Benefits and drawbacks of whisky investment
As old stocks continue to dwindle, Scotch whisky has emerged as a desirable investment opportunity. But can this niche marketplace benefit both industry and consumers?
*This article was first published in the September 2015 issue of The Spirits Business magazine. More up-to-date figures in the rare whisky market can be found here
One of the most pervasive trends that has plagued the Scotch whisky industry in recent years is the widening chasm between supply and demand of aged liquid. It’s no secret that producers have struggled to satiate consumer thirst for vintage expressions, which are low in numbers due to a failure to forecast the sector’s explosion in popularity at the turn of the century. Of course, the rarity of such bottlings itself has spurred demand to unprecedented levels, and even as total Scotch exports plunge, the second-hand market has never been stronger. Combined, these factors have enhanced not only the collectability and prices of rare bottles, but have also made way for unique investment opportunities.
According to Rare Whisky 101 (RW101) – said to be the world’s first rare whisky index, valuation, brokerage and consultancy firm and launched by David Robertson, former master distiller for The Macallan, and corporate banker Andy Simpson, founder of Whisky Highland – the amount of rare Scotch sold in UK auctions reached a record high in 2014, growing 68% to almost 34,000 bottles (see 2015 figures here). Meanwhile, the value of these collectable bottles soared by nearly 70% to £7.7m – evidence of the solid returns offered to savvy investors.
However, the figures, gleaned from RW101’s 2014 annual review, demonstrate that collecting and investing are very different pursuits in whisky. While The Macallan is top of the company’s Collectors’ Index, it plummeted from first to seventh place on the Investors’ Index as the brand’s value fell 7% on the secondary market.
Numbers don’t lie
“The right bottles of Scotch will continue to grow in value,” says Simpson, who co-founded RW101 following the mergence of Whisky Highland and the Robertson Whisky Consultancy. “The Macallan bottles experienced a correction in value, but the whole of supply is diminishing, so there’s medium to long-term investment opportunities. It’s what the numbers tell us.”
A number of new investment firms have launched to capitalise on such untapped prospects in the past 12 months alone. RW101 is predominantly an indexing tool, but it also brokers sales of Scotch whisky collections with a minimum transaction spend of £10,000 using its own network of connoisseurs. Also launched by Robertson last year, and developed in collaboration with Rickesh Kishnani, is Platinum Whisky Investment Fund – touted as the world’s first private equity firm for Scotch. Based in the Cayman Islands, the fund aims to raise US$10m (£6.4m) to invest in rare whisky stocks and then sell them at a future profit.
With plans to close in the next few weeks, the fund will invest its commitments within 12 to 18 months, and will then offload all bottles over seven years. Platinum sources its entire whisky stocks from private collectors, but will sell through a multitude of channels, estimating a 15% to 17% investor return each year. Kishnani adds that while most of the fund’s investors will be located in Europe, its exit strategy will be almost exclusively based in Asia, the hottest growth market for rare bottlings. However, unlike RW101, Platinum has limited the price of its investments to US$1,000 per bottle to minimise the risk of having stagnant stock that won’t sell.
‘All about timing’
“The investment whisky market is a very, very small niche place and it mostly comes down to simple supply and demand economics,” says Kishnani. “There are different market forces at work and it’s all about timing. In 10 to 15 years, it may not be the right time to invest because supply may have caught up. New distilleries are putting forward a large percentage of their stocks for longer-term ageing.”
As such, the limited time to maximise rare whisky assets has prompted a surge in both service providers and budding investors.
However, similar to all investment platforms, the risks of investing in whisky are not to be ignored, particularly since amateurs dominate the market. Not only do backers need to know which specific bottles are likely to appreciate in value, but they also need to take into account storage, auction fees and the risk of inauthentic bottles. “As with every buoyant market, these problems facing whisky investment will continue to grow,” says Simpson. “Some of the fake bottles which enter the market are very good, but experienced auction houses should be able to call them out. Others lack the knowledge to be able to do so.” Simpson adds that investors could also be duped by companies artificially inflating the market. Yet he believes that since the sector is “very small”, the possibility for damage is minimal since it would be “very time consuming” to consistently skew numbers.
“Ultimately there’s as much risk in whisky investment as someone buying the wrong stocks,” he says. “It’s no different from any other investment vehicle in this respect.” He continues: “We want to empower our users to make the right decisions, whether collecting or investing. There’s no regulation in whisky investment, but we aim to be the consumer champion.”
While consumer prospects tend to dominate discussions around whisky investment, many question how the sector can benefit distillers directly. Is it fair, one may ask, that such significant value gains on the second-hand market benefit third party sellers only, side stepping the producers themselves? Rupert Patrick, Diageo’s former commercial director for Africa regional markets, believes he has found a solution to the predicament with his new enterprise, Whisky Invest Direct.
The firm is divided into two main sections: the first offers people the chance to invest in maturing Scotch whisky; the second is a brand-building arm which will re-launch the historic James Eadie label. Described as a “stock exchange for whisky”, Whisky Invest Direct sells casks at wholesale prices, allowing “distillers, brand builders and stockholders” to trade whisky with each other in a “transparent” environment. As such the company claims to “tackle the industry’s greatest problem” – a lack of working capital – by financing the creation and maintenance of maturing stock. “We need to make sure we provide a valuable service to the trade and investors,” claims Patrick. “This initiative brings investors and the trade together by creating an industry brokering platform, allowing producers to plan long-term growth.”
Through a variety of unique avenues, consumers have the opportunity to engage with and profit from the Scotch whisky industry in a completely new way. While merchants and brokers will need to work to build the trust of investors and the trade, an overall sense of optimism suggests the future of the emerging industry is bright – for the next 10 years at least.