companies, otherwise known as BDCs. Goldman Sachs has one. This whole industry of private lending and private credit grew out of the wake of the great financial crisis and an aim of the regulators to avoid systematic risk of banks taking on too much of this exposure. And so

It's not even about that banks won't lend to cannabis companies. It's that this entire even private credit ecosystem won't lend to cannabis companies.

Pascal Wagner (12:07)
And I know that you have multiple different funds, but, can you maybe help the listener understand when we're talking about private credit, maybe what a, like a normal private credit fund, I mean, ⁓ maybe even just a normal debt fund can range anywhere between six, eight, 10%, and, what are the types of returns that you get? What are the premiums, ⁓ that you're getting above that for focusing on?

cannabis.

Peter Sack (12:34)
Yeah, I think the big difference like private credit really just means that these are loans from one company to another. They're not bonds, are technically, which are securities and have higher regulation and they're not loans from banks. And in our case, it's the biggest comp for us. We're making loans to companies that while they're in cannabis, they're effectively a mix between manufacturing and retail companies. And

A manufacturing and retail company that's diversified across multiple states and many locations that's making $20 million of earnings might be able to go to the market and get a loan that's four times that. So they'd be able to get a loan that's for $80 million. And on that $80 million loan, the lender may charge a total return, the interest rate plus all the fees of somewhere between say 8 and 11%.

Our loans are both less risky than that in terms of the debt quantum that we would give and generally higher return profile than that. So that same manufacturing and retail company, but happens to be a cannabis company that's generating $20 million in earnings. We would offer them a 20 to $40 million loan, not an $80 million loan. So less than half the risk profile defined as the ratio of

earnings to debt.

And then we would charge, we charge a return that's between 16 and 20 % for that same, for that loan that is much less risky from a leverage standpoint. And that's, that's really the impact of little competition means that we can structure loans that are both less risky and higher return based on those metrics. And then in addition, we can structure loans that have much more favorable terms from the lender in terms of the documentation that back them.

We can have real covenants. We can have real protections that protect other types of debt from entering the cap stack. We can get personal guarantees from the owners and the management. All of these types of fundamental classic credit protections in lending have just become a lot less common in the broader private credit space simply because there's so much competition and so much race to the bottom in terms of interest rates and in terms of the legal protections that lenders can get from their borrowers.

Pascal Wagner (14:48)
And so give us an idea of how many firms are, you know, you mentioned there's a small, maybe even three subset of firms who are providing these loans. How many firms are looking for these types of loans?

Peter Sack (15:01)
You are there's, suspect that there's north of a thousand companies across the U S that are generating more than $5 million of EBITDA in the cannabis sector today. And that ranges from operators of individual dispensaries to operators of vertically integrated businesses that own both cultivation and processing and dispensaries to large corporate organizations that are diversified across multiple

multiple states and are generating hundreds of millions of dollars of earnings per year and are publicly traded. And so there's dozens of publicly traded US operating cannabis companies whose stock you can buy. They're generally listed on Canadian exchanges.

Pascal Wagner (15:46)
And, and so I think one of the big, you know, as we talk about cannabis and we're talking about, ⁓ there are only so many options that these companies have. Right. So I think one of the things I like talking through is like, what are all the alternatives, ⁓ if they don't use you and really there aren't, many, know, it's, think they either own the building outright, which has a huge cash drag on their operations or, mean, is there anything else?

Peter Sack (16:11)
Yeah, well, we tend to provide loans, loans. So when, when investing with us, they typically, they own their buildings anyway, and they can borrow against it using our capital. But our biggest, our biggest competitor is equity. I think the most significant choice that our borrowers make is do I raise an incremental dollar of equity that will be dilutive to me as an owner or a founder indefinitely, or do I raise capital from

debt capital from Chicago Atlantic that may be expensive, it may have a high interest rate, but it also has a maturity date and I can pay it back and I can refinance it hopefully with cheaper debt in the future. And that's the trade off that most of our borrowers are making is do I raise more equity or do I take a loan from Chicago Atlantic? And as a lender, that's a great place to be in because it means that we can price our debt investments right on the cusp.

of that choice of raising equity or raising debt or raising equity.

Pascal Wagner (17:06)
Can you tell us a little bit about how you see this sector playing out? I think one of the thoughts here is, OK, you're investing in providing these loans. And maybe we are bullish. Maybe we think that cannabis will become legalized at some point in the next five years. And if I'm an investor,

in this type of fun, the first thing I'm thinking through is like, okay, well, what happens the moment it is legalized and they can get loans elsewhere and the competition isn't as fierce, is my capital then at risk or, you know, talk to us kind of how you, how those dynamics would play out and how you kind of see the industry evolving. I think this is really a one-time opportunity that won't

be around forever.

Peter Sack (17:51)
Yeah, well, I in many ways, I hope not. Because when we make loans, we also in about a quarter of a third of our transactions, in addition to just making a loan, we're able to receive warrants or some additional equity upside in the loan. And so over the course of a long enough time, we build up these warrant positions, these equity positions and companies that that that can provide incremental convexity, incremental

incremental upside to our funds. And in the case of legalization, in the case of opening up of capital markets, those equity positions are going to be a lot more valuable for the benefit of our investors, significantly more valuable. Now, there aren't many catalysts on the horizon and the near term horizon that are going to drive significant new lending competition in the cannabis market. Some of the biggest catalysts that could occur

are rescheduling of cannabis from a schedule one to a schedule three substance, unlikely to drive significant new entry of lenders because it is still an illicit substance. Another potential catalyst is a law that's been proposed in front of Congress year in, year out called the Safe Banking Act. Seems very far from being passed, but even if that's passed, will still be very difficult for banks and private credit institutions to lend into cannabis because cannabis is still

and illicit substance under the Controlled Substances Act. Really, full legalization is the catalyst, or legalization under a regulatory regime is what's needed to really open up capital markets to cannabis companies significantly. And that seems many, many years out, in my opinion. But that being said, particularly in our private funds where we're able to receive equity upside

on our transactions, that's a scenario that I welcome because if five years from now cannabis is legalized and my investors see that Bank of America is giving loans to cannabis companies at 8%, all of my borrowers might be coming to me and trying to refinance me out and try and get cheaper capital. And when they do that, they're going to have to pay prepayment penalties that'll accrue to the benefit of my investors. And all of those warrants that are into those funds

are going to be a lot more valuable. And in that context, even in the worst case scenario that all of my investors come to me and say, I want my money back, that's okay. We wait for the portfolio to mature. It should turn over really fast because all of our borrowers want to refinance us. And we'll give that money back with a huge smile on our face and say, thank you for your support over the year because I know I will have made my investors a ton of money if that scenario happens. So as far as a downside scenario goes,

It's one that I would love to experience.

Pascal Wagner (20:27)
Yeah,

I hear that. You touched a little bit on public versus private. And I think, frankly, not something that I am very familiar with. think as an LP investor, if you're in this space, you come across many different syndicators and operators, and you're investing in private syndications or private funds. And I think it's unique that

You have both the private offering and you have both and you have two public stocks that someone can invest into. Can you walk us through the differences between them all?

Peter Sack (21:01)
Sure. Taking a step back, in investment managers that manage credit funds, it's relatively common for an investment manager like Chicago Atlantic to manage many different funds at the same time that offer different types of risk reward. And it allows for an investment manager to manage a fund that has a low risk, lower returning type of vehicle, a medium risk, lower

medium returning type of vehicle, a high risk, high returning type of vehicle, and then find invest different types of investors that want to invest in those different types of funds and manage all of those funds simultaneously. So it's common for credit managers to manage many funds at the same time simultaneously. And for us, that's what we do. We manage private funds that invest in the cannabis space. We manage a public BDC, a business development corporation that trades under the ticker lien.

and it's called Chicago Atlantic BDC. And we manage a public mortgage rate called Chicago Atlantic Real Estate Finance Inc that trades under the ticker REFI, R-E-F-I. All of them invest in the cannabis industry and specifically make loans to the cannabis industry with a little bit different flavor of focus. And from an investor standpoint, it allows investors to choose what type of profile of investment they wanna make. And then also allows us

the source capital from different sources. As an example, retail investors and institutions can buy our stock of either publicly traded vehicle. Our private funds tend to be more limited to qualified purchasers and high net worth individuals and institutions. And so a public offering allows access to similar types of risk reward, but from a broader set of investors. In addition, the public funds

because they're public and the institutional reporting that goes along with them and the public reporting that goes along with them, they tend to be able to raise debt capital a little bit easier. And so our public vehicles are able to have small leverage on their portfolio that allows us to create a stronger return profile for our investors. And if done at a really moderate and low amounts of leverage, it can do so without adding necessarily so significant amounts of risk.

Pascal Wagner (23:10)
So I'm imagining myself, when I invest in the stock market, I think one of the benefits of investing in syndications is that you don't really have the volatility of being in the markets. that, I mean, I'm sure they're still affected by down cycles, but I think that there's largely less volatility that I've experienced in these funds. Is that something?

You know, have you seen your tickers experience volatility? Can you talk about maybe like the pros and cons? If I qualified for all of the options, why I might choose maybe the public ticker versus the private fund.

Peter Sack (23:45)
I think there's certainly volatility in our stocks and every stock. And that's the trade-off for liquidity is fundamentally what it comes down to. There's market price risk versus the opportunity of having liquidity. And in our private funds, as well as other companies, other private credit private funds, there's generally restrictions on how long you have to hold your capital.

in the fund. And there's generally periods in which only set periods in which you can redeem your capital from the private fund. And so that's fundamentally the trade off that you have to make when choosing to invest in a private fund versus a public fund. And if you are a long term older, if you know your outlook is going to be two, three, four years there, then

then the volatility in a public stock may not bother you.

If you are investing in a private fund, you often have to be comfortable holding it for two to four years because the fund may prevent you from redeeming within that period of time. So it really comes, I think a lot of it comes down to what type of liquidity do you need or do you want?

Pascal Wagner (24:51)
So I think in most cases, you would always opt for having more liquidity than less. So what is the trade-off?

Peter Sack (24:59)
Oh, the trade off is that when you choose to sell in a public fund, you may have less certainty on what the price will be because it's driven by a market risk.

Pascal Wagner (25:10)
Interesting.

Peter Sack (25:10)
And you have

some of that in private funds too, but to your point, a lot of private funds tend to have less volatility in the valuations that the manager sets for them. And so unless there's strong declines in performance of the manager, you may experience less volatility in the price at which you may expect to redeem in two years.

Pascal Wagner (25:28)
Interesting. Do they provide the same kind of cash flow or dividends ⁓ or are the dividends higher in private versus public in any way?

Peter Sack (25:38)
It can vary a lot. If you're looking for dividends in debt investments in public options, BDCs are a strong option. You can Google business development corporations, Google public BDCs and find a list of 200 publicly traded BDCs that you can buy. They're generally priced based on two metrics. They're priced on their dividend yield. How much dividends do they offer?

And they're priced on the perceived safety of the portfolio. How safe are the investments? And then how levered is that portfolio? How much back leverage is on the vehicle? And you can choose mix of vehicles that are all first-lean, senior-secured debt with very low leverage. And you can choose investment vehicles whose portfolios are more risky, that are a mix of first-lean, second-lean, unsecured debt, equity positions.

and make an informed choice on what type of risk profile you're interested in. But the same applies to private funds too.

Pascal Wagner (26:39)
You've meant, you,

You've mentioned BDCs. Can you walk us through how like, you know, it's a term I think that's thrown around less frequently in at least my sphere. Walk us through what that is and what we should know about them.

Peter Sack (26:55)
It's a specific type of corporation called a business development corporation that is unique in that it does not pay corporate income taxes. Somewhat similar to a mortgage read, it does not pay corporate income taxes. Now, along with that benefit, it has some management limitations. It has to make investments in a very diversified pool of investment profiles.

and it has to distribute all of the income that it earns every year to its investors.

And so with those constraints, a BDC is an attractive vehicle to make loans because a BDC can raise capital, then deploy that into a diversified set of loans and distribute all of the income that comes out of those loans. And so it's an efficient vehicle to generate yield for that reason. And that's why there's so many publicly traded BDCs because it provides an opportunity for investors.

to get exposure to diversified portfolios of loans, having relatively strong visibility into what the distribution profile, the yield on that investment will be in the immediate term.

Pascal Wagner (27:59)
Okay. So as an investor, I'm putting my LP hat on and I'm, you know, let's say I am, I am searching for yield. I'm looking for some sort of cashflow of some kind. And I, and I, if I like this general strategy, I can choose between multiple different options. Some, one private, a couple of public, they all have different risk profiles, different returns. Some have more liquidity, some have more volatility because of that. When you're

There's also other nuances here where I know that at least in your private fund, that the fund is, I believe, 70 % invested in cannabis. And the other portion, the other 30%, you are investing in other businesses or opportunities. so I think I spent an hour with them.

with one of your colleagues kind of talking through and learning about your fund a couple of months ago. they mentioned that your firm, look at yourself maybe as like you are a private credit firm and cannabis being like a major spearhead of that. have you chosen to, how do you think about that? Why have you chosen to do more than just cannabis and why not separate those into different funds versus running a single fund strategy?

Peter Sack (29:13)
You know, my partners and I were former credit distressed investors, former private credit and private loan investors. And that means that we come to the table with ourselves and a team of individuals that have decades of experience originating and evaluating opportunity sets and networks that give us access to a lot of opportunities outside of cannabis. And when we find opportunities that

we think whose risk reward exceeds what we think is really attractive risk reward in the cannabis sector. That's when we will deploy. And we found over time that it helps smooth out deployment cycles, adds a bit of diversification to our funds, and allows us to invest in the same thesis of serving underserved and unique esoteric areas of the private credit industry.

of which there are many outside of cannabis as well. And it's really that flexibility and ability to be really selective that drives us to make this choice and I think we've deployed a lot of attractive capital in these opportunities as a result. I will say that our non-cannabis portfolios are a lot more diversified and our largest cannabis positions make up a...

largest cannabis positions in some of our portfolios are up to eight or nine percent of the portfolio, whereas our largest non-cannabis positions are much smaller, three or four percent of the portfolio.

Pascal Wagner (30:37)
So I think as an LP myself, one of the things that I talk about on the show is I really like to invest with single strategy operators. Like you mentioned at the beginning of the show, if you're diversifying, you really don't have experience. You see this a lot in our space recently. People might be in multifamily apartment buildings and then

You know, they have a couple of those and then they switched to self storage and now they're managing two different and they really require completely different expertise and teams and, and processes and SOPs. And, ⁓ and so I think one of the hurdles that I came around when I think about, ⁓ these funds is that it's not just cannabis that you're investing in per se, but it, and so if you think about it from.

hey, there's this fund, it's 70 % cannabis, 30 % not. I think of that as a two-asset strategy maybe. But if you then put on the lens of like, we are private credit investors, which is the way that you approached it, then you could see that as a single strategy of which cannabis falls in underneath that. How do you think, what is, I mean, like all of us as LPs are coming up with like,

you know, our best guesses of our own thesis and what's important to us and what's not right. And how would you help someone like me or your average LP think through, you know, whether that should be a sticking point for us or or? Yeah, I mean, I come across that a lot. You're swayed a lot by the operator that you talk to and you want to believe, you know.

And so, yeah, I would just love your take on that.

Peter Sack (32:18)
I love that. I want to believe it reminds me of the exiles. I think ultimately the concepts that I laid out at the beginning of the call, the benefits of focus and specialization and expertise are undeniable. And I think that's what underlies your exact question. If that's true.

Why do 20 to 30 % non-cannabis in diversified portfolios? And the only answer can be that because we find that in this more diverse portfolio of allocation within our broader cannabis fund, that we can generate what we think is higher risk-adjusted returns and more attractive opportunities on a limited basis than what we find in the cannabis markets. And that has to be the hurdle.

at which we are deploying. And it's always going to be a smaller portion of the fund, but that has to be the hurdle. And ultimately, our investors need to be both investing in the cannabis industry, but also investing in us, and our discretion, and our expertise, and our networks, and our experience. And it's against this backdrop of

being institutional private credit investors that we enter the cannabis space and examine the cannabis space. And that's the backdrop under which we have a portfolio that also includes a non-cannabis portfolio. But that being said, we have to prove ourselves every day. We prove ourselves not with our track record of what we've done in the past. We prove our, we know that we're only as good as our next loan, our next deployment, our next workout situation.

And that's what this job is about. It's proving ourselves to our investors every single day and the results show up in our returns.

Pascal Wagner (33:58)
I appreciate that. Okay, so talking about expertise, a lot of, you're exactly right. Like you are investing in the operator and you're investing that we believe that you can execute. I'd love to dig in a little bit of that experience. I know you've been in private credit for a long time. I'd love to understand how your thesis

has evolved and what you've, maybe like how you've changed over time, you know, investing in private credit. you know, before Chicago Atlantic, you were doing something else. You maybe learned something. And so you're now in this niche. I'd love to understand how that has evolved.

Peter Sack (34:37)
Yeah, I joined, I joined Chicago Atlantic as one of the first non-founding partners. And I joined from a credit platform called BC partners in New York where the principal and at, at, my former seat, I was investing across a broad spectrum of, of special situations, senior secured loans, unsecured loans, very safe portfolios and, ⁓ more risk seeking portfolios.

And in that seat, I started investing in cannabis and making loans to cannabis companies. And I found that the first lien loans at low leverage profile to cannabis companies, I could make returns that exceeded the unsecured preferred equity or distress and restructuring loans that were in my pipeline.

And so the choice became relatively simple. This is an opportunity to generate equity-like returns in extremely safe parts of the capital stack with attractive growing companies focusing on the cannabis space or equity-like returns from investing in restructurings and bankruptcies and preferred equity, much less safe parts of the capital stack. And it's that, I think it's that light, that switch.

that led me to say there's a ton of opportunity focusing on the cannabis space. And I need to devote really my life at this stage to deploying capital into this market and attracting investment capital into this market and to this opportunity because I find it so differentiated from a risk reward standpoint.

Pascal Wagner (36:09)
Yeah, it makes sense. I I would love to maybe walk through, think as an investor who's not in the private credit markets every day, I probably have no idea of all the different types of risks that you could come across when you are lending and how those, I mean, you just mentioned that the risks moving from second position, you know, where someone else will get paid back first before you do.

to now being in first position are dramatic. What are all those different risks that maybe some we know, some we don't, that you've learned throughout your career in being in private credit?

Peter Sack (36:45)
Yeah, this is one of the fun things about credit is that credit risk is a spectrum that you can create great risk reward in a lending investment that has a 5 % return. And you can create great risk reward that's a 20 % return. And vice versa, you can create terrible risk reward that on paper says it has a 20 % interest rate. It can be a terrible risk reward, however. And so it creates

a lot more intellectual problem solving that can go into what type of company are you investing in? Where in the capital stack are you investing in? And then what are the legal documents that actually define what your risk and what your reward is? And to contrast with that, to contrast it with equity investing as an example, a private equity fund really only has one type of risk. They are buying the equity and the ownership of companies.

And they're usually doing it on a levered basis, taking out loans to do it. That's one profile of risk. And they're doing it day in, day out, the same type, short, different companies, different industries, different purchase prices. But it's one thing they're buying the equity of private companies and then operating those companies. In credit, there's a much broader type of product or ways that you can invest in a company. You can give them a first lien loan that's at the top of the capital structure, first to be repaid.

If something goes wrong, there's covenants that get stripped that allow you to say, my loan is due now. You need to find someone to refinance and take me out. You can invest in a second lien loan and lien refers to the security. means that you have a lien on the assets. So a second lien loan is still secured. You still have a lien, but you're behind some other lender who's in the first lien position. And so there's still downside protection in that you're in a, you have a secured priority.

But if there's not enough value to cover the first lane, you could still lose all of your money. So if you're in a second lane position, you would imagine that you need to get a higher return, an expected return profile from making a second lane investment than you would a first lane investment. And then going further on the risk profile, you can make an unsecured loan to a company. There's no assets that secure it, but you have a piece of paper that says that

The company needs to pay you back at a set period of time and make set interest payments. And if you don't, and if you don't pay them back, you can sue them for damages and have a court enforce your piece of paper and tell the company that you have, that they have to pay you back. But if that unsecured loan is behind someone who has a first lien on the assets and a second lien on the assets, if the company goes into bankruptcy or other restructuring, there might not be any value for that unsecured lender.

after the first lien lender is paid back and after the second lien lender is paid back. And then you can go even riskier on the spectrum. You could invest in preferred equity of a company. This is an investment that sits behind in the priority structure, first lien, second lien, and unsecured liabilities and gets paid back after that. And then even further on the risk spectrum, you can invest in the common equity of a company, which sits behind all of those others.

And typically when you're buying a stock on the stock market, you're buying the common equity of that company. If you buy Facebook stock, you're buying a class of its common equity. That's at the bottom of the risk profile. But the positive investing in the common equity of a company is generally you're exposed to unlimited upside. Should the company perform really well or do really well. so in, in, in, in credit space, you're, you're usually balancing,

How much return are you getting? Recognizing that it's usually a fixed return. usually don't make, you usually, your profits don't exceed an interest rate and fees unless you're able to negotiate some other type of upside. And so you're balancing how much fixed return am I willing to accept for what my perceived risk is? And that perceived risk is governed both by the company and its profile and how risky its earnings are and its assets are. And also

What type of contract do you have underlying your investment? Is it a first lane contract, a second lane contract, an unsecured contract? And all of those come together for a credit investor to decide what type of return do I need to justify this risk. And that can be a lot more multifaceted and creative process often than you can get picking stocks or

buying a company in private equity because you can custom in a custom manner negotiate and structure all of the contracts that underlie this and what collateral you have. And so it particularly when you have a lot of negotiating power, when you operate in an industry with not a lot of competition, it allows you to in a very custom manner structure how you make investments.

Pascal Wagner (41:25)
I think if you're new to private lending or debt funds or credit funds, it is easy to get confused about what type of risk are you taking. I think that when you, you know, just by looking at returns that maybe provide 15 or 16 % back to the investor,

⁓ and if you've never seen that kind of return anywhere before, automatically in your, your alarm bells go off and you're like, is this even possible? Is this a scam? Is this like, what kind of risks am I taking when I am investing in a fund like that? And, ⁓ and so I would love to ask, you know, as maybe if you're a newer investor, looking at these different credit funds, you know, what are the different

aspects that we should focus on when trying to understand the risk that we are investing into. So an example would be, you know, are they first position or are they second position loans? Is the fund using leverage? I think unrelated to the investments the fund is making, does the fund have audited or unaudited financials?

Can you walk through maybe more of the risks that we may not be thinking about, but we should be considering as we're evaluating different debt investments?

Peter Sack (42:51)
Yeah, think taking a step back, like to think first about the management team and the manager. What is their level of institutionalism?

What is their background? What firms did they come out of? I find that people are extremely influenced by what they've done in the past and what they've done before they're doing right now. And generally, if you learn, if you get your chops doing one type of investing and one profile of firm and all the people that you worked around in that type of firm, you're probably going to be doing the same. You're probably going to be acting similarly in the rest of your career. People don't change their stripes that often.

As far as what type of institutional infrastructure does the fund have? Who is their auditor? Have you heard of them? Who is their legal counsel? Who wrote the loan doc? Who wrote the fund docs? Have you heard of them? Do they have a third party administrator? A third party administrator can be valuable because it's a separate third party company that keeps a parallel set of books. And it reduces the risk of poor record keeping, poor accounting.

or back office infrastructure.

Pascal Wagner (43:51)
Is that different than audited financials?

Peter Sack (43:53)
Oh yeah, absolutely. Audited financials. auditor comes in and audits the financials of the company once per year. And maybe 120 to 180 days after the year is done, the auditor will finish and issue the report. They're looking at what happens at the balance sheet at the end of the year and the entries that happened over the course of the year. They're looking at the end result.

Pascal Wagner (43:55)
Talk to, what?

Peter Sack (44:18)
They don't necessarily spend so much time on the process and the, and, and, and if they're not very good on the controls. And so a third party administrator is a third party that every day or every week is reconciling the books and all of the entries that the manager made and keeping a parallel set of books alongside. And so it helps to reduce risk of execution within an accounting and back office team significantly. But you can also ask.

What are the technology that a company uses to track its loan and make its interest payments and track interest payments and track collections? Are they doing it all in Excel and QuickBooks? That's a bad sign. And it comes down to really error, avoiding errors, avoiding miscalculations and reducing execution risk.

Pascal Wagner (45:03)
So third party administrators are often maybe even better than audited financials in that case.

Peter Sack (45:09)
No, they don't replace one another. They don't replace one another. You need both. You need both.

Pascal Wagner (45:13)
Interesting. Why?

Peter Sack (45:14)
Because the auditors have a professional standards that they're employing to evaluate the controls, checks and balances, and the way the books are maintained. And those professional standards are set by the governing boards that grant auditors their accounting standards and their licenses. And that is a fixed, highly regulated, highly scrutinized process. And that's important. And the administrators do not bring that.

I think the administrators bring a check against Scrivener's errors, against fat thumbs, and against poor organization. The auditors are also explicitly looking for fraud and poor controls that might lead to fraud or embezzlement and all of these things that a company that's poorly run and poorly organized might expose itself to.

Pascal Wagner (46:01)
Today I learned. Okay. I love that. Okay. And so now kind of bringing it back to, so you've talked about the management team. You've maybe talked about if they have third party admins and then in terms of like maybe the loans that these credit companies are making, how do, how should we be thinking about the different risks that we may or may not know about or need to be asking for or consider?

Peter Sack (46:25)
What proportion of the portfolio is first lien, second lien or unsecured? What proportion of the portfolio is equity investments? What proportion of the portfolio is on non-accrual, i.e. the company is not current on its interest payments or its principal payments? Non-accrual and workouts are a fact of life in credit. And a key question is not do they exist, but

How often do they exist and how have you dealt with them? How do you manage them and what's your approach to addressing them? And even for investors that are focused on very safe parts of the capital stack, credit investor needs to really understand what workouts look like, what bankruptcies look like, because it's not only important for when they occur, but you need to understand it when you're making the investment so that you're structuring your investment to understand

What will happen if we do go to bankruptcy? What will happen if there is a receivership? What will happen if there is a liquidation? And you only learn that from actually doing it and from living through it.

Pascal Wagner (47:24)
And to expect them because they're commonplace. I think the question is like, what percentage of the portfolio is delinquent? Is it 1 % or is it 10 %?

Peter Sack (47:34)
Yeah, exactly. And I think a good rule of thumb is that you really want to see that it will vary over time, but you want to see it staying under staying under 10%.

Pascal Wagner (47:42)
Yeah, or even two or three. mean, ⁓ yeah. Okay, very helpful. Very helpful. This has been incredible. Where can people learn more about Chicago Atlantic and figure out if this is a good fit for us?

Peter Sack (47:44)
Mm-hmm. Mm-hmm.

Yeah, you can always reach out. You can reach me at investors at chicagoatlantic.com. You can read about our public companies by Googling Chicago Atlantic real estate finance or the ticker refi, R E F I on the NASDAQ. You can learn more about our public BDC, Chicago Atlantic BDC Inc by checking out the ticker lean L I E N and you can give us a call anytime.

Pascal Wagner (48:17)
Well, but in there, more than willing to hop on the phone. I've spent quite a bit of time with their team, so I can attest to that. Thank you, Peter, for joining us. This has been great. And for all of you who are listening, if you want help building out your own portfolio of private credit investments or you're looking ⁓ for a gamut of these private investments, I encourage you to check out my ⁓

passiveinvestingstarterkit.com and there you'll find a curated deal flow, a bunch of different 506c opportunities that you can invest in and check out today. again, as a reminder, if you want to take what you've learned today even further, join me at the Best Ever Conference happening February 18th to the 20th in 2026 Salt Lake City. I'll be teaching a dedicated LP workshop

And it's also one of the best places to build real relationships with GPs and LPs. So again, those tickets are $6.95 right now. They will go up. So be sure to lock in your spot early if you want to go. I'll be there, and I'd love to meet you in person. And with that, if you loved today's episode, please take 30 seconds. Reach out to us on LinkedIn. Say hi. ⁓ Leave us a review. And as a reminder, every

Thursday, we feature new and other conversations with operators and LPs to help you become a better investor. And with that, thank you for tuning in to the Passive Income Playbook, and we will see you next week.