In Wine We Trust - Private Equity and Wine

When Private Equity Meets Wine

Recently one of my old bosses from my Investment Banking days left his position as a Managing Director for an entrepreneurial endeavor to create a $20 million Connecticut-based principal investment firm focused solely on wine and wine futures (wine that has been made and is in casks but has not yet been bottled). His name is Tim Clew and after his time at Credit Suisse, he initially thought to enter the wine distribution space. Upon finding that there were limited opportunities for him to truly introduce innovation to that portion of the supply chain, he instead opted to create a private equity firm investing in IGWs, or Investment Grade Wines.

His firm, aptly dubbed 'TheWine Trust' (TWT), has a rather unconventional approach to private equity. After raising money from Limited Partners, the fund has a mandate which enables it to invest in IGWs and lock money up for about eight years, slightly longer than the typical PE investment horizon of 5-7 years. As most private equity transactions within the wine industry are typically comprised of purchasing an entire wine business and performing operational and cost cutting initiatives to enhance returns (e.g. Bacchus Capital, Arbor Investments), The Wine Trust is designed as a direct investment in wines from various estates throughout Bordeaux, Valpolicella, the United States, Chile, and Argentina.

Here's how it works:

1.   TWT works with merchants to purchase individual cases of wine with the intention of reselling them in the future or five years from their expected maturity for profit.

2.   Alternatively, TWT works with brokers to purchase "shares" in future produced wine of renowned IGW estates.

The use of a broker seems vital to effectively navigating this asset class as there are approximately 250 premier IGWs produced that are worthy of consideration for financial investment, 90% of which are produced in Bordeaux.

The fund was started in 2012 as a response to various economists and portfolio managers suggesting that there is a need for the inclusion of alternative real assets in a diversified portfolio. Unlike other alternative investments like gold bars or livestock, wine as an alternative investment is truly unique with very few players in the market. Most of the wines purchased as an alternative investment asset are purchased with the intention of reselling them at a higher price in the future. The Wine Trust is also unique in the fact that all of its investments are illiquid (pardon the pun) with all investor principal and returns realized upon the proposed sale dates of the wine. Despite this, history has shown that investments in wine are insulated from economic downturns, making this a rather enticing investment. Tim claims that he was very inspired by a book written in 2008 by David Sokolin called "Investing in Liquid Assets: Uncorking Profits in Today's Global Wine Market". The book explores the fascinating world of fine wine investing and shares anecdotes of the dynamics of this industry, such as explaining how a basket of Bordeaux wines in 1986 worth $327K rose to an eye-popping $3.3 million in 2007, an 11.6% CAGR (nominal).

In my opinion, The Wine Trust represents a very interesting value proposition and the principals of the fund base their hypothesis on historical growth trends in Bordeaux wines. However it is very apparent that these regions are subject to immense volatility and any unanticipated switch in global preference for a different region is likely to be met with an almost immediate drop in the value of their existing investments.

I suppose worst case scenario they can continue their buy and hold strategy for a longer horizon. If it were me and things all went to hell, I would write down the investments and crack open an aged $1,000 Bordeaux to ease the pain.