The most compelling reason for investing in whiskey at the moment is that so many people have invested, which is substantial because Whiskey as an investment asset for the larger retail investment class has emerged very recently. Whiskey is nearly an untapped niche for serious investors and, in a period when redundant capital has chased up the prices of nearly everything else, it is worth a look, on those grounds alone. The more you look the more meaningful it becomes.
Briefly – lets look at the investment fundamentals of the whiskey value chain
There are two principal ways to invest in whiskey, one of
which is to invest in bottles. These can be old or new bottles, and the brand
or distillery of bottle is important.
The other way is to invest and own whiskey in casks. In the case of casks, the distillery from which the whiskey comes is of minor significance. A good return, between 10-15%, can be made from whiskey casks from nearly any distillery, as the blended whiskey market always needs them.
Investing in bottles or casks of whiskey:
- The challenge with bottles is that you need a lot of them to make a market, and that requires lot of investments. Sourcing the right bottles, through auctions or new releases, takes time, experience, and patience.
- Casks are a different story. As blended whiskey, there's a stronger demand for casks. Scotch whiskey casks are a simple asset, held in bonded warehouses in Scotland and no duty is levied while it stays there. From a tax perspective, whiskey is considered a depreciating asset under the local laws, there's no ‘taxes on capital gains’ payable on its trade in the local market (where its stored).
- How do you get to buy the right casks? As with any investment portfolio, diversification is important. Casks can be bought freshly- filled to well- aged. A cask at zero age is called a ‘new fill cask’. The liquid is called ‘new make spirit ‘and will legally become whiskey after three years. Casks can also be bought at any age beyond. The casks become more valuable with maturity and the rate of return grows exponentially with age.
Another consideration is the type of oak the cask is made
of, in which the whiskey is stored in. Whiskey can be stored in what is known
as a first fill, a refill or a rejuvenated cask. Think of the cask like a tea
bag: the first fill is like an unused tea bag which gives out lots of flavour.
The refill is less spunky, lower in intensity as it takes longer for it to
impart flavour. Whiskey in a first fill cask may be very good for a return on a
young whiskey, say up to twelve years old. When buying an older cask, a refill
will be much better. An old, first fill cask may make the impact the taste of
the Whiskey beyond those 10-12 years.
Even within the cask types, there are two types of Oak, European
oak and American oak, providing the whiskey with different flavours. American
oak gives vanilla and sweeter flavours while European oak gives spicy and nutty
flavours. European oak casks are rarer and therefore, are more sought after.
They are more expensive but can give a great rate of return. Around 90% of the global
Scotch whiskey market uses American oak casks and 90% of Scotch sold around the
world is blended whiskey. So, whiskey from a European oak cask (for example a Sherry
cask) is a sound bet. If the whiskey is sold to an independent bottler rather
than for blending, and perhaps further maturing before bottling, then a first
fill European oak cask would be further more desirable.
There are blended whiskies that like to have a good
percentage of content from rejuvenated casks as well. These are much-used casks
whose surface wood has little flavour left, so a couple of millimetres are
shaved off the inside to expose active wood, ready for reuse. They have a
different flavour profile, impart flavour at a similar rate to a first fill
cask, so blenders can use the whiskey earlier and they are less expensive.
The blending industry is enormous. The category counts for almost about 22% of British F&B exports on its own. That supports a substantial market for commodity whiskies which are traded for use as ingredients in the blends. Unlike the high premium malt brands these lesser-known spirits are similarly priced across many varieties and price discovery is similar to other commodities. For all whiskies sold, their age [time spent in a barrel and not a bottle] indicates quality, and older whiskey commands higher prices. This increasing value generates profits for stockholders who sell aged whiskey to brand-owners for direct sales or even for blends.
Whiskey is not a ‘crowded trade’ and neither is it extremely volatile
Unlike equities, bonds, Cryptos and property, whiskey has attracted
very small investments as an asset class for a long time.
In real terms the cost of newly distilled malt whiskey has
continued falling steadily. Over a similar period, typical investment assets
have at least doubled in real terms (equities +170%, houses +124%); as per
global averages (which are much lower than emerging markets).
Adjusted for inflation both types (malt or grain) of whiskey currently cost less than half the 1972 price when bought new.
Source: WhiskeyInvestDirect.com
This represents a significant divergence from those major
investment asset classes, while compared to the millions of people who own
property, equities, bonds etc. there are probably few 1000’s of people who own,
as part of their investment portfolio, a decent quantity of maturing whiskey.
Whiskey’s financial returns over the last decade have
averaged around 8% to 9% per annum (after storage expenses) so clearly the
above chart does not show the whole story. It only shows new whiskey steadily
becoming cheaper to buy, which means entry prices are reducing, but not the
returns. Unlike most stored goods, whiskey becomes a different and more
valuable product as it gets older, and the resulting returns, earned by
stockholders, have been notable through an era of very low interest rates. The
risk to reward ratio, adjusting for inflation, volatility and currency hedges, appear
to be unusually low when set against typical modern investments which generate
that same sort of return (8-9% annualised).
The overall rate of return has remained high enough through
the years to provide profit to both producers and to those who finance an
average of nine years of stockholding.
Whiskey casks have consistently generated robust historical returns
when evaluated as an investment. Each
asset included in an investment portfolio needs to be grounded in data that
demonstrates its earning potential over time. While all the other benefits are
important, the number one reason to invest in whiskey is quite simple, you can
earn better returns with elapsed time. Over the past 5 years’ whiskey casks
have generated an average return of 12.4% per annum, with popular distilleries
delivering even greater returns. There are few physical assets that can boast
such robust levels of growth under every economic cycle.
The market performed exceptionally last year but this is
only one year in a persistent trend over the past five. The Apex 1000 index has
appreciated by 162.91% since 2014, outstripping gold by over 150% and the FTSE
by over 160%. As the interest in alternative investments continues to build, whiskey
is unparalleled in its performance.
However, this comes with some challenges, as more investors
are throwing their hat in the ring, the average bottle price has gone up by
over £100 and the volume of whiskey on the second-hand market is up by more
than 200% since 2014. Identifying the best bottles and ensuring that the right
price is found is vital in this flooded market, especially for investments in
bottles.
According to Knight Frank’s Wealth Report 2021, the value of
rare whiskey has risen by 478% in the last 10 years. Whereas the value of
classic cars rose by 193%, fine art by 71% and wine by 127%. Irish whiskey is
an upcoming market, that has bounced backed over the last two decades and is
currently growing in double digits. The market is projected to continue its
strong growth for the next 20 years. As demand for whiskey grows and more
brands enter the market, they will require mature stock to produce their own
whiskey. This is where the investors come in. They can sell their mature casks
to new brands to meet the global surge in popularity of Irish whiskey. In the
next 10 years alone, it is expected that over 100 new brands will enter the
market. The Scotch market is more established with a variety of providers
sourcing whiskey. This provides a strong secondary market for investors. It is
the single most traded spirit on the planet and value of the high-quality
Scotch single malt market is set to grow from £394m in 2018 to £439 million in
2022.
Experts predict the growth of Irish whiskey to continue in
double digits for at least another 20 years. The IWSR (International Wine and
Spirits Record) which is the global benchmark for alcohol and beverage data,
predicts Irish Whiskey to outgrow Scotch and Bourbon. The IWA (Irish Whiskey
Association) anticipates the market to double in the next 10 years.
Scotch Single Malt sales are rising annually in what is the
world’s most stable whiskey market. Therefore, it is another very safe play to
be holding maturing Scottish Single Malt casks for the future. The emerging
markets are witnessing unprecedented growth in imports of single malts and
there is a rising trend of early adopters of whiskey, which is replacing beers
as drink of choice for the young in the emerging markets. Due to this, whiskey
presents excellent opportunities, even when the world is troubled due to the
extended pandemic and its larger implications on various economies. The
opportunity is not lost on sophisticated wealth managers and their clientele.
Scotch is by far the most successful type of whiskey
available in the world. The established reputation of their distillers and its
geographical identity as a heritage product of Scotland mean that Scotch is
usually the first thing that comes to mind at the mention of ‘whiskey’.
However, the Japanese market is currently also noting impressive growth. The
Japanese Icon 100 Index has seen a 38% increase over the past 12 months and WhiskeyStats
declared it the best-performing whiskey-producing region. Japan out-performed
second-place region Campbeltown, Scotland; by 15%.
Though wine is typically considered the pinnacle of
consumable investments, the performance of the Scotch market says differently.
Last year, the average bottle price for wine was £165, a far cry from the £377
paid for whiskey. Both wine and whiskey saw the world record broken for the
highest price paid at auction for a single bottle last year, but whereas the
73-year-old bottle of Burgundy sold for around £430,000, a 60-year-old Macallan
fetched £1,000,000. This record has also since been broken in 2019 by a bottle
from the same cask which sold for £1.5m.
Though alternative investment assets are generally close to
the investor’s interests, the returns that can be found in whiskey investment
are likely to make this market much more attractive to a more varied audience
in the near future.
As a note of caution, as with any investment and its
underlying asset class, do undertake your own research and due diligence,
before you jump in to invest. Make sure you’re fully aware of just what you are
purchasing and seek expert advice beforehand, not just for purchase, but also
on the means to liquidate and exit, if you need to.
“The cash price for 8-year old
Scotch whiskey bought new, and sold each year of the
decade 2011-2020 shows average historical returns of
15.4% per annum. This number is net of our trading commission. However you
would have paid storage fees of 15p per Litre of Pure Alcohol (LPA) per year,
bringing the return down to 11.7% p.a”. - WhiskeyInvestDirect.com
How to start your Whiskey Investment journey
Like any investment categories whiskey too has active and
passive options. You could invest for the long haul by investing with bottles
or casks or invest in funds and ETF’s in the passive mode.
There are whisky funds globally which allow you to invest
without requiring much expertise. However, this method could require high
investment by value, especially if the fund’s makeup largely consists of
whiskies that are old and rare. For example, Rare Finds Worldwide has launched
its Rare Single Malts fund targeting Asia-based family offices and
high-net-worth investors. The fund aims to acquire rare whisky casks with
bottles and collections between 15 and 40 years old, with minimum initial
investment of $132,000 needed to join in.
Then there’s Wave Finacial's Wave Kentucky Whiskey 2020 fund
which bases their rate of return on acquiring and selling up to 25,000 barrels
of bourbon whiskey from the Wilderness Trail Distillery in Kentucky, USA. The
fund has a six-year investment horizon and aims to generate a 20% IRR across
this period of time.
Alternately there is The Single Malt Fund, which you can
invest on and then either trade its shares in the Nordic Growth Market in
Sweden or mimic the investment and purchase the underlying whisky that the fund
acquires. The fund is actively managed and aims to continuously buy and sell
limited edition bottles of whisky on a global scale. A minimum subscription of
1,000 euros is required to join this.
There is no single industry benchmark for wholesale pricing
of whisky. This can make it hard to assess the value of whisky and difficult to
see how whisky is performing as an asset class. Once you have decided you would
like to invest in whisky, the biggest question is the distillery whose whiskies
to invest in. Like the scripts in the stock market, distilleries’ value and
popularity go up and down in time. The popular ones are like Blue Chips, with
limited downside risks, as almost everyone in the Whiskey world know them and
they do attract premiums. These are mostly the Single Malts from Scotland and
few ones from USA.
The Rare Whisky 101 Investors index shows the distilleries
which are performing the best as an investment. The index is based on actual UK
auction data and charts the percentage change in the value of all bottles from
a distillery with a small weighting on the average price of all bottles and the
highest single bottle from that distillery.
While the investment modes vary between passive investment
in ETF’s and traded funds (like mutual funds) to direct and active investments
like owning bottles and casks directly; the investor class also varies when it
comes to whiskey. Investors could be divided into three categories, collectors
focused on building a prized inventory; professional investors who are seeking with
bigger buying power; and connoisseurs focused on consumption.
Investing in alcohol is by no means a new trend. People have
been investing in wine for many hundreds of years; though whiskey is new, and
as a structured investment product is a recent addition to the alternate asset
landscape.
That’s is probably why many rookie and seasoned investors
like to stick with well-known and high-valued Scotch whisky brands like Macallan,
Highland Park, The Balvenie, Glenmorangie, Ardbeg, and Bowmore.
Rare whisky topped the Knight Frank Luxury Investment Index
in 2019, surging in value by 40% over the previous 12 months from the last
quarter of 2018. The same report also shows that, over the past decade, whisky
values have gone up six-fold.
The Asian market has partially driven the rise in the value
of Scotch whisky. According to the Scotch Whisky Association, single malts now
account for almost one-third of total Scottish exports with the sales of whisky
to India, China and Singapore rising by 44%, 35% and 24% respectively in the
first half of 2018. Hong Kong remains the hub for whisky auctions, as it acts
as a hub for mainland Chinese and other Asian countries to source and obtain the
rarest whiskies in the world.
“Turning wholesale whiskey into an asset investable for individuals is a very unique idea… Whiskey's nature — that its value increases as it ages — is completely different from other commodities." - Kazuhiko Saito, Chief Analyst, Fujimoto Co.
What is Upcide.com doing
Upcide.com is a platform that curates various alternate
assets and brings them as investment opportunities for its members. Whiskey is
growing in stature as a sought after alternate asset option, and at www.upcide.com we are starting to build the
ecosystem that our platform members can use to buy into global trades, whether
its Bottles in bulk or Casks to be stored under Bond in Scotland.
The typical opportunity would be to invest in a special
purpose vehicle, that will be held offshore from India, which will then invest
and hold the Casks directly, through an exchange or an intermediary such that
the SPV will have rights over the physical assets, while retaining the option
to sell the casks in a structured trade in anyone or more exchanges.
If you are interested to know more, please feel free to
reach us at
Sources:
Visuals.ons.gov.uk, Nationwide.co.uk, Scotch Whiskey Industry Review
(Alan S Gray) and UK RPI from the Office for National Statistics, WhiskeyInvestDirect.com
, braeburnwhiskey.com , www.essentialmagazine.com/how-to-invest-in-whiskey ,
businessindia.co/magazine/the-whiskey-exchange-brothers, Data source: IWSR,
Scotch Whiskey Industry Review 2015 – Alan S Gray
