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Scotch auction market hails ‘exceptional’ 2016

Scotch whisky volume and value sales at auction reached record levels in 2016, with more than 58,758 bottles totalling £14.2 million (US$17.7m) sent under the hammer. SB explores just how risky a game whisky investment is.

The multifaceted whisky market is a sector on the up

In value terms sales climbed 48.6% from £9.56m (US$11.9m) in 2015, with the bottle count up 35.2% from the 43,458 sold last year.

The most expensive bottle to hit UK auctions was a 50-year-old Yamazaki which fetched £62,000 (about US$77,400).

The Macallan remains the most-traded distillery, accounting for 10% of all bottles sold and 22% of total values. Ardbeg ranked second with an 8% share of both volume and value sales.

In addition, more players have entered the whisky auction market, making buying and selling more accessible to both investors and collectors. The competition is also driving down fees and costs involved in the auction process.

Distilleries, including Strathearn, even used the secondary market as a primary route-to-market for the sale of its first 100 bottles. Through Whisky Auctioneer, the distillery made between £315 (US$393) and £4,150 (US$5,180) for the its three-year-old Scotch.

According to Rare Whisky 101, a whisky brokerage and consultancy firm, a favourable forex rate for those outside the UK, low interest rates and geopolitical uncertainty are all driving interest in whisky investment.

These factors saw the Rare Whisky Apex 1000 Index close up 38% for the year, compared to 24.79% for wine’s Liv-Ex, 8.46% for gold and 12% for the FTSE 100. On average, £27,700 was spent on whisky as a single “passion” investment.

Rare Whisky Apex 1000 performance against other indexes. Source: Rare Whisky 101

“2016 has been another exceptional year for rare Scotch and we’re beginning to see signs of maturity within the market, said Rare Whisky 1010 co-founder, Andy Simpson.

“The continued growth in both volume and value has added further liquidity, making rare whisky a more popular and more accessible ‘passion investment’. At the same time, the dynamic evolution of the online rare whisky auction market has made it much easier to buy and sell.

“We have no doubt that the current low interest rate environment and wider uncertainty within the market has fuelled demand for rare whisky, as investors have looked to alternative ‘passion’ investments which can offer a diversified approach to balance their portfolios and deliver positive financial returns. While it’s difficult to see the market continuing to expand at such levels over the next few years, primarily due to a finite availability of rare whisky, we do believe that there is further room for growth. As increasing numbers of investors participate in the market and demand continues to increase, it will be fascinating to see how prices move.”

A safe haven?

In the November 2016 issue, SB explored whether whisky represents a safe haven for investors.

Over in New York this October, a “first of its kind” exchange-traded fund was set up to give “diversified access” to spirits producers in developing markets. Meanwhile in Hong Kong, a 50-year-old Yamazaki expression smashed the world record for the most expensive standard size bottle of whisky, selling at auction for a whopping US$129,186 (£106,150).

That both happened within a matter of days signifies an opportunistic shift in the interest in whisky. Driven by poor rates of return in traditional banks and a trend for backing commodities, investors have developed a taste for the spirit, with professionals and amateurs alike eyeing gaps in the production chain, primary and secondary markets, all for the chance to make a quick buck.

The timing is interesting. When the aptly tickered WSKY exchange – The Spirited Fund/ETFMG Whiskey & Spirits, to give its full name – launched in the US, its president and chief executive, David Bolton, spoke of a rotation: “We believe we’re at year five of a 25-to- 40-year supercycle that could see continued growth in the consumer demand for whisky and spirits, much like what has occurred with craft breweries over the past two decades.” With it, growth will bring investment opportunities. But who will really benefit, and could the very structure of the industry be put at risk from snafus of unscrupulous players?

The ‘craft’ start-up segment represents one small but significant side of the story – one of particular relevance for the investment side of Scotch whisky. A glut of new distilleries are at various stages of coming online: some have merely set out plans to produce, others are already laying down stock. What unites them is the need for investment – and the desire to drum up cash has attracted as many amateur investors as seasoned backers.

One such start-up is R&B Distillers, which will see its first distillery on the Isle of Raasay open in summer 2017. To raise funds, it is encouraging interested parties to sign up to its Na Túsairean Club for access to exclusive bottlings from the first 100 casks. It is also considering making whole casks and new-make spirit available as asset buys – a capital-raising move widely embraced.

R&B Distillers may make whole casks available

Zoe White, head of marketing at R&B, said: “They’ll be aimed at everyone who wants to experience part of the journey of a brand new distillery and buy into the history of it. We expect that cask sales will appeal to both investors and whisky enthusiasts who perhaps group together to buy, and we know there’s a growing demand for new make from enthusiasts who want to taste the evolution of whisky.”

Such programmes clearly pour much-needed funds into start-up distilleries. But as interest in cask and new-make investments grows, where do the risks lie?

David Robertson, a founding partner at Rare Whisky 101, a secondary market consultancy, said: “We are contacted by many clients – sellers and buyers – looking to trade in casks. Sometimes we see clients who have been sold a bad investment.” He recalls a recent dilemma faced by a customer who had acquired a cask for £9,500 after being promised stellar returns. “We valued it at £4,500 even after he’d had it for an additional two years – an unscrupulous company taking advantage of an unsuspecting owner.” It is a hard lesson to learn: if the whisky isn’t good enough, even in seasons of high demand blenders and bottlers can and will be choosy.

Inexperienced financiers

A carefully considered exit strategy is clearly essential – and a statement of the obvious for seasoned investors. But for enthusiasts, Robertson has short shrift. “We have advised many inexperienced investors not to buy a cask – it saddens us greatly when new-to-market buyers are sold something for two, three or even four times its value.”

The key is being realistic. There is little wrong with whisky enthusiasts buying into a new distillery purely for enjoyment, as long as all transactions are done fairly and with transparency, he says. “Some, like Arbikie, who are looking to sell 300 casks for £10,000 each and offer a buy-back are, at least, trying to provide some future exit opportunity.” The risk lies in a cost versus value, entry versus exit matrix, he says.

Rupert Patrick, co-founder and chief executive at Whisky Invest Direct, a market for buying and selling maturing whisky in- cask as a commodity, agrees that there is a significant difference between cask enthusiasts who are paying purely to play, and inexperienced wannabe financiers who see whisky as a get-rich-quick scheme. “It should be seen as a hobby and a fun way of having an association with whisky, rather than ‘I’m going to make money’,” he says. “I think that would be silly.”

Whisky Invest Direct intends to service unemotional investors though its bulk- market exchange of casks mostly destined for blends, and Patrick claims the concept, modelled on the gold business, can offer returns of around 7-8%. “Our typical investor is someone who may or may not like whisky, they just have some money in a physical good with a liquid market, 24/7 trading, one they can get in and out of very easily, and one where there is, in this case I hope, a solid Scotch whisky market behind it.”

But even on such an exchange, where insurance, liquidity and the benefits of bulk add at least a sort of safety net, investment in whisky brings with it risks. Oversupply is a concern, as well as issues such as theft and damage that come with tying money into physical assets.

Whisky growth might look like the golden ticket for whisky fans more interested in monetary returns than the liquid itself, but can the industry cope with more and more stock being bought up? For Robertson, there is no question that the large producers can cope. They cannot afford to take risks and will guard their inventory with their lives, he reckons. But the start-ups should exercise caution. “Some of the casks that don’t mature properly may be bottled without the distillery of origin’s control and could damage its reputation.”

Disruption to trade?

Even the Whisky Invest Direct camp, which operates on a far larger scale than groups of plucky investors ever could, there is little fear the Scotch sector faces disruption from the snapping up of casks. The business currently owns around 1.5-2 million litres of maturing liquid, which sounds substantial before it is compared to the three billion or so currently maturing in Scotland, Patrick says. “We could possibly in 10 years’ time end up with something around 1-2% of the total maturing stock. That would be a significant business for us, but it would be tiny in terms of overall stock.”

If the biggest risk through all of this is to ill-equipped novices, should the industry worry about the rise in cask and new-make investments at all? Aside from the smallest of distillers, perhaps not. Yet it remains a growing trend. For Robertson, some rare bottles on the secondary market have proved to be a stable asset but even then he endorses restraint. Don’t buy anything you won’t be prepared to drink if the investment doesn’t work out. “And if it’s too good to be true, then it is… don’t touch!”

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