Fifth Street Founder Leonard Tannenbaum Makes Direct Lending Comeback With Cannabis REIT IPO

A few years after selling Fifth Street’s BDC assets to Oaktree, Tannenbaum has taken AFC Gamma public.

(Luke Duggleby/Bloomberg)

(Luke Duggleby/Bloomberg)

With Fifth Street Asset Management nearly wound down, founder Leonard Tannenbaum has just taken his new firm AFC Gamma public in an effort to expand direct lending in the cannabis industry.

AFC Gamma priced its initial public offering at $19 a share to raise $118.8 million, according to its announcement after markets closed March 18. Shares of the real estate investment trust, founded by Tannenbaum last year to provide loans to U.S. cannabis companies, began trading Friday on the Nasdaq Global Market under the ticker “AFCG.”

AFC Gamma is “the first legally listed lender in cannabis” on a U.S. exchange, said Tannenbaum, chief executive officer of the commercial real estate finance company, in a phone interview Friday. “Up until now, really the only way cannabis companies could finance was through sale-leaseback.”

The REIT provides an alternative source of financing and has already “mapped out” most of the loans that it will be funding from the IPO proceeds, Tannenbaum said. AFC Gamma will lend companies money through loans secured by their cash flows, real estate, and licenses, he said.

Tannenbaum — who built his previous investment firm Fifth Street into a direct lender with $5 billion of assets — now sees potential for AFC Gamma to also oversee billions of dollars in assets. Cannabis is “one of the fastest growing industries” in the U.S. as states increasingly legalize it, creating a need for financing, he explained.

His REIT went public at the high end of its targeted price range, pulling off an IPO more than three years after Tannenbaum sold Fifth Street’s business development company assets to Howard Marks’s Oaktree Capital Management. Oaktree purchased assets from Fifth Street for $320 million in October 2017, becoming the investment adviser of its two BDCs, Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp.

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Fifth Street Asset Management is now almost entirely wound down and has no employees, Tannenbaum said. Since the sale to Oaktree, Fifth Street has made no investments, has no revenue, and will be dissolved by the end of June, according to AFC Gamma’s IPO prospectus.

The IPO documents also cite Fifth Street’s settlement with the Securities and Exchange Commission over alleged violations tied to its business development companies. The SEC’s cease-and-desist order from December 2018 alleged that Fifth Street improperly allocated expenses to its former BDC clients and had review failures in its valuation of two company investments held by one of its BDCs. Under the SEC settlement, Fifth Street neither admitted nor denied the allegations.

“We successfully settled it,” said Tannenbaum. “Our relationship with Oaktree is terrific.”

Tannenbaum said AFC Gamma was occasionally asked about the settlement during the IPO roadshow, which was done through Zoom with more than 70 back-to-back meetings. The offering had strong demand from institutional investors, he said, adding that the vast majority of meetings resulted in orders to participate in the oversubscribed IPO.

AFC Gamma’s shares jumped 21 percent in their trading debut Friday, closing at $23.

Before the IPO, Tannenbaum had already begun building AFC Gamma’s assets. By February 15, the West Palm Beach, Florida-based REIT had originated and funded about $135 million of loans to companies operating in the cannabis industry and was actively reviewing a pipeline of potential loans totaling $561.8 million, according to its amended IPO documents filed March 16.

One of AFC Gamma’s larger deals post-IPO will be in New Jersey, which recently legalized marijuana, Tannenbaum said. He explained that the loan will help a licensee in the state build out infrastructure such as cultivation and dispensers. AFC stands for “advanced flower capital,” he noted, saying the REIT aims to become partners with the leaders that will emerge in the U.S.

“The industry is going to quickly consolidate,” Tannenbaum said.