Whisky investment is the hot topic among my friends. A very nice-looking Tasmanian distillery is offering a great deal.
You buy a barrel of whisky now, and they keep it for you. In four years it matures and you get a choice. You can either get your money back, plus a 9.55 per cent per annum return, compounded, – or you can have the barrel bottled and take delivery of a whole lot of bottles of whisky. Or a mix of money and whisky.
This model is well-established in the wine growing regions of France where it is called En Primeur. Top Bordeaux vintages are sold out while the grapes are still green. The concept makes even more sense for a distillery – the time between first harvesting the grains and having a decent, drinkable product is long. The distillery needs capital to cover that period.
The company guarantees the purchase of the Whisky at the end of the four year period. And if you buy the barrels, they send you a gift:
“Valued at over $1,000, each gift box contains a bottle of Nant Single Malt Whisky together with a Crystal Decanter Set.”
They are also busy promoting the Whisky. There are four bars in operation – three in Brisbane and one in Melbourne. They also have Queenslander and Australian cricket legend Matthew Hayden as a sort of brand ambassador. His face is all over the website.
This business seems to be run by someone credible. So why not just get a bank loan? Does it make sense for a distillery to pay a whopping 9.55 per cent per annum on its capital?
A residential secured fixed term small business loan goes for 7.1 per cent, according to the RBA. But that is a secured loan. If you go broke the bank gets your house.
The difference here is that the barrel owners will not be “secured” creditors. I’ve been to quite a few creditors meetings in my time as a financial journalist and the difference between being a secured and an unsecured creditor can be the difference between millions and zip.
The investment is only a good one if you think the risk is low. How bad could it be?
In the UK, whisky scams are part of the folklore. In 2004, the Serious Fraud Office nailed a guy who ran a scheme through the 1990s. But there were others too. (and others)
Is this a scam? Keith Batt bought the distillery in 2004, and from what I can see the first mention of Whisky investments was in early 2010, around the time of their first bottlings. I guess those first people should have cashed out their Nant investments by now, but I haven’t found anyone raving about it online.
Let’s assume it’s all above board and look at the gritty details.
The price of the “Great Australian Cask Offer” is $30,000 for two 225L barrels. 450 litres @ $66.66 a litre. You can buy smaller amounts too (225L and 100L), and weirdly they work out slightly cheaper, at $66/L.
That price, for the people playing along at home, is high.
A litre of Johnny Walker Black Label would be $61.21, and that is in a bottle, in a Dan Murphy’s near you. Not down in Tasmania in a barrel you can’t drink for four years.
You also need to take into account GST (which is included in the $30,000 price, and which you can claim back if you have an ABN) and what they call the “angel’s share” – evaporation. Every litre turns into say 900mL over four years. But you’re not exposed to the cost of that shrinkage if you sell them back the barrel.
The Big Question is whether they’ll be able to afford to buy it back.
Nant charges $205 for a bottle of their single malt and apparently it’s worth it. The world’s top whisky critic puts it in the top 50 whiskies in the world. Selling a few choice bottles will be easy. But moving barrels and barrels at that price is going to be an uphill slog…
Here are the two big risks:
1. The company is solvent but the whisky is destroyed. There could be a mudslide, or that pretty antique building could collapse. Termites might get in the barrels or vandals might break down the doors. Do you technically own the asset? Who has to insure it? Is it insured for the amount you paid, the amount you were promised in return, or its market value?
2. The whisky is fine but the company is insolvent. Do liquidators have to give the whisky back to the investors? I doubt it. I suspect they sell them off to pay back secured creditors.
So the whisky investment is a risky investment. That’s why the return is good.
But even risky investments don’t go bad every time. And in fact there are examples of such an investment scheme actually adding value to a company. There’s a burrito bond on offer in the UK, for example, which has raised 1.8 million pounds.
The owner of that Mexican food concern sees it as a marketing coup: “We now have hundreds of extra brand ambassadors,” says Chilango co-founder Eric Partaker.
In a crowded whisky market where the skills to distinguish good whisky from bad are the province of relatively few, having hundreds or thousands of people with a vested interest in believing your whisky is worth every penny might be the smartest marketing ever.
Cheers to that!
EDIT: The prospectus is here: Prospectus for 100L barrel. It talks a lot about volume growth at the top end of the market and the rise of premium and super-premium brands.