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Andy DeFrancesco's investment firm Sol faces legal battle with lender – The Globe and Mail

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Controversial Canadian dealmaker Andy DeFrancesco is in the midst of a heated legal battle with Toronto-based hedge fund MMCap Asset Management over shares of U.S. cannabis company Verano Holdings, that are now worth almost $700-million.

The tug of war involves SOL Global Investments Corp. – the cannabis company founded and led by Mr. DeFrancesco – and 1235 Fund LP, an affiliate of MMCap. It has culminated in both entities hurling lawsuits at each other in courts in New York and Ontario.

1235 Fund is seeking hundreds of millions of dollars from SOL, Mr. DeFrancesco, his wife, Catherine DeFrancesco, as well as his private equity company Delavaco Holdings.

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The dispute is unfolding at a time of renewed investor interest in the cannabis sector that has sent pot stocks soaring, increasing the stakes for both parties involved in the litigation centred around millions of shares of the newly listed Verano.

SOL has a 20-per-cent all-stock stake in Verano, which went public on the Canadian Securities Exchange in mid-February and is one of SOL’s most valuable assets. In the summer of 2019, SOL borrowed US$50-million from 1235 Fund, which is now seeking repayment in the form of SOL’s Verano shares.

A lawsuit filed by SOL on Feb. 7 in New York alleges that 1235 Fund is attempting to “extort a usurious windfall” in relation to a US$50-million convertible debenture that was issued to SOL in July, 2019. The cannabis company insists that according to the repayment terms of the loan, it is only obligated to pay back the US$50-million principal plus 6 per cent in interest.

But a separate lawsuit, filed by 1235 Fund on Feb. 24, accuses SOL and the guarantors of the loan – Mr. DeFrancesco, Ms. DeFrancesco and Delavaco Holdings – of deliberately misinterpreting the terms. The suit argues that SOL is obligated to hand over millions of Verano shares worth US$550-million as repayment for the convertible debenture.

“This action concerns the unlawful conduct of rogue participants in the Canadian capital markets … the Defendants [SOL] now regret their bargain and seek to resile from it instead of honouring their contractual and legal obligations,” states the 1235 Fund lawsuit, filed in an Ontario court.

The latter half of 2019 was a particularly bad time for cannabis companies, both in the U.S. and Canada. The euphoria of legalization the previous fall had waned, and signs of oversupply and low demand had started to permeate the industry. Between October, 2018, and July, 2019, shares of SOL plummeted 60 per cent, and the company was facing significant financial difficulty, public filings show.

It was under these circumstances that SOL and 1235 Fund entered into the convertible-debenture agreement. “SOL was in critical need of cash to continue as a going concern. 1235 had what SOL needed, namely available funds to invest,” the Ontario suit against SOL states.

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1235 Fund, for its part, was particularly interested in the large equity stake that SOL had in Verano at the time, which was one of the cannabis company’s most valuable assets. Verano was set to merge with another large U.S. cannabis company, Harvest Health & Recreation, and the fund saw a huge monetary upside in the deal if it went through.

The debenture agreement, according to the lawsuit, stated that if the Harvest-Verano deal was successful, 1235 Fund would receive 8.2 million shares of the resulting company as repayment for the US$50-million loan.

More critically, if the deal did not go through, 1235 Fund claims that the agreement between both parties stated that the fund had the option of receiving 1.7 million in Verano shares as repayment for the loan. The fund alleges that it was also “given the option” of receiving repayment of the loan purely in cash.

Hedge funds have long played the role of providing much-needed cash to companies with little revenue. MMCap and its affiliates frequently entered into these types of share-lending agreements, which also gave them the chance to sell their borrowed shares at opportune moments.

“Although structured using a debenture … whenever 1235 purchases debt securities, those securities always carry an equity upside,” the Ontario lawsuit said.

In March, 2020, the Harvest-Verano deal fell apart because of a combination of regulatory and financing issues. The fund could have technically exercised its equity option in Verano shares at the time or received repayment of the loan in cash, but it chose not to, according to the lawsuit filed by 1235 Fund against SOL, because Verano shares “appeared to be worth considerably less than US$50-million.”

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But then in late 2020, a new deal was on the table. Taking advantage of the renewed investor interest in cannabis, Verano was planning to go public on the Canadian Securities Exchange.

SOL still had millions in Verano stock and issued multiple news releases reminding shareholders of how Verano’s public debut would significantly boost its own value. According to SOL, it was in early 2021 that 1235 Fund decided to ask for Verano’s shares, threatening to invoke an “event of default” under the debenture agreement that would force SOL to repay the fund in Verano shares. That was effectively what prompted SOL to file a lawsuit against the fund, according to a Feb. 16 news release from SOL.

“Defendants saw in Verano’s going-public transaction an opportunity to extort an advantage for themselves at Plaintiffs’ expense,” SOL’s New York lawsuit stated.

Mr. DeFrancesco played a central, and often controversial role in many deals in the early days of the cannabis boom. He was most famously in the spotlight in late December, 2018, when a short-seller report accused him of orchestrating the sale of SOL-owned Latin American cannabis assets to Aphria Inc. at an inflated price.

Mr. DeFrancesco declined a request for comment.

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World's Biggest Wealth Fund Makes $1.6 Billion Wind Investment – BNN

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(Bloomberg) — Norway’s $1.3 trillion wealth fund has made its first investment in unlisted renewable-energy infrastructure since being given the go-ahead to move into the asset class.

The world’s biggest sovereign investment vehicle said on Wednesday it will buy 50% of the 752 megawatt Borssele 1 & 2 Offshore Wind Farm from Orsted A/S of Denmark. The deal is worth 1.375 billion euros, or about $1.6 billion, it said.

Norway’s wealth fund has been looking for such assets to purchase since getting a mandate to start buying in 2019. But as recently as January, Chief Executive Officer Nicolai Tangen said it was proving hard to find reasonably priced targets.

“We are excited to have made our first unlisted investment in renewable energy infrastructure, and we look forward to working alongside Orsted on delivering green energy to Dutch households,” Mie Holstad, chief real assets officer at the wealth fund, said in a statement.

Strategy Update

The announcement coincided with a strategy update by the fund, in which it signaled it will apply a more active approach to its investment strategy. That includes a goal of becoming a global leader in sustainable investing.

Tangen, a former hedge-fund boss who’s been running the giant sovereign investment vehicle since September, has stepped up the Oslo-based fund’s reliance on external asset managers and made environmental, social and governance goals a cornerstone of his focus. He wants to rely more on technology, including artificial intelligence, and plans to expose his portfolio managers to the same kind of training regimens that help shape top athletes.

In Wednesday’s strategy update, the fund said it will “emphasize specific, delegated active strategies and have less emphasis on allocation or top-down positioning.”

As the world’s biggest stock investor, the Norwegian wealth fund’s “knowledge of our largest company investments helps us achieve the highest possible return after costs,” it said. “It improves risk management and enables us to fulfill our ownership role. We believe our active management improves our ability to be a responsible investor.”

The fund, which generated $123 billion in returns last year, used a previous strategy update to shift its equity exposure toward U.S. stocks and away from Europe. Much of last year’s performance was driven by the fund’s holdings of U.S. technology stocks.

The fund follows a benchmark that allocates about 70% to stocks and the rest to fixed income. It also invests in real estate and was recently given a mandate to start buying renewable infrastructure.

The sovereign wealth fund, managed by a unit of the central bank, was created in the 1990s to invest Norway’s oil and gas revenues abroad, initially to prevent the domestic economy from overheating. It owns about 1.5% of global stocks.

The fund said the goal is to become a global leader in responsible investment, partly by further integrating ESG data into its investment process.

©2021 Bloomberg L.P.

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Digital investments correlate to financial success – The 21st Century Supply Chain – Perspectives on Innovative

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Executives live daily with a daunting dual challenge. One part is the need to manage the business through steady-state operations and times of disruption. The other is to create value for shareholders through financial excellence and growth.

At the intersection of these two parts lies the digitalization of supply chain. Through digital transformation, supply chain leaders can begin to develop the capabilities that are already needed to manage disruption, as well as those that will help overcome known obstacles, such as data availability and quality. Layering on top of data is information and insight, which are critical to ensuring that those in supply chain are making the decisions that matter most to the business.

The operational opportunities are evident, so the rationale behind the investment is clear. However, that only solves one part of the executive’s dual challenge. Quantifying the value created through financial excellence has been more difficult, but recent research from Professor Morgan Swink of Texas Christian University now shows the correlation between investing in digital transformation and delivering financial success.

Kinaxis customers outperformed during the pandemic

Using quarterly financial statements for 48 publicly held, North American companies that use Kinaxis for their supply chain planning, Professor Swink conducted what is known as a difference in differences analysis for all of 2019 and the first three quarters of 2020. In that analysis, the 48 companies represented those who have already begun their digital transformation against industry averages for each respective vertical over the corresponding period. Furthermore, the analysis was performed as a pre/post event comparison based upon the declaration of COVID-19 as a global pandemic in Q1 2020.

While industry averages showed declines after the pandemic declaration in return on assets (ROA), return on sales (ROS) and return on invested capital (ROIC), the Kinaxis users all delivered improvements when compared to the pre-pandemic performance.

“These data are very strong. I was quite surprised at the level of positivity in these findings,” Professor Swink said upon sharing his findings. The results were so impressive that among the initial six financial metrics compared, the group of 48 Kinaxis customers, representing the digitally transformed, outperformed their industry averages across the board.

The academically rigorous, statistically significant data shows that while industry averages showed declines after the pandemic declaration in return on assets (ROA), return on sales (ROS) and return on invested capital (ROIC), the Kinaxis users all delivered improvements when compared to the pre-pandemic performance. The largest gap occurred for return on sales, which acts as a measure of operational efficiency, where the Kinaxis group improved by more than 1.5%, while the industry declined by more than 0.5%, leading to an overall performance gap of more than 2%. Costs, as a percentage of revenue, also were an advantage for the group of 48 Kinaxis users as both costs of goods sold and sales, general and administrative costs decreased while industry averages either declined slightly or grew.

Translate supply chain success into the CFO’s main metrics

With an impressive array of data, like the research findings, it becomes critical that supply chain leaders be able to convey the right information to the right people. In the case of what matters most to CFO’s, Professor Swink says, “The two things that every CFO cares about are profit and growth. And from the CFOs perspective, they’re looking at ways to invest money to drive profit and growth.”  

Therein lies a significant opportunity for supply chains because they have historically struggled with translating operational capabilities into financial success. This carries over to digital transformation, as well. In both cases, the benefits are typically stated in the terms of those desiring the investment, as opposed to the metrics of whomever is making the decision. As Professor Swink stated, “You need to learn what those metrics are and be able to position your proposal in that language just like the other people who are competing for those funds.”

Flow chart connecting digital capabilities to financial outcomes
Translate digital transformation outcomes into meaningful impacts for decision makers, for example, aligning supply chain capabilities to financial outcomes.

Once the metrics are identified, begin to understand how operational capabilities work as input drivers for them. For example, increased visibility is highly desirable so that supply chains can sense disruptions as it is happening and respond immediately. That alone is a tremendous benefit and it can be tied to financial outcomes such as reduced inventory and cash buffers, improved capacity utilization and lower cost resolution of demand-supply mismatches.

Taking it a step further, the improvements in return on invested capital, and even return on assets, can then be tracked as digitally enabled capabilities are now linked to these financial performance measures. By doing so, the “why an investment is needed” aligns with what it means to the decision maker.

This creates a pivot point for supply chains as Professor Swink suggests that practitioners must be able “to relate structural choices, policies, technology investments, and training and labor investments to the kinds of KPIs that show up on income statements and balance sheets.” This is crucial because “if we really want to speak the language of the CFO we must think beyond those kind of specific operational metrics to think about how our choices affect these larger outcomes.”

To hear more about Professor Swink’s research, watch his on-demand webinar, Speak your CFO’s language – Managing risk and opportunity in supply chains.

Watch the on-demand webinar, "Speak your CFO's language - Managing risk and opportunity in supply chains"

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CI Financial and industry veterans co-launch real estate investment firm – The Globe and Mail

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CI Financial CEO Kurt MacAlpine in downtown Toronto on Dec. 20, 2019. Over the past 18 months, Mr. MacAlpine has been rapidly expanding CI through acquisitions in its wealth management business.

Tijana Martin/The Globe and Mail

CI Financial Inc. is making its first foray into the private real estate sector with a joint venture interest in Axia Real Assets LP, a newly formed alternative investment manager focusing on global real estate and infrastructure.

CI announced the new venture on Tuesday along with industry veterans and Axia co-founders Kelsey Boland, Darrell Shipp, Greg Stevenson and Joshua Varghese, a former CI portfolio manager.

No financial details were released by either company, but Axia will be independently operated and managed by its four partners. Prior to the deal, CI had only stepped into real assets by offering larger institutional investors access to private real estate funds and private equity and credit.

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The new venture will now allow retail investors access to private real estate opportunities that are typically hard to access, said Mr. Varghese, who managed a multibillion-dollar portfolio of global real estate equities at CI Global Asset Management for more than a decade.

Over the past 18 months, CI chief executive officer Kurt MacAlpine has been rapidly expanding CI through acquisitions in its wealth management business, as well as boosting its alternative investment arm to include alternative exchange-traded funds, cryptocurrencies and private-fixed income.

“The products people are buying today are very different from what they bought 10 years ago and they will be different five years from now,” Mr. MacAlpine said in an interview. “We are trying to be relevant to wherever Canadians want to invest – and today that includes real assets.”

With more than $3.7-billion in liquid alternative funds, CI offers retail investors access to publicly listed real estate investments through mutual funds and ETFs – as well as a private real estate fund for accredited investors.

Mr. MacAlpine said along with the growth of CI’s wealth management business, which has doubled its assets under management compared with a year ago, “the demand for both liquid – and illiquid – real estate has also increased from both institutional and retail investors.”

Rather than expand through acquisition, Mr. MacAlpine spent several months last year discussing the new joint venture with Mr. Varghese, who left his role at CI last November to start building Axia.

Mr. Varghese was joined by several former Slate Asset Management executives, including Mr. Stevenson who was the former CEO of the Slate Retail real estate investment trust, which invested in U.S. retail properties anchored by grocery stores.

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“Right now what we are seeing is a lot of the interesting opportunities in real estate that are based on the emergence of the new economy – whether it’s e-commerce warehouses, grocery stores, or data centres – and are hard to access for a lot of investors, both retail and institutional,” Mr. Stevenson said in an interview.

“As investors continue to diversify their portfolios to accumulate long-term wealth, we believe the opportunities for global real assets are significant.”

In addition to grocery-anchored real estate, which includes big-box grocery stores, other areas of interest to the firm, said Mr. Varghese, include life-science facilities, cold-storage facilities and single-family rental homes.

Mr. Varghese declined to comment on the company’s initial investment capital, but said he expects to launch the first set of investment products this summer.

“We think because of digitization and because of what that is going to do to enable societal change, we are going to see bigger changes in the next two decades than we saw in the last two decades,” Mr. Varghese said.

“When you are investing in real estate – which is a long-term asset class – you have to have a laser focus view on what those changes will look like and [the areas we are looking] will provide our investors access to the types of real estate that are going to benefit from the new economy.”

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