The Exit Starts Before the Investment

Why Liquidity Matters in Wine and Whisky

One of the biggest misconceptions surrounding alternative assets is that buying something scarce or desirable is enough to make it a good investment.

It isn't.

An asset can appreciate significantly on paper, but ultimately an investment return is only realised when somebody is prepared to buy it. For that reason, at EWI Group we think about the potential exit before we make the investment.

Who is the likely future buyer? Why will they want the asset? Where are they located? How quickly could we sell? And what compromises might we have to make between price and speed?

These questions are particularly important in fine wine and whisky because neither operates like a traditional financial market.

There is no central exchange providing continuous liquidity. Different buyers can place very different values on the same asset, and the best route to market can depend on the producer or distillery, age, vintage, rarity, geographical demand and the circumstances surrounding the sale.

That creates complexity. But it also creates opportunity.

Multiple Routes to an Exit

With a mature whisky cask, we may have several potential routes available.

We could sell the cask intact to another investor or trade buyer. We could approach an independent bottler. Certain distilleries may attract stronger demand from buyers in Asia. An auction house may provide a faster and more transparent route to market. Alternatively, we can bottle the cask ourselves through our sister company One8Nine, transforming one asset into potentially hundreds of individually saleable bottles.

Each route has different characteristics.

Auction can provide speed and transparent price discovery, but costs need to be considered. A private or international buyer may potentially pay more, but the transaction could take longer. Bottling can unlock additional value from exceptional liquid, but introduces further costs, execution risk and a longer selling period.

There isn't necessarily one correct answer.

The important point is that we want those options available before we invest.

A Current Example: 42-Year-Old Caol Ila

A recent opportunity provides a good illustration.

We identified an exceptionally mature 42-year-old Caol Ila cask available through our network.

On the surface, the investment case was already interesting: more than four decades of maturation, an internationally recognised Islay distillery and an increasingly scarce age profile.

But that wasn't enough.

Before considering the investment, we wanted to establish what a credible exit might look like today -  not simply what we hoped the cask might be worth several years from now.

We therefore approached a major international auction house for an independent assessment.

The resulting valuation indicated a meaningful premium to the price at which we were able to acquire the cask.

That distinction is important.

The investment case wasn't dependent entirely upon predicting that whisky prices would rise over the following three or five years. We had identified a pricing disparity that potentially existed at the point of acquisition, while retaining the option to continue holding an increasingly mature and scarce asset.

It is a good example of two principles that sit at the heart of our approach:

Buy well but also understand how you could sell.

Price Versus Speed

Liquidity isn't simply about whether an asset can be sold. It is also about understanding the relationship between price, timing and certainty.

The fastest exit will not necessarily achieve the highest price.

For a client requiring liquidity quickly, auction may be appropriate. With more time, we may instead approach private collectors, specialist trade buyers or international markets where demand for a particular asset is stronger.

Our relationships in Asia are particularly important here. Certain distilleries and wines can command very different levels of interest depending on geography and understanding where that demand sits can materially influence how we approach an exit.

The objective is therefore not simply to maximise a theoretical valuation. It is to find the most appropriate route for the investor and the asset.

Liquidity Begins at Acquisition

This brings us back to one of the central principles behind how we invest at EWI.

We don't view acquisition and disposal as two separate decisions.

They are part of the same investment thesis.

A whisky cask might appear extraordinarily cheap, but if we cannot identify the eventual buyer, that discount may exist for a reason. Equally, an asset with several credible routes to market may justify a very different assessment of risk.

The same philosophy applies to fine wine.

Before purchasing a position, we consider not only producer, vintage, scarcity, provenance and entry price, but also the depth of the secondary market and where future demand is likely to come from.

Because ultimately, the value of an investment isn't simply what somebody says it is worth.

It is the price at which you can realistically convert that asset back into capital.

At EWI Group, the exit strategy therefore doesn't begin three or five years after an investment is made.

It begins before we buy.