In a recent article, Blair Bowman, a personal friend of AVC Advisory, warned of what he saw as a ‘train crash’ approaching with regards to a growing trend for investors to buy Scotch Whisky Casks.
The general premise is that investors buy a share of or, if they invest enough, an entire cask, and then just wait a minimum of 10 years but more likely 15-20 years for proper maturation. At that point, casks can be ‘disposed’ of in a variety of ways, and according to the marketing blurb, for a very high multiple of the sum originally outlaid. That’s the theory, and in practice it works. However, there are, as Bowman calls it, “a succession of red flags”.
For the seasoned advisor, many of these red flags are the same that we have heard and seen many times before, just slightly tweaked to apply to this particular type of investment.
First off, the returns ‘promised’ are eye-watering. 582% has been quoted in more than one marketing document. Why this exact figure? This comes from a report by Knight Frank Luxury Investments Index where a single cask was sold for a investment multiple matching this figure. However, this cask was a rare cask from a highly sought after distiller and these returns are not normal. A standard cask from a standard distillery (where 99% of the investors will place their money) has a return nowhere near that figure. So whilst high returns are possible, they are certainly not the expected return for the majority of the investors.
Another flashing warning is the liberal use of “guaranteed”, for as we all know few things in life are guaranteed. In our experience, anything that proposes to be guaranteed is certainly worth a degree of skepticism, and whisky cask returns are no different. Once you understand exactly whom is guaranteeing the returns (answer: not the Bank of England) then one wonders how exactly this can be enforced, and as Bowman points out, these offerings usually “originate from a jurisdiction where it is legally difficult to pursue a case for mis-selling”
Bowman, himself, goes on to draw similarities between the Whisky Cask offers to a previously defunct investment theme involving wine.
He mentions Australian Wine Investments, which offered similar returns and guarantees on wine barrels. As Bowman fears with some of the Whisky Casks, these wine barrels were sold to investors at vastly overvalued prices or, worse, were barrels that did not exist.
Casks may legitimately not exist as in some cases, these Casks are being sold now to fund the construction of a new distillery or reconstitute an old one. However this is a very speculative venture as one can imagine.Even if the Whisky Casks do indeed exist, there is also a pledge by the promoters that the distillery will buy back your cask upon maturity. They might do. But then again, they might not. No distillery will sign an obligation to do so.
These issues are somewhat superficial issues we see as being major problems for investors looking for a safe and decent return. However, scratch below the surface and the technical intricacies of owning a whisky cask are also questionable.
For a start, this industry is heavily regulated by the HMRC, the British Government Tax collectors. The rules pertaining to who can own, who can sell, who can hold and where are complex but clear-cut.
Much of the marketing promises made by Whisky Cask investment promoters ignore some of these rules.
Ultimately, there can be money made over a long period of time in these ventures, but, pardon the pun, money will remain illiquid for many years and there is no degree of success. Like all transactions of this nature, caveat emptor.